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crs_RS22398 | crs_RS22398_0 | 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—Tajikistan and Kazakhstan.
MFN/NTR and the GATT/WTO
Most-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.
The 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—rates 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.
The 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.
Invoking 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.
Jackson-Vanik Amendment and Communist and Former Communist Country GATT/WTO Members
In 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.
Section 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.
Czechoslovakia 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.
The 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.
The 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.
Mongolia 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.
The Case of China
As 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.
China'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.
Prospective WTO Accessions
Countries 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.
Congress 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.
A 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.
During 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
the 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.
A 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.
In 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.
The 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. | 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.
During 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—the Magnitsky Rule of Law Accountability Act of 2012—that 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.
The 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. |
gao_GAO-05-249 | gao_GAO-05-249_0 | Background
The 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—usually 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.
One challenge is how to permit “full cost” 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’ useful lives ensures that the full annual cost of resources a program uses is considered when evaluating the program’s 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.
A 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.
The CAF concept was formally proposed in the February 1999 Report of the President’s 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.
CAFs were also discussed in the President’s Fiscal Year 2004 Budget issued in February 2003. The section on “Budget and Performance Integration” 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’s interest in CAFs appears to have waned. CAFs were not mentioned in the President’s Budget in either fiscal year 2005 or 2006 and the CAF legislation described has not been introduced.
Scope and Methodology
To 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.
To 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—important 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.
Since 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.
Finally, 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.
We 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.
CAF Operations Would Create a New Financing System and New Oversight Responsibilities
Implementing 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.
Although 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’ and subunits’ BA—both 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.
CAFs Would Be Positioned at the Department Level and Create a More Complex Process for Financing Capital
Although 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.
The 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’s 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.
For each project funded through the CAF, the subunit’s 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’s 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’s appropriation.
At some point, the mortgage on an asset would be “paid off.” 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.
Treasury Would Oversee Borrowing Authority Used to Acquire Capital Assets
Treasury 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’s 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.
CAFs Would Add Complications to Oversight and Scoring
A 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.
As they do for all appropriation actions, CBO and OMB would score the CAF and subunit BA—both 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’s 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.
The 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’s 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’ totals and in the BA and outlay totals for the federal budget as a whole.
When 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.
CAF Benefits Can Be Achieved through Alternative Means Without the Added Budget Complexity
CAFs 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—managing periodic spikes in BA caused by capital asset needs—if 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.
Allocating Annual Capital Costs and Improving Decision Making for Capital Assets May Be Achieved through Existing Initiatives
Officials 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.
The Departments of the Interior and Agriculture Are Implementing Asset Management Systems to Make Informed Decisions on Capital Investment
As 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.
For 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.
According 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.
FS, 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’s 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’s 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’s 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.
The 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’s real property assets and to assure management accountability for implementing federal real property management reforms.
Some Agencies Are Beginning to Use Full Cost Information to Make Budget Decisions, Although Much Work Needs to Be Done
We 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’s 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’s Quality Award in 2002 in the “performance and budget integration” 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’s vision of effective program management.
In 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’s “Full Cost” 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 “full cost” 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 “full cost” budgeting with helping to identify underutilized facilities, such as service pools—the infrastructure capabilities that support multiple programs and projects. NASA’s service pools include wind tunnels, information technology, and fabrication services. If programs do not cover a service pool’s 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 “full cost” 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.
Some 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’s and congressional decision makers’ 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.
CAFs Might Smooth Budget Spikes, but Benefit May Be Minor
The President’s 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.
However, 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.
Some Spikes May Be Created by Congressional Funding Decisions
Our 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’s 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’s 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 “waves” 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.
Staff 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.
Spikes Are Being Managed by Funding Useful Segments or Using No-Year Authority
When 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.
WCFs and FBF Can Be Used Both to Finance Capital Assets Without Spikes and to Allocate Capital Costs
WCFs, 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.
Some we spoke with use WCFs to finance capital assets such as IT initiatives and equipment. For example, USDA’s 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’s 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’s WCF functions similar to that of the FS’s WCF. BLM’s 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.
This 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’ budgets.
To 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.
Agency Officials, Congressional Staff and Other Key Players Have Numerous Concerns About CAFs
Agency 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.
Concerns over Receipt of Annual Mortgage Payment
Treasury, 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 “forgiven” 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 “fish credits.” 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 “fish credits” that had accumulated since 1980.
Some 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’s 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.
The alternative to force-fitting a mortgage payment within agencies’ annual appropriations is to adjust agency budgets with an automatic add-on equal to agencies’ 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.
Concerns About Shifting More Control over Capital Assets to the Department Level
Under 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’s 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’s facilities are mission specific. BLM’s 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.
Concerns over Problems Not Addressed, Additional Complexity, and Limited Benefits
The 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.
Almost 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.
Several Issues to Weigh When Considering Implementation of CAFs
While 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’ 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.
Imputing an Annual Capital Charge on Existing Capital May Offer Benefits but Would Be Difficult and Contentious
There 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.
Accomplishing these goals would require developing a standard method of computing an appropriate annual capital usage charge. Subunits would pay these charges to the department’s CAF using appropriated funds, which would then be transferred to Treasury’s 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.
Before 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.
Some 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.
If 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—OMB, CBO, and the budget committees—would 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’ 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.
Similar 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 “paid off” 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 “paid off” 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.
Aside 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—which is reflected in agency budgets—and depreciation expenses—which are reflected in agency accounting systems along with asset maintenance costs—sufficiently 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.
In 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’s 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.
Cost Allocation Efforts May Have Limited Effect on Agency Decision Making
Although 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.
A 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.
Some agencies questioned the effectiveness of applying a charge to influence managers’ 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’s 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’s 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’ 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.
Many 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—which is common in the federal portfolio and certainly within the inventories of USDA and DOI—are 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.
If 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.
Issues Regarding Property Sales Would Further Complicate CAF Implementation
Provisions 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 “owner” agency of the asset or (2) allow the “seller” 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 “seller” agency’s budget would be reduced by an amount equal to the asset’s mortgage payment. However, if that was done, it would lessen or eliminate the incentive for the “seller” agency to sell or transfer the asset. If the asset was sold instead of transferred, an appropriate “sale price” 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.
Some Capital Would Likely Continue to Be Obtained through Existing Means
The CAF’s 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.
For 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.
Agencies 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.
Land, 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.
Conclusion
There 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.
Beyond 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.
We 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.
When 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.
Agency Comments and Our Response
We obtained comments on a draft of this report from OMB, Treasury, GSA and our case study agencies—USDA 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.
OMB 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’ 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’s 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.
We 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’s 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.
It is also unclear that CAFs would create new incentives as OMB argues. As we describe in the section titled “Cost Allocation Efforts May Have Limited Effect on Agency Decision Making,” 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.
We 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.
As 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.
Comments from the Department of the Treasury
GAO’s Comments
We believe that the discussion of BPA’s use of “fish credits” is an appropriate example for the section on agencies’ 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’s comments.
Comments from the Department of the Interior
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Public Affairs | Why GAO Did This Study
CAFs 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.
What GAO Found
Capital 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. |
crs_R42467 | crs_R42467_0 | Introduction
This 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.
Localities 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.
Some 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.
However, 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.
Whether 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.
Capital 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—at 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.
Six Policy Options
This 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.
Increase 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.
Since 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—WIFIA—was 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.
Increase Funding for the SRF Programs
The 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.
Established 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.
Both 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%.
From 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.
Although the SRF programs are considered to be highly successful in addressing water quality problems, several concerns and criticisms of them have been raised.
First, 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.
Second, the potential for leveraging to increase overall funding is limited, because nearly half of the states do not use that financing technique.
Third, some stakeholders—especially large cities—contend 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.
Fourth, 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 ).
Fifth, 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.
Perhaps 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.
Securing 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 ).
In 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.
Further, 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—also called sequestration—follows. 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.
While 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—by 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.
Authorization 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.
In 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 .
Legislation 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.
Enacting 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.
Perspective 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—such as might also occur if the state volume cap on private activity bonds were lifted (see below)—additional offsetting receipts likely would be required in SRF reauthorization legislation.
Create a "Water Infrastructure Finance and Innovation Act" Program (WIFIA)
One 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.
TIFIA, 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.
TIFIA 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.
Since 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.
The 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.
EPA 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.
Activities 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.
From 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.
One 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.
A 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.
Another 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"—the 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."
Enacting 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—thus, 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—potential revenue loss—raised a different kind of problem for entities seeking WIFIA credit assistance.
After 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.
Implementation of WIFIA—i.e., making project loans—was 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.
Although 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.
Create a Federal Water Infrastructure Trust Fund
One 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.
This 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.
The 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.
The 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.
A 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.
From 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.
In 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—that is, points of order can be waived.
Conceptually, 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.
Create a National Infrastructure Bank
Another 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.
According 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.
Whether 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.
Another 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.
Selecting 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.
Once 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.
One 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).
The 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.
Bills 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.
H.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.
The 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.
A 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.
H.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.
In 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.
Separate 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.
Lift Private Activity Bond Restrictions on Water Infrastructure Projects
Water 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.
Among 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.
Generally, 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.
Traditional 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.
The 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:
the 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."
The 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.
The 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.
The 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.
The 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.
The 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.
Demand 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.
The 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.
Private 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.
The 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.
Three 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.
The 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.
Reinstate Authority for Issuance of Build America Bonds (BABs)
Another 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).
BABs 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.
BABs 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:
The 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.
One 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.
One 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.
In 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—now to be called America Fast Forward Bonds—as 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.
According 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.
Conclusion
Consensus exists among many stakeholders—state and local governments; equipment manufacturers, construction companies, and engineers; and environmental advocates—on 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.
Through 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. | 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.
Six options reflected in legislative proposals in the 114th Congress, including their federal budgetary implications, are discussed.
Increase 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).
A number of these options have been examined by congressional committees since the 112th Congress. A pilot program for one of them—WIFIA—was 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.
Consensus exists among many stakeholders—state and local governments, equipment manufacturers and construction companies, and environmental advocates—on 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. |
gao_GAO-11-596 | gao_GAO-11-596_0 | Background
Overview of DHS Acquisition Process
DHS 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’s 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.
Our 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.
In 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’ investment review policy, and 18 were not reviewed at all. Four of these investments had transitioned into a late acquisition phase—production and deployment—without 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.
In 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.
In 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’s implementation and transformation, which includes the department’s 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.
DHS 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’s 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).
Each 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’s acquisition life cycle. The acquisition decision authority—the Chief Acquisition Officer or other designated senior-level official—is 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—level 1 and level 2—is to be at the department or component level and the acquisition decision authority for nonmajor acquisitions—level 3—is 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.
Following 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’s readiness to proceed to the following life-cycle phase. However, we reported in March 2011 that the ARB had not reviewed most of DHS’s 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’ costs and feasibility, which contributes to poor cost, schedule, and performance outcomes.
As 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’s major oversight list for fiscal year 2010, 62 of which TES and component officials determined required T&E oversight—that 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’s Passenger Screening Program. For more information on these 86 major acquisition programs, see appendix II.
DHS’s 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.
TES’s Role in Overseeing Component Testing and Evaluation
To 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’s 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.
In 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.
The 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’s 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’s responsibilities in overseeing T&E across DHS components and its role in the acquisition review process. Table 1 describes TES’s T&E responsibilities as outlined in the T&E directive for all level 1, level 2, and special oversight acquisition programs.
The 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’s responsibilities throughout the four DHS acquisition phases as defined in the acquisition directive.
To 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.
TES Met Some Oversight Requirements for T&E of Acquisition Programs Reviewed; Additional Steps Needed to Ensure That All Requirements Are Met
TES 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’s Advanced Spectroscopic Portal’s operational test results, as required by the T&E directive.
TES Oversight of Components’ Test Plans and Test Reports
TES 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’s acquisition directive. TES’s 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’s 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’s involvement is limited.
We reviewed TES’s T&E oversight efforts for 11 DHS programs and found that TES had conducted oversight of components’ 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’s 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.
As 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—ATLAS Tactical Communications—the 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.
Component 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’s 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’s approval of the plan.
After 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’s 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.
Component 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’s (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.
At 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—which is an d independent assessment of the adequacy of the operational test an provides TES’s 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.
Of the 11 programs we selected to review, TES developed a letter of assessment for the 1 program— TSA’s Advanced Technology 2 —that 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’s test agent’s 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’s 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.
In 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’ T&E and whether these issues impact their program’s readiness to go before the ARB. Further, the officials told us that TES’s input at the ARBs, if any, is to be documented in acquisition decision memorandums. Acquisition Program Management Division officials also noted that TES’s 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.
TES 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—site preparation, tower construction, and sensor and communication equipment installation at the Ajo, Arizona test site—until 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’s advice to the contrary, and directed TES to work with component officials to revise test plans, among other things.
Additional Steps Needed to Ensure that T&E Requirements Are Met
While TES’s 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.
TES Did Not Consistently Document the Extent to which Criteria Used in Its Approval of Operational Test Agents Were Met
The T&E directive requires that an operational test agent—a government agency or independent contractor carrying out independent operational testing for major acquisition programs—is to meet certain requirements to be qualified and approved by TES, but does not specify how TES’s 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’s operational effectiveness and suitability to DHS decision makers, such as the ARB. For example, some the test agent’s 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.
Assisting the component program manager in the preparation of the test and evaluation master plan.
Planning, coordinating, and conducting operational tests, and preparing the operational T&E report.
Reporting operational test results to the program manager and TES.
According 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.
In the absence of such a mechanism in fiscal year 2010, TES’s 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’s approval of their agents; however, they believed that TES’s 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.
With regard to the three programs in which TES had documented its approval in memoranda, these memoranda detailed TES’s 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 “serious reservations” for 1 year to TSA’s 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’s interim approval in a memo, they were able to communicate their concerns about the test agent’s independence to TSA and DHS decision makers and set forth interim measures that TSA needed to address regarding their concerns.
In July 2010, TES granted conditional approval to the test agent for the U.S. Citizenship and Immigration Services’ (USCIS) Transformation program’s test agent. TES made its approval contingent on the program developing a plan to ensure that the test agent was familiar with the component’s 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.
In January 2011, TES granted conditional approval for the U.S. Secret Service’s Information Integration and Transformation program to bring its selected test agent on board. TES’s final approval will be given after program officials brief TES on the test agent’s operational testing approach, which is to demonstrate that the test agent has knowledge of the product and has the capacity to execute the tests.
TES 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’s 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.
TES Did Not Consistently Document the Extent to Which Certain Acquisition Documents Met T&E Criteria
In 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.
Specifically, 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’s 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’s 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.
TES 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.
Also, 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.
Standards 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.
TES Does Not Plan an Independent Assessment of ASP’s Operational Test Results as Required by the T&E Directive
According 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’s 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’ 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.
While 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.
In 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.
In 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’s “true” 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.
In 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.
With 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—a throughput measure of bags per hour—for the majority of the time under test which resulted in a “not effective” determination by TES.
TES 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’s 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’s 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.
TES and Component Officials Cited Challenges in Coordinating and Overseeing T&E across DHS; Efforts Are Underway to Address Some Challenges
TES 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’s operational requirements—the key requirements that must be met for a program to achieve its intended goals—can 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.
Ensuring Operational Requirements Can Be Tested and Are Suitable to Meet Mission Needs
Both 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’ 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’ 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.
Our 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’s 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—a surveillance, command, control, communications, and intelligence system being fielded in two portions of the international border in Arizona—were 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.
In 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’s capabilities and to uncover and resolve problems with ASPs before full-scale deployment.
We 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.
In 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 “front end” 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’s 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’s 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’s 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.
T&E Experience and Expertise within DHS Components Varies
TES 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.
Furthermore, CBP recently established a new office whose goal is to strengthen expertise in acquisition and program management, including T&E, and ensure that CBP’s technology efforts are focused on its mission and integrated across the agency.
In response to this challenge, TES has worked with DHS’s 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’s 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.
Lack 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.
Further, 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.
Using Existing T&E Directives and Guidance to Oversee Information Technology Acquisitions
Effectively 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.
The 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’s 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—the combination of developmental and operational testing—for 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.
As 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.
Allowing Appropriate Time for T&E within Program Cost and Schedule
Both TES and component officials stated that balancing the need to conduct adequate T&E within the confines of a program’s 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’s (DOD) Director of Operational Test and Evaluation found that while the acquisition community has three central objectives—performance, cost, and schedule—the 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.
TES 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’s, 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’ 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—including the involvement of more TSA staff in the tests—after 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’s 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.
Conclusions
Timely and accurate information resulting from T&E of major acquisitions early in the acquisition process can provide valuable information to DHS’s senior level managers to make informed decisions about the development, procurement, deployment, and operation of DHS’s 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’ T&E, which can help reduce, but not eliminate, the risk that new systems will not be operationally effective and suitable.
Since 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’s troubled history, which we have highlighted in a series of prior reports.
Recommendations for Executive Action
To 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.
Develop 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.
To 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’s operational test results, to include an assessment of the adequacy of the operational test and a concurrence or nonconcurrence on the operational test agent’s evaluation of operational suitability and operational effectiveness.
Agency Comments and Our Evaluation
We 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.
DHS 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.
DHS 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.
Finally, DHS concurred with our third recommendation that S&T arrange for an independent assessment of ASP’s 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.
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If 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.
Appendix I: Descriptions of Selected Major Acquisition Programs
An 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.
U.S. Immigrtion nd Custom Enforcement (ICE)
An effort to modernize ICE’scticl 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.
Segment 1: Prodce/ Deploy/ Support Segment 2-6: In the process of eing pdted.
A 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) – Replce obsolete component nd substem; (5) Ship Helicopter Secre Trvere & Stem (SHSTS) – 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.
An effort to modernize Secret Service’s 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.
An integrted tem of intrusion detection, lyticl, intrusion prevention, nd informtion-ring cabilitie thre to used to defend the federl civilin government’s 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.
A 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.
A 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.
A 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.
TASC 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.
U.S. Citizenhip nd Immigrtion Service (USCIS)
An 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.
Appendix II: DHS’s Fiscal Year 2010 Major Acquisition Programs
In fiscal year 2010, there were 86 acquisition programs on the Acquisition Program Management Division’s 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’s 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’s Test and Evaluation and Standards office (TES) oversight.
Appendix III: Comments from the Department of Homeland Security
Appendix IV: GAO Contact and Staff Acknowledgments
Staff Acknowledgments
In 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. | Why GAO Did This Study
In 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.
What GAO Found
TES 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.
What GAO Recommends
GAO 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. |
gao_GAO-17-36 | gao_GAO-17-36_0 | Background
The 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.
In 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’s 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.
Each 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’s WYO Financial Control Plan Requirements and Procedures (Financial Control Plan). The Financial Control Plan outlines WYO companies’ responsibilities for program operations, including underwriting, claim adjustments, cash management, and financial reporting, as well as FEMA’s responsibilities for management and oversight.
Other Parties Involved in Day-to-Day Processing of Policies and Claims
WYO 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—into 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.
WYO 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.
WYO Compensation
Current 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’s 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).
Commission and operating expenses are based on a proxy of a WYO company’s 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’s aggregates and average industry operating expenses for five lines of property insurance—fire, allied lines, farm owners multiple peril, homeowners multiple peril, and commercial multiple peril.
Further, WYO companies receive payment for three types of claim adjustment expenses.
Allocated 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.
Unallocated 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’s 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.
Special 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.
In 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’s marketing goals were not aligned with FEMA’s 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’s growth bonus to better link it to new business—if a WYO company acquires another company’s business, the number of transferred policies is added to the company’s 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.
FEMA Management and Oversight of WYO Companies
Within 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.
FEMA 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.
Claims 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’s 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.
Improper 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.
Reinspection 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’s 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.
Biennial audits. According to the Financial Control Plan, the biennial audit is to provide an independent assessment of a WYO company’s 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’s 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.
Audits 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’s history.
NAIC and FEMA WYO Company Reporting
Insurance 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’ financial solvency and market conduct. According to NAIC, state regulators monitor an insurers’ compliance with laws and regulations and a company’s financial condition through solvency surveillance and examination mechanisms. Insurance regulators use insurance companies’ 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.
Through 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’s 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.
FEMA’s 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.
FEMA Compensation and Oversight of the Direct Program
As previously discussed, FEMA’s 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.
FEMA 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.
FEMA oversees the DSA contractor and conducts operation reviews on the DSA’s 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’s consolidated financial statements that an independent certified public accountant performs.
FEMA Still Relies on Insurance Industry Proxies for Setting Compensation and Has Not Yet Revised Its Practices in Response to the Biggert-Waters Act
FEMA 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.
Efforts Have Resulted in Some Improvements to Federal Flood Financial Data Critical to Revising Compensation
Efforts 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’ federal flood data, but has found mixed results.
A 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’s request. According to FEMA, this change was intended to address one issue we found during our 2009 engagement–-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 2008–2014 period. Only one company from those we selected to review continued to report a portion of its expenses net of compensation in 2014.
In 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—one 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.
To 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’ 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’ 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’s 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’ 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’ 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, “0-5 percent”, and “5-10 percent” to assess the trend in WYO company expenses over time.
In 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.
According 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’s specification that, upon request, WYO companies supply FEMA with a true and correct copy of a WYO company’s property and casualty annual financial statement filed with state insurance regulatory agencies and the arrangement’s 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’s efforts to pay WYO companies based on actual expenses incurred by companies.
Inconsistencies in WYO Company Reporting Continue to Limit Its Usefulness in Setting Compensation Rates
Reporting Inconsistencies
We 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.
More than half of the companies we reviewed did not report to NAIC all of their adjuster fees and other expenses incurred on the companies’ 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’s expenses and not the company’s, 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’ established practices at the time and their interpretation of NAIC’s 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.
The 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—linked to a lag in WYO companies receiving financial data from vendors that, in turn, affected the companies’ 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.
However, 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’ 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’ 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.
Effects of Inconsistent Reporting on Expenses and Profit for 10 WYO Companies
We 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.
An 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).
While 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.
WYO Company Operations Can Affect Flood Line Expenses and Profits and Are Relevant When Developing Compensation Methodology and Rates
Aside 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’s 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’s 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.
Effects of WYO Company Operations on Flood Line Expenses and Profit
Based on our analysis of the costs of operating their flood lines of business in relation to expenses and profits, we found that companies’ 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.
As demonstrated previously, WYO company expenses and profit vary significantly and those variances can be explained in part by the companies’ 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’ 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.
The 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’ 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’ 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.
All 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’s 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.
WYO 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’s 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.
We 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’s employees. Some companies told us that the fee charged was either intended to cover only the affiliate’s 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’ 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.
In 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’ 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’s profit on this line and the variances we observed may reflect the relative significance of the federal flood line to the WYO companies’ total property business and the extent that certain activities are performed by internal WYO company personnel versus their vendors.
WYO Company Perspectives on Factors That Can Affect Their Expenses and Profit
Aggregate 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’s design and requirements may have on WYO companies’ 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’ 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.
FEMA Has Not Yet Revised Its Compensation Methodology
FEMA 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’s 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’s 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’s new methodology for compensating WYO companies, as well as fully address our open recommendation from the 2009 report related to compensation and data quality.
However, 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’s plan to ensure the accuracy of the data WYOs submit to NAIC. FEMA also has not made clear whether—in light of its own observations on unusual expense ratios and our findings of inconsistent WYO company reporting—it 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:
We 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.
We 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.
Federal 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.
Our 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’ reported expenses to the payments it makes to the WYO companies and determined the companies’ 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’s completion of additional actions to improve data quality and transparency and accountability over compensation will help it meet Biggert-Waters Act requirements.
Data and Views on Over- and Underpayment of NFIP Claims
Data on over- and underpayment of claims in fiscal years 2008–2015 varied in over- and underpayments identified, depending on the type of review conducted as part of FEMA’s 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.
FEMA Data on Over- and Underpayment of Claims
To 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 2008–2015. We found that the extent of over- and underpayments varied, depending on the type of review conducted.
Claims Operation Reviews
The vast majority of WYO companies received satisfactory ratings in FEMA’s 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’s review steps provide an opportunity for WYO companies to respond to and resolve errors before the agency issues a final report.
In fiscal year 2015, FEMA’s 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.
Under 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’s WYO arrangement. In 2002, the Standards Committee recommended that FEMA not renew one company’s WYO arrangement. According to FEMA officials, the company’s 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.
One WYO company appeared in 2011 to address unsatisfactory underwriting and claims operation reviews.
Three 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.
The 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.
Improper Payment Reviews
According to FEMA officials, DHS’s 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’s 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.
FEMA’s most recent improper payment reviews found that improper payments in NFIP claims for fiscal years 2012–2014 occurred less than 0.2 percent of the time, well below FEMA’s 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.
As 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).
Starting 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’s 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.
The 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 2013–2015. 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.
No WYO companies received unsatisfactory biennial financial audit ratings during fiscal years 2010–2015; 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.
According to the current Financial Control Plan, FEMA’s 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’s 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’s 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’s data submissions to the agency.
Audits for Cause
In 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’s 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.
According 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.
FEMA, WYO Company, and Stakeholder Views on Over- and Underpayment of Claims
FEMA 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.
According 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’s 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.
Representatives 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’ expectations for insurance and their actual coverage, resulting in added frustrations.
Representatives 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:
Nature 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.
Large 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.
Inexperienced 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’s 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.
Changes 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’s 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.
Market fluctuations. Replacement cost calculations in the data might change between the time an adjuster develops an estimate and a contractor begins repairs.
Recent OIG Report Identified NFIP Oversight Deficiencies
In March 2016, a DHS OIG report found that although FEMA performed the required oversight reviews of WYO companies in accordance with the agency’s 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—including claims operation reviews, biennial audits, and claims reinspections—to 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.
As 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.
Prior to the issuance of the OIG report, FEMA had begun evaluating the customer experience to further identify ways to align NFIP and FEMA’s processes around the policyholder. For example, according to agency officials, in 2015 FEMA surveyed approximately 2,000 policyholders to understand customers’ priorities and found, among other things, that customers would prefer a simplified program and more coverage choices.
Furthermore, FEMA has begun reorganizing FIMA, including separating the department into two branches—one to oversee the WYO program and the other to oversee the DSA—and 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’s 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.
Current WYO Arrangement and Potential Alternatives Involve Trade-offs
According 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.
Trade-offs of Current Arrangement Include Advantages for Consumers and Insurers from WYO Company Competition but Disadvantages for FEMA Oversight
Based 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.
However, 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’s 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.
In 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’s 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—a vendor—noted 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’s relationship is with the WYO company and, therefore, its oversight was specific to WYO companies and did not include any requirements for vendors.
Potential Alternatives to the Current WYO Arrangement Each Involve Trade-offs
Three 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.)
More specifically, we identified the following three potential alternatives (see fig. 1):
Alternative 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.
Alternative 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.
Alternative 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.
We 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’s 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.
Alternative 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).
Some 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.
Fewer 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.
Responding 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.)
Alternative 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’ involvement in NFIP (see table 11).
Representatives 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.
Similar 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.
Furthermore, 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.
Lastly, 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.
Many 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.
This 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—rather than having WYO companies contract with vendors as is the current practice—WYO companies would have less control over customer service quality and could face reputational risks.
However, according to representatives of two WYO companies and a stakeholder, competition among participating vendors could drive down program costs or improve customer service quality.
Some 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.
WYO Companies and Stakeholders Suggested Possible Improvements to the Current Arrangement and Other Potential Alternatives
Most 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.
Improve 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’s 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.
Simplify 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.
Reconsider 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.
Provide 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.
Other 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.
FEMA 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.
Additionally, 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.
Limiting 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—rather than determining the number of WYO companies allowed to participate—would be another way to achieve fewer participating companies.
Removing 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.
Adopting 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—17 as of September 2016—have 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.
Large WYO Companies Wrote the Majority of NFIP Residential Policies at the State and County Levels
Our 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.
Overall, 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).
At 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–38 percent) and the DSA (4 percent –28 percent) varied more.
At 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.
See appendix III for additional analysis.
Conclusions
FEMA 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’s 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’ 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’ actual flood expenses.
FEMA 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’ 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’s 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.
Recommendations for Executive Action
To 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’ expenses and profits when developing the new compensation methodology and rates.
Agency Comments
We 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.
DHS 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.
As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to 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.
If 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.
Appendix I: Objectives, Scope, and Methodology
Our objectives in this report were to describe the (1) Federal Emergency Management Agency’s (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’s current arrangement with WYO companies for selling and servicing flood insurance policies.
To 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.
Status of FEMA Revisions to Compensation Methodology
For our first objective, we reviewed the Biggert-Waters Act, other laws and regulations relevant to FEMA’s 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’s compensation packages for WYO companies for fiscal years 2010–2016. To understand the status of FEMA’s 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.
To 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 2008–2014 from FEMA and premium, loss and expense data for all WYO companies from SNL Financial and NAIC for calendar years 2008–2014. 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’s 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.
To better understand WYO companies’ 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 2008–2014. Specifically, we selected a nongeneralizable, purposive sample of 10 WYO companies, selected based on net premiums written during 2008–2014. 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.
We 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’ 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’ 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.
Our analysis and ability to estimate WYO company expenses and profit were subject to a number of limitations.
First, the adjustments we made to the companies’ 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.
Second, 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-– 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—2014. 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.
Third, 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’s 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.
Fourth, some of the companies we reviewed use affiliated companies as vendors to service flood policies. As information on the affiliated companies’ 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.
We 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’s external auditor supporting its work on WYO program financial data included in the department’s 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.
Information on Over- and Underpayments
For 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’s 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’s Financial Control Plan and Financial Control Plan Monitoring Procedures) to understand FEMA’s 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’s 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.
Trade-offs of Potential Alternatives to WYO Arrangement
For our third objective, we reviewed a prior GAO report and conducted a literature review to identify potential alternative approaches to FEMA’s 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.
After 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’s 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’s 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.
In 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.
We also compared requirements of NFIP’s WYO arrangement and FEMA’s 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’s 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.
We 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.
Appendix II: Federal Contract Requirements and Write-Your-Own (WYO) Company and Stakeholder Views
In 2009 and again for this report, we identified potential alternative administrative structures for the National Flood Insurance Program’s (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.
The 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’s 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.
Open competition. Executive agencies generally must seek to obtain “full and open competition” 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.
Bid protests and dispute processes. Federal acquisition regulations and statutes provide for bid protests—where 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’s 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’s nonrenewal of a WYO company’s participation in the program, the company can submit the dispute to arbitration.
Government as a party to a contract. Federal contracts generally provide an agency the right to unilaterally terminate the contract— 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’s interest. Agencies generally can make certain unilateral modifications to a contract during performance as long as those changes fall within the contract’s 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.
Contract 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—where the government pays for allowable incurred costs to the extent prescribed in the contract—can only be used if the contractor’s 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.
Ethical 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.
Representatives 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’s 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.
FEMA 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.
Stakeholders 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’s oversight might improve because the agency would have more authority to direct how WYO companies administered claims. One stakeholder—a vendor—said 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.
Appendix III: Geographic Concentration of National Flood Insurance Program (NFIP) Residential Policies Written by Write-Your- Own (WYO) Companies
Our 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.
We 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.
In 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.
As 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’s share ranged from 13 percent to 18 percent in the different areas.
In 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.
In 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.
In 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.
In New York and New Jersey, large WYO companies achieved their highest market share of NFIP residential policies among the five states—78 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–21 percent and the DSA had 4 percent–27 percent).
In 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).
Appendix IV: Comments from Department of Homeland Security
Appendix V: GAO Contacts and Staff Acknowledgments
GAO Contacts
Staff Acknowledgments
In 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. | Why GAO Did This Study
Private 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 2008–2014 (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 2008–2014.
What GAO Found
The 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)—which collects data by line of insurance from insurance companies—and 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 2008–2014) 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.
According 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.
What GAO Recommends
GAO 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. |
gao_GAO-16-151 | gao_GAO-16-151_0 | Background
Taxpayer Services and Tax Return Process
IRS 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.
Correspondence: 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’s 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 “overage.” 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.
Online services: IRS’s 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’s Interactive Tax Assistant application to get answers to tax law questions without calling or writing to IRS.
Face-to-face assistance: Face-to-face assistance remains an important part of IRS’s service efforts, particularly for low-income taxpayers. Taxpayers can receive face-to-face assistance at IRS’s 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.
Tax 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.
Budget and Service Changes
IRS’s 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’s 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’s website. See appendix II for more details on these service initiatives.
Tax Law Changes
A 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.
IRS’s Customer Service Continued to Decline in 2015 and IRS Has Not Developed a Comprehensive Service Strategy
IRS Reduced Resources for Answering Telephones and Correspondence in 2015 in Order to Meet Other Responsibilities
Overall, 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—about 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.
IRS 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).
As 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’s 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.
IRS Provided Taxpayers with Poor Telephone Service and Encountered Difficulties in Answering Correspondence and Providing Other Assistance
Telephone: 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).
Calls 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—including calls pertaining to PPACA and identity theft—while 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.
IRS 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’s 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.
Figure 3 shows that a key indicator of taxpayer service, the level of service (LOS)—defined as the percentage of people who want to speak with an IRS assistor who were able to reach one—declined to about 38 percent in fiscal year 2015. While the IRS Commissioner characterized this as “abysmal” service, it was in line with IRS’s 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.
In 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.
Correspondence: 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.
As shown in figure 5, the percentage of correspondence cases in IRS’s inventory classified as “overage”—cases generally not processed within 45 days of receipt by IRS—has stayed close to 50 percent since fiscal year 2013. However, this is more than double fiscal year 2010’s 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.
The 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.
Online: 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’s Get Transcript application allowed taxpayers to obtain a viewable and printable transcript on IRS’s 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.
In 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.
In 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’s 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’s 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’ identities.
Authenticating 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.
While IRS experienced security problems with Get Transcript, it continued to build on progress in directing more taxpayers to other online resources. IRS’s 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’s website.
Walk-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’s 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.
At 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—a 3 percent increase from the previous year. See appendix VII for additional information on taxpayer use of walk-in and volunteer site services.
IRS Streamlined Its Processes for Handling Taxpayer Correspondence and Is Working to Implement a New Quality Review Process
IRS 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—which oversees both Accounts Management and Submission Processing—have been working to identify opportunities to improve IRS’s 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’s systems code them correctly so they are routed to the appropriate assistor; reviewed IRS’s 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’s 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.
IRS’s launching of its Get Transcript tool—one of the service initiatives IRS implemented in fiscal year 2014—helped 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.
In 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’ work, instead of the assistors’ 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.
We 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.
IRS Does Not Have Adequate Controls to Ensure Assistors Consistently Send Accurate Correspondence to Taxpayers
Since 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.
Managers 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.
IRS officials confirmed that assistors’ 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.
IRS‘s 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 “timely” 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 “overage.” In addition, internal control standards state that agency management should design appropriate types of control activities—such as policies, procedures, techniques, and mechanisms— to achieve its stated objectives.
Accounts Management officials acknowledged they do not have adequate controls in IRS’s 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’s 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.
Treasury and IRS Have Not Developed a Comprehensive Customer Service Strategy with Measurable Performance Targets
Both 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.
In response to GPRAMA, executive orders, and other policies, Treasury and IRS have taken steps to define customer service targets and align them to Treasury’s and IRS’s 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’s 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’s 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.
However, Treasury and IRS’s 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— such as the Treasury Inspector General for Tax Administration (TIGTA) and the National Taxpayer Advocate—do not have information readily available to monitor IRS's performance in handling correspondence from taxpayers.
IRS 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’ 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.
IRS 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—or the “best in the business”—to 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.
IRS 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’ needs for services at a lower cost.
In 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’s 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’s strategic plan beginning in spring 2016. However, IRS’s 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.
Opportunities Exist to Improve and Streamline Return Processing
IRS Had Mixed Results Implementing New and Extended Tax Law Provisions
IRS 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.
One area, however, where IRS did experience some problems was verifying taxpayers’ 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.
IRS’s Refund Timeliness Performance Measure Does Not Include All Returns with Errors
IRS’s 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’s responsibilities is to correct these errors. IRS generally does this in three processing units: Error Resolution System—Corrects a wide range of simple errors, such as missing schedules or forms using Math Error Authority. Rejects—Corrects incomplete returns by corresponding with taxpayers to request information, such as missing forms. Unpostables—Corrects returns that failed to pass validity checks and cannot be recorded (or posted) to the taxpayer’s account, such as incidents associated with identity theft.
IRS has three units that correct errors—the 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.
When 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.
Even 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’ 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.
IRS Has Not Undertaken a Comprehensive Evaluation of Its Return Processing Operations, Resulting in Missed Opportunities to Identify Savings and Efficiencies
We 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’s 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.
However, these reviews do not include comprehensive assessments of long-term or potentially systemic inefficiencies in IRS’s 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.
During 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’s 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’s 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.
IRS 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’s 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’s computing systems are not set up to do so.
IRS 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’s 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.
IRS Redirected Resources to Core Services, but Could Improve Services and Compliance by Implementing Our Prior Recommendations
IRS Redirected about $50 Million in Resources to Focus on Services Only IRS Can Provide
IRS 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.
IRS 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’ 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’s actions also helped the agency move toward its vision of transitioning taxpayer demand for assistance to lower cost, self-service options.
Implementing Our Prior Filing Season-Related Recommendations and Expanding Use of Math Error Authority Would Provide IRS with Multiple Benefits
IRS 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.
However, 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 “Real Time Tax” 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.
Our prior work also identified actions Congress could take to enhance IRS’s 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).
In fiscal years 2015 and 2016, the administration included legislative proposals that would grant Treasury regulatory authority to expand the IRS’s 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.
Expanding 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’s 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.
We 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’s efforts to conduct more pre-refund matching of W-2 information.
Conclusions
The severe decline in IRS’s 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’s reduced budget and expanding responsibilities, we have reported for several years that IRS needs to dramatically revise its approach to customer service. While IRS’s 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.
IRS 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’s performance plan. This would enhance Congress’s understanding of IRS’s customer service performance and challenges.
IRS 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.
Matter for Congressional Consideration
To 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.
Recommendations for Executive Action
To improve performance management of taxpayer services, we recommend that the Secretary of the Treasury update the Department’s performance plan to include overage rates for handling taxpayer correspondence as a part of Treasury’s performance goals.
To 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.
Agency Comments and Our Response
We 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.
Treasury neither agreed nor disagreed with our recommendation to update the Department’s performance plan to include correspondence overage rates as a part of Treasury’s 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.
IRS 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’ 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.
As 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.
In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me at (202) 512-9110 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.
Appendix I: Objectives, Scope, and Methodology
Our 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.
To 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’s 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’s telephone operations) in Atlanta to observe assistors answering taxpayer calls and correspondence; interviewed officials from IRS’s 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’s 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’ 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.
To 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’s actions to implement our prior recommendations, we reviewed relevant documentation, including IRS Joint Audit Management Enterprise System reports tracking IRS’s actions to implement our recommendations, and obtained information from IRS officials.
To 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.
Appendix II: The Internal Revenue Service Implemented Service Initiatives in Fiscal Years 2014 and 2015
We 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’s 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’s website.
Fiscal 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’s walk-in sites. 3. Launched the “Get Transcript” 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’s online tool.
Fiscal 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.
Appendix III: Appropriated Resources, User Fees, and Other Resources for IRS Taxpayer Services, Fiscal Years (FY) 2010 through 2015
Resources Available for Obligation New Appropriated Resources Pre-Filing Taxpayer Assistance and Education
Appendix IV: IRS Experienced Substantial Decreases in Levels of Service and Increased Average Wait Times among Many IRS Telephone Lines since Fiscal Year 2010
IRS 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.
Average wait times (in minutes)
IRS changed the name of the product line from "Identity theft" in May 2013.
Appendix V: Receipts and Closures Changed for Selected Categories of Taxpayer Correspondence since Fiscal Year 2010, While Overage Rates for Most Categories Increased
Appendix VI: Use of IRS Website and Online Services Generally Increased since Fiscal Year 2010
Appendix VII: Services Offered at IRS Walk- in and Volunteer Sites, Fiscal Years (FY) 2010 through 2015
Appendix VIII: Executive Orders, Presidential Memorandums, and Office of Management and Budget Guidance Outlining Required Agency Actions on Customer Service
Executive 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.
Executive Order 12862, Setting Customer Service Standards, was issued in September 1993 and requires that all executive departments and agencies that “provide significant services directly to the public shall provide those services in a manner that seeks to meet the customer service standard established” which is “equal to the best in business.” 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 “must 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.” In addition, we have reported that performance data should be used to identify and analyze the gap between an organization’s 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.
Executive 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.
We 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.
Appendix IX: Internal Revenue Service’s Method for Processing Individual Tax Returns Is Complex
The Internal Revenue Service’s (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’s account, it identifies that certain returns cannot post, such as identity theft returns, and attempts to resolve these unpostable returns.
Appendix X: Open Filing Season-Related Matters for Congress and Recommendations to the Internal Revenue Service
The following tables present our prior matters for Congress and recommendations to the Internal Revenue Service (IRS) related to IRS’s 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.
Appendix XI: Comments from the Department of the Treasury
Appendix XII: Comments from the Internal Revenue Service
Appendix XIII: GAO Contact and Staff Acknowledgments
Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
During 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.
GAO 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.
What GAO Found
The 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.
More 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.
What GAO Recommends
Congress 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.
Treasury 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. |
crs_R44557 | crs_R44557_0 | Introduction
The 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.
This 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 .
HUD 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.
The 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.
Additionally, HUD and FHEO have taken steps to protect against discrimination not explicitly directed against members of classes protected under the Fair Housing Act—issuing 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.
After 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.
A Brief Overview of the Fair Housing Act
The 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:
Race Color Religion—The 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—Courts 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—The 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 —The 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."
Note 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).
The 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:
Refusing 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.
HUD's Involvement in Enforcement of the Fair Housing Act
HUD, 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.
Once 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.
No 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—a 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.
Aggrieved 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.
If an individual withdraws a complaint, no longer cooperates, or cannot be reached for follow-up, then HUD closes the complaint as an administrative closure.
In 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 ."
HUD Funding for State, Local, and Private Nonprofit Fair Housing Programs
HUD 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.
Fair Housing Assistance Program (FHAP)
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. 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.
Funding 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.
Activities 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 ."
Fair Housing Initiatives Program (FHIP)
The 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—including state and local governments, nonprofit organizations, or other public or private entities, including FHAP agencies—to 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.
FHIP 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.
HUD funds three activities that are provided for under the statute:
Private 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.
Organizations 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.
Funding for FHAP and FHIP
In 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 .
HUD and FHAP Agency Complaint and Enforcement Data
HUD 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.
Complaints 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—38% 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.
Recent 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—familial status, national origin, sex, religion, and color—have 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.
The 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).
Other HUD Efforts to Prevent Discrimination in Housing
In 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.
The following subsections describe HUD's regulations regarding equal access to housing as well as several guidance documents HUD released during 2016.
HUD's Equal Access to Housing Regulations
The 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.
The 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.
In February 2015, based on this monitoring, HUD followed up by issuing a notice governing Community Planning and Development (CPD) programs—Community 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.
The 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.
HUD Guidance
In 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.
Use of Criminal Background Checks
In 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.
HUD'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.
Nuisance Ordinances and Victims of Crime, Including Domestic Violence
In 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—to lessen or remove—a 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.
The 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.
People with Limited English Proficiency
Another 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.
If 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.
Requirement for HUD and Grant Recipients to Affirmatively Further Fair Housing (AFFH)
In 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.
What "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
Action 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.
A 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
This 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.
In 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.
AFFH Process for Specific HUD Grantees
For 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.
On 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 .")
The Old Process: Analysis of Impediments
Prior 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:
the 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.
Regulations 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.
The 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.
HUD 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).
Both 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.
The New Rule: The Assessment of Fair Housing
The 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.
This subsection describes how the AFFH rule is to operate.
Assessment of Fair Housing Submission Deadlines
The 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.
The Assessment of Fair Housing (AFH)
The AFFH rule defines "affirmatively furthering fair housing" as
taking 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.
Prior 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.
The AFH has several steps that program participants are to take:
Summarizing 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.
The 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.
Under 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.
HUD 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).
According 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.
While 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.
Assessment Tool
In 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.
The 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.
Proposed Legislation to Prevent Implementation of the AFFH Rule
Since 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.
Versions 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.
HUD Decision to Delay Implementation of the AFFH Rule
On 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.
Five months after HUD released its notice extending the deadline for local governments, on May 8, 2018, a group of organizations—the National Fair Housing Alliance, the Texas Low Income Housing Information Service, and Texas Appleseed—filed 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.
A 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).
In 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.
Currently, 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.
Other Requirements Overseen by HUD's Office of Fair Housing and Equal Opportunity
In 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.
Section 3, Economic Opportunities for Low- and Very Low-Income Persons
Section 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.
Public 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.
Other 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.
Section 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.
Limited English Proficiency
FHEO 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.
HUD'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.
Depending 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.
Congress 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.
Appendix. FHAP and FHIP Funding Table
The table below shows FHAP and FHIP funding from FY1996 to the present. | 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.
State 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:
The 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.
Another provision of the Fair Housing Act requires that HUD affirmatively further fair housing (AFFH). As part of this requirement, recipients of certain HUD funding—jurisdictions that receive Community Planning and Development grants and Public Housing Authorities—go 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.
Among 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.
FHEO 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. |
gao_GAO-16-545 | gao_GAO-16-545_0 | Background
The mission of IRS, a bureau within the Department of the Treasury, is to provide America’s 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.
IRS 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.
The mission of IRS’s 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’s Information Technology organization.
IRS Relies on IT to Carry Out Its Mission
IT 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’s toll-free access to tax information.
For 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’s 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.
Approximately $1.4 billion of IRS’s 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.
TSS supports IRS’s 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.
MSSS 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.
FATCA 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.
ACA encompasses the planning, development, and implementation of IT systems needed to support IRS’s 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.
CADE 2 is intended to provide daily processing of taxpayer accounts.
A 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’s 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.
RRP is intended to deliver an integrated and unified system that enhances IRS’s 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.
GAO Has Reported on IRS’s Major IT Investments and Identified Needed Improvements
Over 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.
We 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–a 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.
We 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.
Further, in April 2013 we reported that the majority of IRS’s 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.
IRS 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’s current program management processes and the cost and burden to use it outweighed the value added. While we disagreed with IRS’s 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.
Finally, our February 2015 report found that most of IRS’s 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.
IRS Has Identified IT Priorities for Fiscal Year 2016, but Does Not Have a Process for Prioritizing Modernization Efforts
IRS 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’s 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.
IRS Has Identified Priorities for Operations Support and Modernization
IRS has identified eight priorities—referred to as repeatable priority groupings—for 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’s 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’s 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.
IRS has also identified eight priority projects for modernization. These projects, as well as their descriptions and associated funding allocations are identified in table 4.
IRS Has a Structured Process for Prioritizing Funding for Its Operations Support Activities, but Lacks a Similar Process for Modernization Activities
According to GAO’s 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’s 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’s 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.
Further, the Office of Management and Budget’s (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.
In 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’s prioritization process.
IRS 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.
IRS 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’s 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’s IT Financial Management Service.
Finally, IRS senior executives stated that its final funding decisions on IT proposals are based on IRS’s prioritization process. According to these officials, when the agency receives its appropriation, it evaluates prioritized activities—starting with the highest priority demands—until 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’s Senior Executive Team approves the Chief Technology Officer’s funding recommendations and submits the recommendations to the Commissioner and Deputy Commissioners for final funding approval.
Despite 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’s 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.
In 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’s 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.
Senior 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’s needs and priorities for appropriated funds. Such a process would better assist Congress and other decision makers in carrying out their oversight responsibilities.
Performance Varied for Selected Investments
Of the six selected investments in our review, two development investments—FATCA and RRP—performed 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.
Four Investments in Development Experienced Variances and Performance Reporting for These Investments Could Be Improved
Best 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’s 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’ 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.
FATCA 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).
As 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.
IRS 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.
While 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.
CADE 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.
With 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—after 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.
Regarding ACA, IRS does not report timely cost or scope information.
A 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.
Reporting 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.
One Investment in Operations and Maintenance Met All Operational Performance Goals, the Other Met the Majority of Goals
According to OMB’s 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’s 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.
The 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.
Table 9 identifies the MSSS operational performance metrics, their descriptions, and the performance against these metrics during fiscal year 2015.
IRS 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.
According 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.
Table 10 identifies the TSS operational performance metrics, their descriptions, and the performance against these metrics during fiscal year 2015.
Conclusions
While 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.
IRS has developed performance metrics for two investments—FATCA and RRP—which 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.
Recommendations for Executive Action
To 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’s 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’s 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’ final funding decisions on IT proposals are based on IRS’s 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.
Agency Comments and Our Evaluation
We 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.
With 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.
Regarding 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’s 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.
We 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.
If 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.
Appendix I: Objectives, Scope, and Methodology
Our objectives were to (1) describe the Internal Revenue Service’s (IRS) current information technology (IT) investment priorities and assess IRS’s process for determining these priorities, and (2) determine IRS’s progress in implementing key IT investments.
To address our first objective, we reviewed documentation, such as IRS’s fiscal year 2016 Business Systems Modernization Operating Plan, as well as financial reports to determine IRS’s IT funding priorities and funding allocations.
In addition, we reviewed artifacts from IRS’s 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’s process for determining its IT investment priorities. Further, we interviewed officials in IRS’s Office of Strategy and Planning, as well as stakeholders of the Portfolio Investment Planning process from IRS business units. We then analyzed IRS’s processes against best practices in our IT Investment Management Framework and the Office of Management and Budget’s 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’s role in IRS’s process for prioritizing IT funding.
For our second objective, we analyzed the performance of four key development investments—Customer 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 —Telecommunications Systems and Support (TSS) and Mainframes and Servers Services and Support (MSSS). We chose these investments because they represented IRS’s most significant expenditures on development and operations for fiscal year 2015 ($496.5 million and $777.8 million, respectively).
A 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’s 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’s guidelines for an Earned Value Management System. For CADE 2, we analyzed IRS’s quarterly reporting of planned and actual costs, as well as requirements reports and schedule reporting. For ACA, we analyzed IRS’s 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.
To 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.
To determine the reliability of data used for our review, we obtained and reviewed IRS’s 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’s Investment Performance Tool. In addition, we relied on extensive work we previously completed on IRS’s 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.
We 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.
Appendix II: Performance Evaluation for Selected Investments in Development
This appendix illustrates the potential for reporting complete performance information via IRS’s 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.
Return Review Program
IRS 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’s 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.
Foreign Account Tax Compliance Act
IRS 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’s 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.
Appendix III: Comments from the Internal Revenue Service
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
IRS 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.
Accordingly, 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.
To 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.
What GAO Found
The Internal Revenue Service (IRS) has developed information technology (IT) investment priorities for fiscal year 2016, which support two types of activities—operations 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.
Of the six investments GAO reviewed, two investments—Foreign Account Tax Compliance Act and Return Review Program—provided 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.
Two 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—Mainframes and Servers Services and Support and Telecommunications Systems and Support—generally met performance goals.
What GAO Recommends
GAO 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. |
gao_GAO-14-801 | gao_GAO-14-801_0 | Background
Future Operational Environment Includes Increasing A2/AD Challenges
Future 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.
The JOAC notes that challenges to operational access are not new but that three trends promise to significantly complicate DOD’s ability to establish operational access.are According to the JOAC, the three trends
Technology 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.
Space 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.
Posture 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.
According 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.
The JOAC describes A2/AD challenges in the context of an adversary’s 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.
Militarily, 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.
DOD Strategic Guidance and Recent Joint Concepts Focus on Operational Access
DOD 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’s 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.
The 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.
The 2014 QDR maintains the emphasis on overcoming A2/AD challenges. It builds on the 2012 Defense Strategic Guidance and continues DOD’s 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’s three strategic pillars—build security globally and project power and win decisively—emphasize 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’s activities in order to best address the increasingly complex operational environment.
The 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’s vision for how the joint force will defend the nation against a wide range of security challenges and helps establish force development priorities.
Among these priorities is developing capabilities to defeat A2/AD threats, which as noted above is the specific focus of the JOAC.
The 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).
Army and Marine Corps Are Undertaking Efforts to Prepare for Operational Access Challenges
The 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.
Army and Marine Corps Are Incorporating Operational Access Challenges into Service Concepts and Wargames
The 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’s development of supporting functional concepts, which eventually inform Army assessments of capability needs, gaps, and solutions.
The 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.
In 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’s 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’ 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.
Although 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.
Army 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
The 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.
Engagement Activities
The 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’s 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.
Both 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.
In 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.
Entry Operations
The 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.
The 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.
It 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—small, 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.
Logistics
The 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’s and the Army’s 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.
According 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.
In 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’s and the joint force’s demand for items such as fuel, water, and ammunition. For example, the Army’s 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.
Missile Defense
Another 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.
Land-based missile defense is a core Army function and a main element of DOD’s 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’s missile defense force structure indicate that they do not meet this required capability, including the following:
Mobility/supportability—The 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.
Capacity—According 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.
Cost—According to DOD, current missile defenses are very expensive. By pursuing increasingly advanced missiles, adversaries are able to impose costs on the United States.
Army 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’s 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.
DOD Is in the Early Stages of Developing the JOAC Implementation Plan, but Has Not Fully Established Specific Measures and Milestones to Assess Progress
DOD is developing an implementation plan for the JOAC in order to bring coherence to the department’s 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’s 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.
DOD Is in the Early Stages of Developing the Joint Operational Access Concept Implementation Plan
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. 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.
The 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.
The first iteration of the implementation plan—the 2014 plan—remains 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.
These 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.
The 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’s current list of prioritized gaps in the Chairman’s Capability Gap Assessment with the list of JOAC capabilities. The working group also included a special topic in the annual Chairman’s 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.
Officials 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.
Draft Implementation Plan Does Not Have Fully Established Specific Measures and Milestones to Assess Progress
The 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.
Moreover, GAO’s Schedule Assessment Guide states that milestones and measures are essential for tracking an organization’s 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.
The draft JOAC Implementation Plan identifies four stages at which the working group is to assess implementation.
Implementation Actions. The working group is to assess the progress made in implementing the discrete materiel and nonmateriel actions in the execution matrix.
Required 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.
Operational Objectives. The Implementation Plan organizes the required capabilities into four operational objectives—the 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.
End State. The working group is to assess progress in reaching the JOAC end state based on the implementation progress of the four operational objectives.
The 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—i.e., the number of actions—but 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.
Similarly, 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.
Joint 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.
While 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’s Schedule Assessment Guide, that emphasize the importance of tracking an organization’s 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’s 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.
Conclusions
The 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’s 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.
DOD’s 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’s efforts to address JOAC-required capabilities, such as the Army’s 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—including with respect to their key roles in engagement activities, entry operations, logistics support, and missile defense—with 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.
Recommendation for Executive Action
To improve DOD’s 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.
Agency Comments and Our Evaluation
We 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’s 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.
In 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’s 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.
DOD also provided technical comments, which we have incorporated as appropriate.
We 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.
If 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.
Appendix I: Joint Operational Access Concept Required Capabilities
The 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.
Command and Control
1. 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’s intent and effect the necessary cross-domain integration laterally at the required echelon.
Intelligence
6. 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.
Fires
9. 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.
Movement and Maneuver
13. The ability to conduct and support operational maneuver over strategic distances along multiple axes of advance by air and sea. 14. The ability to “maneuver” 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.
Protection
18. 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.
Sustainment
24. 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.
Information
27. The ability to inform and influence selected audiences to facilitate operational access before, during, and after hostilities.
Engagement
28. 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.
Appendix II: Comments from the Department of Defense
Appendix III: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
According 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.
GAO 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.
What GAO Found
The Army and Marine Corps are undertaking multiple efforts to address operational access challenges—challenges that impede a military force's ability to enter and conduct operations in an area—that 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
engagement activities—improving access conditions through such activities as multinational exercises, prepositioning supplies, and forward presence, and
entry operations—deploying forces onto foreign territory to conduct missions such as eliminating land-based threats to access.
In addition, the Army has identified areas specific to its role, including
logistics—sustaining forces despite increased vulnerabilities from access threats and challenges associated with new operational approaches, and
missile defense—providing defense against increasingly accurate, lethal, and available ballistic and cruise missiles.
The 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.
What GAO Recommends
GAO 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. |
gao_GAO-03-320 | gao_GAO-03-320_0 | Background
Our 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.
In our past work, we have offered several possible approaches for better managing crosscutting programs—such as improved coordination, integration, and consolidation—to 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.
Perhaps 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.
OMB guidance to agencies on the Results Act states that, at a minimum, an agency’s 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.
In April 2002, as part of its spring budget planning guidance to agencies for preparing the President’s fiscal year 2004 budget request, OMB stated that it is working to develop uniform evaluation metrics, or “common measures” 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’s common measures initiative initially focused on the following crosscutting program areas: job training and employment, health.
We 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’ 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.
Scope and Methodology
To 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.
Family 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.
Financial 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.
Public health systems focuses on major federal efforts to prevent and control infectious diseases within the United States.
To 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’s 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.
OMB 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.
We 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.
We 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.
We conducted our review from September through November 2002, in accordance with generally accepted government auditing standards.
Agencies Involved in Crosscutting Areas Show Opportunities for Coordination
As shown in table 1, multiple agencies are involved in each of the crosscutting program areas we reviewed.
The discussion of the crosscutting areas below summarizes detailed information contained in the tables that appear in appendixes I through IV.
Drug Control
Fourteen 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’s 2001 Annual Report discussed two strategic goals that pertain to controlling the supply of drugs that enter the United States, including (1) “shielding U.S. borders from the drug threat” and (2) “reducing the supply of illegal drugs.” ONDCP reported two performance goals under the strategic goals—reduce the rate of illicit drug flow through transit zones and reduce the shipment rate of illicit drugs from arrival zones and supply zones.
For fiscal year 2001, all the agencies we reviewed—Justice, State, Transportation, and Treasury—discussed 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.
None 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’ effectiveness in dissolving major drug trafficking organizations and prosecuting and convicting major traffickers. For the other goal—increasing foreign governments’ effectiveness in reducing the cultivation of coca, opium poppy, and marijuana—State 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—number of priority drug trafficking organizations dismantled or disrupted by the Drug Enforcement Administration (DEA)—and did not meet one of two targets for the second measure—the number of drug trafficking organizations dismantled by the Federal Bureau of Investigation (FBI).
The four agencies we reviewed—Justice, State, Transportation, and Treasury—provided 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.
According 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’s 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—Transportation 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.
Justice, 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’s 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.
While 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—number 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.
Family Poverty
Federal government agencies have major programs aimed at supporting families classified as poor. For example, HHS’s 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.
In addition, Agriculture’s Food Stamp Program helps low-income individuals and families obtain a more nutritious diet by supplementing their incomes with food stamp benefits. Agriculture’s 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—the one-stop center system—to 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.
The 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’s Workforce Investment Act Committee, which includes HUD, Labor, HHS, and Education, to address the nation’s 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 “showcase” 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’s 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’s CMS stated that they coordinated with other agencies, but did not specify the agencies or the types of coordination efforts.
The 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.
All 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’ receipt of health care despite Head Start’s medical referrals and (2) Medicaid’s 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’ use of tax credits and continuing the Pathways to Advancement pilot project, which subsidizes employers, upgrades and advances current TANF “alumni,” and validates data at the program level, among other strategies.
For 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— Agriculture, ACF, HUD, and Labor—provided 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’s baseline measure and reporting methodology, but it does not describe specific strategies for how it intends to achieve its targets for this area.
All 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—Agriculture, HUD, and Labor—included 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.
Financial Institution Regulation
Financial 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.
A 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.
Although 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.
Generally, 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’s 2002-2003 plan includes a section on interagency coordination of crosscutting issues. For instance, the section of the plan entitled, “Interagency Coordination of Crosscutting Issues” 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.
In 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.
On 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—scheduling 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.
On 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’s 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’s 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.
Of 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’s 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.
Public Health Systems
Broadly 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—federal 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’s foodborne disease surveillance systems.
Agriculture and each of the five components of HHS we reviewed—CDC, CMS, FDA, HRSA, and NIH—discussed 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.
According 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—to 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—increase the proportion of the national AIDS education and training center (AETC) interventions provided to minority health care providers—will not be collected until February 2003. Three agencies—CDC, FDA, and Agriculture—provided explanations for not meeting a measure or goal that appeared reasonable. For example, FDA reported that it missed its target—inspect 90 percent of high-risk domestic food establishments each year—because 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.
For fiscal year 2003, HHS’s 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—“increase the number of minority health care and social service providers who receive training in AETCs”—because 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’s 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.
Agriculture 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— create a coordinated national and international food safety risk management system to ensure safety of U.S. meat and poultry—has 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.
Agriculture 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’s 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.
FDA 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’s 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.
Concluding Observations
We 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’s 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.
Some 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.
Furthermore the quality of the performance information reported—how 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—varied 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.
Agency Comments and Our Evaluation
We 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.
Regarding 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.
Regarding 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’s 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.
Regarding family poverty, HUD commented that, although GAO’s review focused on two of HUD’s eight goals, it believes all of its goals and many of its indicators have an impact on family poverty. We do not dispute HUD’s 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.
Regarding 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.
We 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.
If 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.
GAO Contact and Staff Acknowledgments
GAO Contact
Acknowledgments
In 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.
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Public Affairs | Why GAO Did This Study
GAO'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.
What GAO Found
GAO 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. |
crs_RS20672 | crs_RS20672_0 | Background
Sources 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.
In 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 [μg/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.
The 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.
Arsenic and the 1996 SDWA Amendments
In 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.
The 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.
EPA's Final Arsenic Rule
In 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.
Standard-Setting Process
In 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.
Variances and Exemptions
Congress 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.
The 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.
Congress 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.
Exemptions 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.
Costs and Benefits
When 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.
In 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.
Regarding 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.
EPA'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.
Arsenic Rule Review
EPA 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 μg/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.
Legislative Action
Since 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.
The 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.
In 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.
Arsenic-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.
Bills 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.
Safe 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].) | 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.
Since 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. |
gao_AIMD-96-4 | gao_AIMD-96-4_0 | Background
Prior 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 “pending its disbursement for program purposes.”
The House Committee on Government Operations, when considering the CMIA legislation in 1990, noted that the Intergovernmental Cooperation Act had been “the source of continuing friction between the states and the Federal Government.” The House Committee stated that under the Intergovernmental Cooperation Act, “the States need not account to the Federal Government for interest earned on Federal funds disbursed to the states prior to payment of program beneficiaries.” Several years earlier, in 1988, when the Senate Committee on Governmental Affairs had looked into this matter, it found that as a result, “some administering departments at the state level were drawing down Federal funds too far in advance of need, costing the Federal Government foregone interest.”
Both committees pointed out, however, that whenever the federal government complained that states profited unduly from early drawdowns, states would recite “numerous instances where they lose interest opportunities because the Federal Government is slow to reimburse them for moneys the states advance to fund Federal programs.” 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.
The House Committee expected that CMIA would “provide a fair and equitable resolution to those differences.” It would do so, according to the committee, by establishing “equitable cash transfer procedures, procedures whereby neither the Federal nor state governments profit or suffer financially due to such transfers.”
CMIA, as enacted in 1990, requires the federal government to schedule transfers of funds to states “so 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,” and expects states 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 for program purposes.” 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.
The Senate Governmental Affairs Committee explained when considering a 1992 amendment to CMIA that the act is “meant 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.” The “self-enforcing incentive” that the Senate Committee refers to is the act’s 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’s 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’s 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’s bank account.
CMIA 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:
The Department of the Treasury must establish rules and regulations for implementing CMIA.
States 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.
States may claim reimbursement from Treasury annually for allowable direct costs relating to development and maintenance of clearance patterns and the calculation of interest.
States 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.
The 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’s request, review annual reports submitted by the states for reasonableness and accuracy.
During fiscal year 1994 (which, for the majority of states, included 9 months of the states’ 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.
Objectives, Scope, and Methodology
Our objective was to report, as required under the act, on CMIA’s 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’s request, reviewed annual reports submitted by the states for reasonableness and accuracy.
To 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.
The 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.
We also reviewed Treasury’s 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.
To 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.
The period covered by the audit was the states’ 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.
The 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.
We 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’ claims for direct costs reimbursement), nor did we test the accuracy of program disbursements made by the states.
We provided a draft of this report to Treasury’s FMS for review and comment. FMS agreed with our findings and conclusions.
The Three Key Agents of CMIA Have Made Progress in Achieving the Act’s Purpose
Our review showed that the Department of the Treasury, federal program agencies, and the states have made substantial progress in achieving the act’s 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.
While 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’ 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.
Financial Management Service and Federal Program Agencies
As amended, CMIA directed that by July 1, 1993, or the first day of a state’s 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.
FMS 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.
As 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.
In 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’s implementation.
States
State 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.
The 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.
Treasury-State Agreement: All but 2 of the 56 states and all of the 12 states visited signed a first year TSA with FMS.
Clearance 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.
Adherence 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’s 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.
In 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.
In 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.
Interest 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.
Our 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’s claim, but state officials told us that they no longer had sufficient documentation to support their claim.
Direct 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.
Annual Reports: All 56 states submitted an annual report to FMS for the first year’s activities.
Some States View Certain Procedures as Burdensome
While 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.
Some of the issues cited by the states included:
Administrative 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.
Three 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.
A 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.
Treasury 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.
Some 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.
We 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.
First-Year Exchange of Funds Indicates Act Is Working
Under 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.
Interest 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’ appeals were subsequently approved based on additional supporting documentation provided to FMS.
As 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’ immediate control and was instead attributed to certain states’ 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’ adherence to such laws.
Single Audit Coverage
OMB 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.
The 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’ 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.
FMS 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.
FMS 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’s 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.
Conclusions
The 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’s effectiveness and help alleviate any concerns about administrative burden.
We 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.
This 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.
Gene 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.
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Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Why GAO Did This Study
Pursuant 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.
What GAO Found
GAO 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. |
crs_R42645 | crs_R42645_0 | Background
Despite 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.
The 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.
The 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.
In 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."
In 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.
Renewed Political Contestation
In 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.
Onaga 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.
Outlook for Construction of Offshore Runways at the Henoko Site
Construction 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.
Construction 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.
Okinawa's Strategic Importance
Okinawa'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.
The 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.
Although 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.
One 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.
Okinawan History and Grievances
The 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.
The 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—though 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.
After 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.
Contemporary Okinawan Views
The 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.
The 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.
These 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.
Media 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.
The 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.
Policy Background to Base Realignment
Attempts 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.
Efforts 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.
The 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.
Since 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.
Overall Progress on Realignment Process
The 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.
Increased 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.
Impact Mitigation Measures on Okinawa
The 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.
Based 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.
A 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.
The Politics of U.S. Basing in Okinawa
In 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.
Contemporary 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.
Tokyo-Okinawa Relations
Although 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.
However, 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.
Role of the Prefectural Governor
The 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.
Governor Nakaima Agrees to Futenma Relocation with Conditions
First 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.
In 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.
Prime 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.
Governor Onaga's Multi-Pronged Struggle against Futenma Relocation
Governor 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.
On the political front, Onaga has sought to bring wider attention—from mainland Japan and around the world—to 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.
Nago City Political Dynamics
Camp 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.
On 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.
Congressional Involvement
In 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.
Concerns Raised in 2011
In 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.
Soon 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.
Funding Cuts and New Requirements in FY2012 National Defense Authorization Act
Increasing 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.
The 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
... 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.
2012 CSIS Assessment
Section 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."
Incremental Progress on Realignment since 2013
The 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.
The 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.
The 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.
Ongoing Risks of Futenma Operations
As 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.
The 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.
Deployment of MV-22 "Osprey" Aircraft to Futenma
The 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. | 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.
Due 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.
In 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.
Facing 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.
In 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.
Many 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. |
gao_GAO-10-25 | gao_GAO-10-25_0 | Background
Securitization is a process by which similar debt instruments—such as loans, leases, or receivables—are 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.
TALF 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’s Financial Stability Plan under the Consumer and Business Lending Initiative (CBLI). Treasury has pledged $20 billion for TALF LLC—a special purpose vehicle created by FRBNY—to purchase the underlying collateral associated with TALF loans in the event the loans are not repaid. Because of Treasury’s role in protecting these taxpayer funds committed through TARP, Treasury has consulted with the Federal Reserve on TALF’s 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.
TALF accounts for a small proportion of TARP funds (see fig. 1). As of December 31, 2009—of the $20 billion committed—Treasury 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.
FRBNY 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.
A portion of the interest earned by FRBNY on all TALF loans—called the “excess interest”—is paid to TALF LLC as a fee for TALF LLC’s 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.
If accumulated fees and interest earned on TALF LLC’s 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.
Asset Classes Eligible for Use as TALF Collateral
When 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.
All 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’s underlying credit exposures must be for newly issued ABSs—originated by U.S.-organized entities or institutions, or U.S. branches or agencies of foreign banks—and for all ABSs—made to U.S.-domiciled obligors or located in the U.S. or one of its territories, in the case of real property.
Interest rates for TALF loans are either fixed or floating and vary according to the collateral securing the loan, as has been determined by FRBNY.
In 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’s 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.
In 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.
How TALF Works
A number of entities help administer the TALF program.
TALF agents, which are primary dealers or designated broker-dealers that operate under FRBNY’s Master Loan and Security Agreement. The agents’ 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’s share of principal and interest payments paid on the collateral backing the TALF loan.
The 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’s books and records, and assisting other TALF entities with the pricing of collateral.
Collateral monitors—Trepp LLC and Pacific Investment Management Company LLC (PIMCO)—which check the pricing and ratings of securities; provide valuation, modeling, reporting, and analytical support; and advise on related matters.
CW Capital, which provides underwriting advisory services related to certain commercial mortgage loans backing newly issued CMBSs.
FRBNY 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—that 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 “Know Your Customer” 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—a 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.
Next, 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’s 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.
On each TALF loan’s settlement date, the borrower must deliver the loan collateral and administrative fees to FRBNY’s 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’s administrative costs for the facility.
Determining the Loan Amount
If 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 “haircut,” in effect sets the amount of equity the TALF borrower holds in the collateral. Haircuts vary by FRBNY’s 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).
As 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’s 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.
TALF offers nonrecourse loans, which allow borrowers to walk away—or stop paying a loan—with 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).
When 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’s loan rate is equal to the 1-month London Interbank Offered Rate (LIBOR) rate plus 300 basis points.
If 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’s loan rate is equal to the 1-month LIBOR rate plus 100 basis points. The principal on FRBNY’s loan would be repaid before the principal of the $20 billion TARP loan.
Alternatively, 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.
Management of TALF LLC With the Federal Reserve’s and Treasury’s 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’s monetary policy considerations may not align with Treasury’s investment interests in the TALF program, Treasury plans to obtain independent advice on the disposition of investments.
TALF 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.
Fund expense reimbursement account up to $15 million.
Repay outstanding principal on any FRBNY senior loans to TALF LLC.
Fund the cash collateral account up to the senior loan commitment (currently $180 billion).
Repay outstanding principal on any Treasury loans.
Repay FRBNY loan interest.
Repay Treasury loan interest.
Repay any other secured obligations that may arise that have not been specified yet by the agencies.
Pay Treasury and FRBNY (90 percent and 10 percent, respectively) any residual amounts but only after the above requirements are satisfied.
As of December 2009, cash inflows have been used to pay TALF LLC expenses and fund the expense reimbursement and cash collateral accounts.
TALF Includes Features That Mitigate Potential Losses, but CMBSs Could Pose Greater Risks Than Other Asset Classes
Under 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’s role in TALF and we cannot evaluate FRBNY’s TALF operations.
Some Scenarios Could Provide TALF Borrowers with Economic Incentives to Stop Payment on Their Loans
As 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.
A borrower can lose equity in the collateral if the collateral’s value falls below the outstanding loan balance. As discussed earlier, TALF’s 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’s equity in the securities. If the value of the collateral were to decline—such that the borrower could sell the securities only for some amount less than $90,000—and 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.
As TALF currently works, TALF borrowers earn the difference between the ABS’s return and the cost of borrowing from FRBNY on the TALF loan, multiplied by the inverse of the borrower’s 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—the interest and principal due— a borrower might stop payment on the loan or surrender the collateral to FRBNY.
Investors 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.
TALF 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 “reputation risk” by not walking away from their loans—even 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.
Moreover, 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’s 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’s 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.
TALF Has Several Features That Likely Protect Taxpayers
Certain 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.
Credit protection is provided primarily by the borrower’s 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.
The 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.
FRBNY 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.
The final pillar, market discipline, includes the TALF borrowers’ 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.
These 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.
Rates of Return for TALF Borrowers on TALF Collateral Have Declined for Most TALF Collateral from Their Highs Earlier in 2009
As noted earlier, TALF borrowers earn the difference between the ABS’s 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’ 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.
To 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.
Most 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’s 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.
The 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’s 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’ bonds falls below the loan rate charged by the FRBNY. This occurrence is consistent with FRBNY’s 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.
New Securitizations Have Generally Been Structured with More Credit Protections since the Credit Crisis Began
Certain 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.
Credit 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’s purchase of such ABS and CMBS.
We reviewed the credit enhancements on every TALF-eligible ABS issued between the program’s 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.
In 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’ ABSs before the financial crisis. This increase was a combination of market demands and credit rating agencies’ 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.
TALF Poses Minimal Risks to TARP Even in Adverse Market Conditions; CMBS Risks are Potentially Higher
While 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’s 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—along with interest income from investing such money—will go mainly to Treasury; therefore, Treasury could potentially gain from its commitment to TALF if losses were minimal.
Treasury Currently Expects to Earn a Profit on TALF
Treasury 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—and is updated on a quarterly basis—currently projects more than $1 billion in profit related to Treasury’s TALF exposure.
To assess the reasonableness of Treasury’s position that TALF may actually earn money rather than expose the taxpayer to any losses, we reviewed the Treasury contractor’s model—which 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.
Uncertainty in the Commercial Real Estate Market Could Create the Potential for Losses if Conditions Deteriorate
While 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’s 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.
In 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.
In 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’s equity would be eliminated. Moreover, more than $3.5 billion owed by TALF borrowers—or about 85 percent of the total value of TALF legacy CMBS loans—would 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.
While 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—instead of selling them—and 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’s 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.
Treasury Worked with the Federal Reserve and FRBNY to Analyze Risks Related to TALF but Did Not Fully Document Analysis Supporting Final Decisions
FRBNY, 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’s concerns were ultimately resolved, they could not provide documentation showing how Treasury resolved the contractor’s concerns, or how the contractor’s analysis informed Treasury’s 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’s monitoring of the $20 billion of taxpayer funds at risk through TARP.
The Federal Reserve and Treasury Worked Together to Determine the Eligibility of Proposed TALF Collateral and Their Potential Risks
Treasury, 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.
Treasury officials said that one asset class that FRBNY proposed— insurance premium finance loans—required 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’s 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.
According 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—section 7(a) and section 504—that support financing for small businesses. Treasury requested that these securities be included because they would assist in carrying out TARP’s goals of supporting small businesses and the risks were deemed to be low because of their government guarantees.
As 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.
As an example, the contractor’s 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’s 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’s for this asset class, the contractor agreed with FRBNY’s estimates on haircuts and even suggested a haircut lower than FRBNY’s.
Treasury Did Not Fully Document Its Analysis or Basis to Support All Major Agreements with the Federal Reserve and FRBNY
Although Treasury told us what its reasons were for not accepting all of the contractor’s 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’s contractor, the Federal Reserve, and FRBNY.
Additionally, 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 “fluid;” 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.
Finally, 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.
Our 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—and the unprecedented size and scope of government assistance to support the financial sector— transparency and accountability are of the utmost importance. As an example, for the largest program in TARP—the Capital Purchase Program—all 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.
As 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’s administrative office for TARP—the Office of Financial Stability—faced, 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—with unprecedented economic challenges and low, impermanent staffing—may help explain why such processes were not established and documented when the program was first established.
However, 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—such as the Capital Purchase Program—have established systems for documenting decisions and the rationale for decisions. But Treasury’s 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.
Treasury’s and FRBNY’s Indicators Suggest That Credit Market Conditions Have Shown Some Improvement, but Treasury Lacks Performance Indicators in the Event that It Must Purchase TALF Assets
FRBNY, in conjunction with Treasury, monitors TALF by tracking indicators—such as securitization volumes, changes in pricing, and TALF loan volumes—by 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’s 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.
Treasury, FRBNY, and the Federal Reserve Collaborate on Monitoring Market Indicators
Federal Reserve and Treasury officials said that they collaborated on monitoring indicators that could help measure TALF’s 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’s impact. According to Treasury officials, they review FRBNY’s metrics related to TALF, including cash flows from TALF loans that it receives monthly from FRBNY, and speak daily with FRBNY officials.
New Issuances in Various Asset Classes Increased after TALF’s First Subscription in March 2009
To 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—using data from before and after TALF’s 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.
After 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—or $44.9 billion— 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.
By 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—such as the combined effects of the numerous stimulus programs, changes in consumer demand for credit, and investor willingness to invest—also 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’s “Safe Harbor” rule in light of new accounting rules effective for annual financial periods beginning after November 15, 2009.
Interest Rates in Most Asset Classes Have Generally Not Decreased Since TALF Was Announced
One of TALF’s 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.
Because 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’s inception. FRBNY officials attributed the elevated credit card rates to increased charge-offs, which have raised companies’ costs of funds. These rate changes could also be the result of credit card companies’ 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.
FRBNY 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.
TALF Loan Volumes and the Composition of TALF Participants Have Changed since the Program Began
As 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.
As 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.
CMBS (legacy 14%; new issue 0%)
According 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’s 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.
Differences in Prices and Benchmarks Have Decreased for Most TALF- Eligible ABS Collateral
As we have discussed, one method of measuring market participants’ perceived risk of a security is to compare the difference between the security’s 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.
Treasury Reviews TALF- Related Data from FRBNY’s Indicators but Has Not Developed Indicators to Collect and Disclose Data on Future TALF LLC Assets
Treasury 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—assets 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’s 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’s 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.
Although 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.
Conclusions
TALF 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’s monetary policy activities, we believe our ability to completely assess and report on taxpayers’ exposure to the entire program or the Federal Reserve’s management of the program is limited.
Although 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—specifically CMBS—are 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.
Treasury, 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.
Believing 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’s 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’s efforts to be fully transparent about TARP activities.
Matter for Congressional Consideration
To 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.
Recommendations for Executive Action
To 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.
Agency Comments and Our Evaluation
We 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.
In 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’s response, we acknowledged that securitization volumes in markets had come to a complete halt in 2008, but increased after TALF’s 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’ 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—making it virtually impossible to definitively single out and measure TALF’s impact.
Treasury 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.
Treasury 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.
Finally, 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’s 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.
In its comments, the Federal Reserve did not agree with our recommendation that Congress consider providing GAO with authority to audit the Federal Reserve’s TALF operational and administrative actions because it disagreed that there are limitations on GAO’s authority to audit these Federal Reserve activities. The Federal Reserve also noted that it fully cooperated in GAO’s conduct of this audit and provided us access to records and personnel.
The 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’s involvement in it. However, we believe the express statutory prohibition in 31 U.S.C. § 714(b) on GAO auditing the Federal Reserve’s monetary policy and discount window activities, which the Federal Reserve believes include TALF’s operation and administration, prohibits us from auditing the Federal Reserve’s 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’s performance of these activities. Further, the Federal Reserve’s 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’s TALF operational activities or other performance. In our view, our lack of authority to audit the Federal Reserve’s 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’s operation and administration of the TALF program. Our detailed response to the Federal Reserve’s comments on these issues is contained in appendix X.
We 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.
If 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.
Appendix I: Objectives, Scope, and Methodology
The 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’s implementation based on indicators tracked by Treasury and FRBNY.
GAO 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’s 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’s 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.
To 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’s Financial Stability Plan and how risks to the taxpayer were reduced in TALF’s 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’s 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).
To 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’s Investors Service and Standard & Poor’s. 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 “coupon” variable in the equation below: ROE = Coupon – (1 – 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’s and Moody’s Investors Service. For each security, we compared the level of credit enhancement for the TALF issuance with that issuer’s most recent securitization prior to TALF, which ranged from 2004 through 2008.
To understand the recent activity in CMBS markets, we collected information from Moody’s Investors Service on commercial real estate prices (Moody’s/REAL Commercial Property Price Index) and on CMBS delinquency (Moody’s 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.
We 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.
For details on our methodology for assessing adverse scenario losses from TALF ABSs and CMBSs, see appendix II.
To address the second objective on Treasury’s 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—NSM Structured Credit Solutions—that 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’s contractor and the subcontractor for clarification on the reports and to understand Treasury’s 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.
To 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’s 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.
To 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.
To 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—and ensuring that the numbers were within an acceptable range of each other—would ensure the reliability of such data for our purposes.
To determine what information Treasury collects to assess TALF’s 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’s 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’s impact on the securitization and credit markets.
Appendix II: Methodology for Market Value Analysis of ABSs and CMBSs
To 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’s 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 “stress tests” 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.
Our first analysis focused on ABSs. We conducted a market value analysis on a sample of the three largest asset classes—ABSs backed by credit cards, auto loans, and student loans—because they make up the majority of TALF’s 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).
Within 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.
We modeled TALF collateral cash flows using assumptions consistent with the FRBNY’s 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’ 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’s equity and TALF’s excess interest, a stress loss was calculated. No loss was assumed if the required spread widening was less than the extremes of November 2008.
Our 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.
For 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.
Appendix III: The Securitization Process Explained
Securitization is a process that packages relatively illiquid individual financial assets—such as loans, leases, or receivables—and converts them into interest-bearing, asset-backed securities (ABS) that are marketable to capital market investors. As outlined below, the market participants in securitization—borrowers, consumer and small business lenders, investment banks or pool assemblers, credit rating agencies, and investors—each 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.
The 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 “investor-required yield.” 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.
Appendix IV: Descriptions of Asset-Backed Securities
Auto Loan and Lease
Asset-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—for 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 “subordinate tranches,” 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.
Credit Card
Credit 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.
Student Loan
Student 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.
Insurance Premium Finance
Insurance 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.
Commercial Mortgage-Backed Securities
Cash 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.
Commercial Fleet Leases
Unlike 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’s 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.
Mortgage Servicing Advances
Mortgage 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.
Dealer Floor Plans
Floor 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.
Equipment
Equipment 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.
SBA-Loan Backed ABS
The 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—for example, similar maturity dates.
Appendix V: Credit Enhancement
Credit 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).
Subordination: 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.
Overcollateralization: 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.
Reserve 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.
Excess 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.
Yield-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.
Mortgage 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’ and other professional fees, are also accounted for in the event that the servicer incurs them while foreclosing on and liquidating repossessed real estate.
The 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’s 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.
Appendix VI: Additional Information on TALF Compliance
According 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.
TALF 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 “Know Your Customer” 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’s “Know Your Customer” programs and files. The entire process is under the management of FRBNY, without the Department of the Treasury’s (Treasury) participation.
Sponsors 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.
In 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.
According 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.
Appendix VII: New Securitization Volumes Have Increased since the Inception of the TALF Program
Since the Term Asset-Backed Securities Loan Facility’s (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.
Credit 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—about 65 percent—have been TALF supported.
Student 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’s inception.
This 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.
Appendix VIII: Comments from the Department of the Treasury
Appendix IX: Comments from the Board of Governors of the Federal Reserve System
Appendix X: Analysis of Legal Comments Submitted by the Federal Reserve
As 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’s operational and administrative actions because it disagreed that there are limitations on GAO’s authority to audit these Federal Reserve activities.
However, we believe the express statutory prohibition in 31 U.S.C. § 714(b) on GAO auditing the Federal Reserve’s monetary policy and discount window lending activities, which the Federal Reserve believes includes the Term Asset-Backed Securities Loan Facility’s (TALF) operation and administration, prohibits us from auditing the Federal Reserve’s 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’s performance of these activities. Further, the Federal Reserve’s decision to voluntarily provide requested access in this instance, while helpful, does not create GAO authority to audit the Federal Reserve’s TALF operational activities or other performance. In our view, our lack of authority to audit the Federal Reserve’s 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’s 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 “that is established by a Federal reserve bank and receives funding from the TARP,” 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’s 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’s operation or administration of TALF.
As support for its view that the May 2009 amendment in section 601 authorized GAO to audit the Federal Reserve’s 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’s position. The Senator provided material for the record stating in part, “According to Federal Reserve staff, . . . amendment No. 1020 would expand GAO’s authority to oversee TARP, including the joint Federal Reserve-Treasury Term Asset-Backed Securities Loan Facility (TALF) . . ..” 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’s TALF actions.
Citigroup, Bank of America, and Bear Stearns. This language was enacted as a new subsection (e) to 31 U.S.C. § 714.
Finally, the Federal Reserve commented that because of TALF’s unique “hybrid” nature—it serves objectives of both monetary policy and TARP— GAO has “ample authority” to audit TALF operations, Treasury’s participation in them, and the Federal Reserve’s administration of TALF “on behalf of” Treasury, all from the perspective of TARP. In this regard, the Federal Reserve noted that in practice, it obtains Treasury’s input and agreement on many aspects of TALF. However, the view that GAO can separately audit the Federal Reserve’s 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. § 714, its original legislative history, or the amendments Congress enacted to it in May 2009. “inextricably bound up in monetary policy” and is intended to be covered by the prohibition. Under this reading, GAO is prohibited from auditing the Federal Reserve’s TALF discount window lending activities even from the perspective of TARP.
The Federal Reserve’s position also conflicts with Congress’ enactment of § 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 “hybrid” 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.
In light of these statutory restrictions on GAO’s authority to audit the Federal Reserve’s TALF activities, we continue to believe that Congress should provide GAO with authority to audit the Federal Reserve’s operation and administration of the TALF program.
Appendix XI: GAO Contact and Staff Acknowledgments
Staff Acknowledgments
In 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. | Why GAO Did This Study
The 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.
What GAO Found
TALF 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. |
crs_RS22949 | crs_RS22949_0 | Introduction1
As 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.
Legal Services in the WTO
Legal 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.
In 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—(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).
As 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.
The 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.
In 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.
Any 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 §102 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.
If 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.
Certain U.S. Rules Relating to Foreign Lawyers
The 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.
Additionally, 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.
U.S. Ethical Implications
The 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.
The 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.
ABA 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.
With 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. | 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. |
gao_GAO-02-18 | gao_GAO-02-18_0 | Background
As 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.
In 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.
Under 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’s 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’s 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’s continued listing requirements and, in accordance with the market’s rules, will take action when these requirements are not met.
SEC’s oversight of a market’s equity listing requirements includes reviewing the SRO’s 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’s initial and continued equity listing guidelines or standards, must be approved by SEC and can be changed only with SEC’s approval. SEC also reviews the SRO’s listing decisions, either on appeal or by its own initiative, and SEC’s OCIE periodically inspects the SRO’s listing program to ensure compliance with the market’s listing requirements.
Listing Requirements Have Generally Addressed the Same Factors, but Amex Has Not Required That All Quantitative Requirements Be Met
In 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.
Quantitative Listing Requirements Generally Addressed the Same Factors, Although Minimum Thresholds Varied
Amex’s 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’ 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—such as size—of 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’ 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.
The 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’s. 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’ 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.
In 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.
The 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’s initial listing guidelines required, under one alternative, that a company have at least $4 million of stockholders’ 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’ equity. Such differences between initial and continued listing requirements were typical of all the U.S. markets.
Qualitative Listing Requirements Have Addressed Corporate Governance and Other Factors
The 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.
U.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’s guidelines stated that even though a company may meet all of the exchange’s 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’s 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’s financial integrity, demonstrated earning power, and future outlook.
Amex Retained the Discretion to List Companies That Did Not Meet Its Quantitative Guidelines
Although 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’s 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’s 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.
Amex Did Not Agree to OCIE’s Recommendations on Listing Requirements and Public Disclosures
As of September 7, 2001, Amex had not agreed to implement OCIE’s recommendations related to the exchange’s 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’s 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.
OCIE Recommendations Addressing Amex’s Use of Its Discretion Remained Open
OCIE 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’s 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’s 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’s listing guidelines are discretionary, investors rightfully presume that the companies listed on Amex generally meet its quantitative and qualitative guidelines.
In 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.
OCIE also expressed concerns about Amex’s 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’s 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—about 10 percent of the exchange’s 704 listings—did 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).
In 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.
In 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’s 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.
OCIE 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’s 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’s listing symbol or devise an alternative means of disclosure to denote that a company was not in compliance with Amex’s continued listing guidelines.
Amex Did Not Agree to Relinquish Its Discretionary Authority or to Modify Its Stock Symbols
As of September 7, 2001, OCIE and Amex were in ongoing discussions about the actions Amex would take to address OCIE’s recommendations. However, in responding to OCIE’s 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’s 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’s operating condition from other public sources, obviating the need for a stock symbol modifier or other public notice.
OCIE 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’s listing guidelines provided broad discretion in making listing decisions. They emphasized that they were concerned about Amex’s discretion to list companies that did not meet its quantitative guidelines, stressing that they did not want to remove Amex’s 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’s 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’s 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’s 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’ awareness of a company’s listing status.
Amex 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’ equity listing standards, recommend that stock symbol modifiers be used to identify such companies.
Finally, 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’s quantitative guidelines. According to Amex, from November 1, 2000, through August 27, 2001, 6 of the 39 new listings—approximately 15 percent—were granted exemptions to the exchange’s 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 “substantially” met all of the exchange’s initial listing guidelines. According to Amex, the determination of substantial compliance was based on the fact that the applicant had met all the exchange’s guidelines, except that the company’s 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’s quantitative guidelines. OCIE officials told us that they had considered the changes to the Amex listing program in making their recommendations.
OCIE Planned to Report to the SEC Commissioners on Significant Recommendations That Amex Did Not Agree to Implement
In 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’s 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’s 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.
Amex Did Not Prepare Management Reports That Demonstrated the Effectiveness of Its Listing Program
Amex 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’s 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.
The 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—whether they achieved compliance or were delisted—could provide Amex and OCIE with an indicator of the effectiveness of Amex’s 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 “monitors” 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’s initial and continued listing guidelines and, therefore, could be useful in identifying appropriate revisions to them.
Other markets have developed this kind of management report. In response to concerns about the effectiveness of Nasdaq’s 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.
Conclusions
Amex’s use of its discretion to initially list and continue to list companies that do not meet the exchange’s quantitative guidelines for equities could mislead investors, who are likely to assume that the companies listed on Amex meet the exchange’s 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—who have the authority to require their implementation—would provide an additional incentive for Amex to act.
Notwithstanding Amex’s 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’s 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’s listing program operations.
Recommendations to the Chairman, SEC
As part of SEC’s 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.
Agency Comments and Our Evaluation
We 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).
Also 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.
Amex 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’s rules would provide for greater investor protection if they included specific time frames for notifying the public about material events related to a company’s 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’s 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.
In 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’s “regular” listing standards or, subject to mitigating circumstances, under its less stringent “alternative” 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’s practices for continued listings in addition to data on the exchange’s exceptions-granting practices for initial listings. Our report discussed the kinds of aggregated and analyzed data that would be important to include in Amex’s management reports and that Nasdaq and NYSE include in their reports. Amex would benefit by working with SEC to ensure that the exchange’s reports contain similar information.
Scope and Methodology
To 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—Amex, the Boston Stock Exchange, the Chicago Stock Exchange, NYSE, the Pacific Exchange, and the Philadelphia Stock Exchange—and 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’s 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.
In reviewing OCIE recommendations to Amex for improving its equity listing program, we discussed the contents of the April 2001 inspection report and Amex’s written response to it with officials of OCIE and Amex’s Listings Qualifications Department and Office of General Counsel, focusing on the areas of disagreement between OCIE and Amex. Additionally, we examined OCIE’s 1997 inspection report on Amex’s listing activities, Amex’s 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.
To 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.
We 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.
As 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.
If 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.
Appendix I: Comments From the American Stock Exchange
Appendix II: Comments From the Securities and Exchange Commission | What GAO Found
The 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. |
gao_GAO-01-998T | gao_GAO-01-998T_0 | Background
In fiscal year 2000, VA’s pharmacy benefit provided approximately 86 million prescriptions at a cost of approximately $2 billion—or about 12 percent of VA’s total health care budget, compared to 6 percent of VA’s 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.
Like 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.
VA 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’s 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’ 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’s formulary meets the Joint Commission for the Accreditation of Health Care Organizations’ requirements for developing and maintaining an appropriate selection of medications for prescribers to use in treating their patient populations.
VA’s formulary lists more than 1,100 unique drugs in 254 drug classes— 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—that 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 “closed” 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 “open” classes.
To 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.
National Formulary Standardization Not Yet Achieved
While 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.
The 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’s 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.
From 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.
The second factor impeding standardization is the wide variation in the number of drugs added by VISNs to their local formularies. VA’s policy allowing VISNs to supplement the national formulary locally has the potential for conflicting with VA’s 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.
The 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’s ability to achieve cost savings through its committed-use contracts.
While 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—84 percent to 96 percent.
Of the remaining 10 percent of prescriptions filled systemwide, VA’s 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’s 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.
Prescribers 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 “great extent” or to a “very great extent.” Approximately 27 percent reported that the formulary meets their patients’ needs to a “moderate extent,” with 4 percent reporting that it meets their patients’ needs to a lesser extent. No VA prescribers reported that the formulary meets their patients’ needs to “very little or no extent.” This is consistent with IOM’s conclusion that the VA formulary “is not overly restrictive.”
Veterans 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’ 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 “lifestyle” 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.
Approval Processes for Nonformulary Drugs Have Weaknesses
While 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.
Both 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.
During 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.
In 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.
Prescribers we surveyed were almost equally divided on the ease or difficulty of getting nonformulary drug requests approved. (See table 1.)
Regardless 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’ nonformulary requests were approved.
When 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.
For 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.)
Contrary 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’s 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.
Plans for Improving Oversight Are Progressing
We are encouraged by VA’s 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’s 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’ application of these criteria. VA’s 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.
To 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’s 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. | Why GAO Did This Study
Although 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.
What GAO Found
GAO 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 . |
gao_GAO-06-813 | gao_GAO-06-813_0 | Background
Before 1996, Medicare program integrity activities were subsumed under Medicare’s 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—such 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’ 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.
HIPAA Established MIP and Provided Dedicated Funding
Beginning 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—from about $438 million to $714 million, as figure 1 shows. HIPAA authorized MIP funds to be used to enter into contracts to “promote the integrity of the Medicare program.” The statute also listed the various program integrity activities to be conducted by contractors.
MIP Funds Support Program Integrity Efforts
CMS allocates MIP funds primarily to support its contractors’ 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.
CMS has contracted with intermediaries, carriers, and MACs to perform two types of activities—claims 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.
In 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’s 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.
Contractors 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’ Medicare reimbursement.
Medical 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.
The secondary payer activity seeks to identify primary sources of payment--such as employer-sponsored health insurance, automobile liability insurance, and workers’ 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.
Benefit integrity involves efforts to identify, investigate, and refer potential cases of fraud or abuse to law enforcement agencies that prosecute fraud cases.
Provider 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.
CMS 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.
MIP Funding for All Five Activities Has Generally Increased over Time
For 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’s 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.
In 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—about 81 percent—and, 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.)
Increased 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’s 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.
CMS officials explained that medical review would help identify providers that were billing inappropriately, and provider education would focus on individuals’ 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’s program management budget. Provider education spending increased from $17 million in fiscal year 2001—before provider outreach was added to the provider education activity—to $53.5 million in fiscal year 2002. In fiscal year 2005, funding for the provider education activity reached $70 million.
In 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.)
CMS’s Current MIP Funding Allocation Approach Has Weaknesses
CMS 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’s role has changed as Medicare’s payment methods have changed in the last decade, but it continues to have the largest share of MIP funding.
MIP Funds Allocated Primarily on a Historical Basis
According to agency officials, CMS allocates funds for the five activities based primarily on an analysis of previous years’ 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’s 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.
CMS 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—which are not objectively measured—for the other three. In fiscal year 2005, for its medical review and secondary payer activities, CMS tracked dollars saved in relation to dollars spent—a quantitative measure that the agency calls a return on investment (ROI).
Having 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’s reported contribution to ROI fell to almost zero. (See fig. 5 and app. II, table 5, for additional ROI details.)
CMS 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’ 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’s 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’s 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.
However, 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’ 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.
From 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.
CMS indicated that trying to measure the results of the contractors’ 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’s successful investigations and prosecutions.
In regard to educating providers on appropriate billing practices, CMS may be missing opportunities to evaluate its contractors’ 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.
CMS 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’s 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—about $396 million, or 56 percent of MIP funds in fiscal year 2005—could 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.
CMS 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.
CMS Does Not Ensure That Funds Are Allocated in an Optimal Way within Activities
After 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.
Allocations for Medical Review, Provider Education, and Benefit Integrity Are Not Based on Vulnerabilities
Medical 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’s 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—two states experiencing high levels of fraudulent Medicare billing—improperly paid 11.5 percent of its 2004 claims—or $474.9 million—which 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.
The 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—about $5 billion in fiscal year 2004—and received about 7 cents in medical review funds for each $100 in benefits paid.
Further, 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.
Similarly, 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.
Audit’s Role Has Changed, but Funding Allocations May Not Be Optimal
During the last decade, Medicare has significantly changed how it pays institutional providers—such as hospitals and nursing homes—that 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’s 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.
CMS 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’s 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—such as critical access hospitals— and conducting required audits.
For providers paid under a PPS, CMS has shifted its audit focus to the few items that could affect a provider’s 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’s add-on payments.
CMS 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—such as at the provider level—than 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—for example, whether it should focus more attention on bad debt or other areas of the cost report for specific types of providers.
Further, CMS’s audit function continues to focus on verifying specific aspects of the provider’s cost report that affect its individual payment. This type of audit generally addresses a small portion of providers’ 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’ 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.
CMS might find it cost-effective to gather additional information because audits have the potential to give the Congress better information on hospitals’ 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—or ratio of Medicare payments to costs—than their cost reports suggested. This information was factored into MedPAC’s 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’s 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.
CMS Used Savings Information to Optimize Allocation of Secondary Payer Funds
In 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.
CMS 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—voluntary reporting of primary payer information to CMS by health insurance companies—increased 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’s compensation, could be the primary payer.
Future Programmatic Changes Will Affect MIP Funding Allocations
The 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’s current allocation approach—which agency officials characterized as primarily relying on previous fiscal year funding allocations for each activity, and to each contractor, to determine current allocations—will 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.
CMS’s Current MIP Allocation Approach Is Not Adequate to Address Emerging Risks
CMS’s current allocation approach will not be adequate to address Medicare’s 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’s benefit integrity and audit efforts.
Because 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’s 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.
Medicare Contracting Changes Will Affect MIP Allocations
Another 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—about 2 years ahead of MMA’s specified time frame. Contracting reform will affect MIP funding allocations because of (1) changes in contractors’ 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.
The transition to MACs will change some contractors’ 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’ jurisdictions, but this activity will be performed by almost all of the MACs in the future. Further, contractors’ 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.
According 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’s estimate, and in our August 2005 report on CMS’s 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.
As 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.
The 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’ performance in detecting and deterring fraud and abuse. The OIG found that although the evaluation reports were used as a basis to assess contractors’ overall performance, they did not consistently include quantitative information on the activities contractors performed or their effectiveness.
Conclusions
We 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’s billions of dollars in improper payments, CMS must use Medicare’s program integrity funding as effectively as possible. Further, Medicare’s susceptibility to fraud is growing, as it addresses the challenges of adding a prescription drug benefit to the program. Despite Medicare’s 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’s 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—and within—the five program integrity activities. Also supporting the need for CMS to assess its current allocation approach is that the agency’s 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’ 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’ effectiveness should assist CMS in making more prudent management and funding allocation decisions.
Recommendation for Executive Action
To 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’ workloads, and risk.
Agency Comments and Our Evaluation
In 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’s program integrity activities, Medicare contractors’ 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.
CMS 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.
Our 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’ views on the difficulty of developing quantitative measures for the benefit integrity activity. We also provide information on CMS officials’ 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—to the extent they can be developed—could help CMS determine whether MIP funds are being wisely invested or if they should be reallocated.
CMS 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’ workloads being more evenly distributed. In addition, CMS noted that it is developing award fee measures for contractors’ 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.
CMS 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.
We have reprinted CMS’s letter in appendix V. CMS also provided us with technical comments, which we incorporated in the report where appropriate.
As 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’s Web site at http://www.gao.gov.
If 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.
Appendix I: Objectives, Scope, and Methodology
To 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’s 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.
To 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’s management and budgetary decisions. Therefore, we considered these data to be reliable for the purposes of our review.
In addition, we interviewed CMS officials regarding changes in the Medicare program that may affect MIP funding allocations, including CMS’s 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’s 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’s evaluations of contractor performance. We performed our work from August 2005 through August 2006 in accordance with generally accepted government auditing standards.
Appendix II: Information on MIP Funding, Expenditures, and ROI
The 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.
Appendix III: Key Tasks Performed by Contractors That Conduct MIP Activities
Medicare contractors conducting activity
Hospitals, nursing homes, home health agencies, and other institutional providers that are—or have been— 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.
Contractors review all or part of the cost report to assess whether costs have been properly allocated and charged to the Medicare program.
Contractors determine if the cost report is acceptable or if it needs further review.
In some instances, contractors may conduct on-site cost report audits, which include the review of financial records and related documentation supporting costs and charges.
Contractors 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.
Most medical reviews do not require a manual review of medical records.
Often contactors conduct medical reviews simply by examining the claim itself, usually using automated methods.
Coordination of benefits (COB) contractor, intermediaries and carriers, and Medicare administrative contractors (MAC)
The COB contractor collects, manages, and maintains information regarding health insurance coverage for Medicare beneficiaries.
To gather information to properly adjudicate submitted claims, the COB contractor sends questionnaires to newly enrolled Medicare beneficiaries and employers to solicit information about beneficiaries’ health insurance coverage.
The COB contractor also collects secondary payer data from providers, insurers, attorneys, and some state agencies.
The 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.
Intermediaries and carriers also conduct secondary payer operations, including prepayment activities in conjunction with the COB contractor, and they recover erroneous secondary payer payments.
Contractors are tasked with preventing, detecting, and deterring Medicare fraud.
PSCs 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.
Once a case is developed, PSCs refer it to the OIG or to law enforcement for prosecution.
NSC reviews and processes applications from organizations and individuals seeking to become suppliers of medical equipment and supplies in the Medicare program.
NSC verifies suppliers’ 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.
NSC also periodically reenrolls active suppliers and uses data to assist with fraud and abuse research.
The 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.
When 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.
Contractors 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.
Appendix IV: CMS’s Planned Spending of $100 Million Provided by DRA
For 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’s planned spending of $100 million in general MIP funds provided by DRA, including spending related to the Part D prescription drug benefit.
Appendix V: Comments from the Centers for Medicare & Medicaid Services | Why GAO Did This Study
Since 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.
What GAO Found
For 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. |
crs_RL31026 | crs_RL31026_0 | Introduction
There are two basic antitrust laws in the United States—the 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—i.e., neither the Antitrust Division nor private persons—may 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.
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). 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—i.e. competition and not the protection of any individual competitor .
The Primary Laws
Sherman Act (15 U.S.C. §§ 1-7)
Section 1 (15 U.S.C. § 1)
Prohibits contracts or conspiracies in restraint of trade, which phrase has been, since at least 1911, judicially interpreted as meaning unreasonable restraints of trade.
Section 2 (15 U.S.C. § 2)
Prohibits monopolization or attempted monopolization; it is sometimes used in conjunction with section 7 of the Clayton Act
(15 U.S.C. §18), which prohibits mergers or acquisitions which may tend to lessen competition.
Violation 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.
Clayton Act (15 U.S.C. §§ 12-27)
Section 4 (15 U.S.C. § 15)
Contains the damage provisions of the antitrust laws. 15 U.S.C. §15(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. §15(b)). The limitation to actual damages was also applicable, until late 1990, to monetary injuries sustained by the United States (15 U.S.C. §15a)); 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. §15.
Section 7 (15 U.S.C. § 18)
Is 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.
Section 7A (15 U.S.C. § 18a)
Contains 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. §18a(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.§18a(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. §18a(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—from 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.
Robinson-Patman Act (15 U.S.C. §§ 13, 21a, 13a, 13b)
Broadly, 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. §13(a)) and not to services; and only to goods "sold for use, consumption, or resale within the United States" (15 U.S.C. §13(a)), but not to goods destined for export.
Nonprofit 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. §13c).
Federal Trade Commission Act (15 U.S.C. §§ 41 et seq.)
Section 5 (15 U.S.C. §45) 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. §45(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. §45(a)(3)).
Other Applicable Laws
National Cooperative Research Act of 1984 (15 U.S.C. §§ 4301-05)
This 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. §4302 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. §4303(a)), despite the general antitrust damage provisions (15 U.S.C. §15, supra, pp. 2-3). The statute was amended in 1993 ( P.L. 103-42 ) to include production joint ventures.
Export Trading Company Act (15 U.S.C. §§ 4001-21)
Export 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. §§4013, 4016).
McCarran-Ferguson Act (15 U.S.C. §§1011-15)
Pursuant 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 ."
Soft Drink Interbrand Competition Act (15 U.S.C. §§3591-03)
Enacted 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. §3501). Outright price-fixing agreements or other horizontal restraints of trade and group boycotts remain subject to the antitrust laws (15 U.S.C. §3502).
Local Government Antitrust Act of 1984 (15 U.S.C. §§34, 35)
The 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.
Characterization of Antitrust Offenses
Per Se
Per se offenses are those for which there is no justification. As the Supreme Court has expressed it:
... 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.
The kinds of activities which are most generally found to be per se antitrust offenses, and are most likely to be criminally prosecuted, include:
1. 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")
All of the per se offenses, as concerted activity in restraint of trade, are violations of section 1 of the Sherman Act .
Rule of Reason
Any 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.
There 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—in other words, the reasonableness of the actions which produced the final entity.
Most rule of reason offenses involve a single entity, and do not usually violate section 1 of the Sherman Act . | 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. |
crs_RL34121 | crs_RL34121_0 | 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.
This 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.
Dedicated Child Welfare Funding by Purpose
By 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.
Foster Care, Adoption Assistance, and Kinship Guardianship Assistance
Under 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—although it still represents more than half of all federal dedicated child welfare funds—while 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 .)
Services for Youth in, or Formerly in, Foster Care
Separately, 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 .)
Services for Children and Families
The 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 .)
Research, Other Grants, and Incentive Funds
Finally, 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 .)
Composition of Funding by Purpose
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).
The share of dedicated child welfare funding appropriated to support children once they have been removed from their birth families—whether in foster care, in permanent adoptive or guardianship homes, or via services to youth in or formerly in foster care—held 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.
FY2013 Appropriations for Child Welfare Programs
The 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.
P.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 billion.
Child Welfare Programs and Sequestration
Most 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 .
However, 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 .
For 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 .
Earlier FY2013 Appropriations Laws or Bills
Temporary FY2013 Funding Measure
Congress 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 ).
Full-Year Measures Considered During the 112th Congress
As 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 Congress. 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 ).
Three 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.
The President's FY2013 Budget Request for Child Welfare
The 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 —and after application of the March 1 sequestration order and the 0.2% reduction in non-security discretionary spending—was $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.
For 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.
The 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.
The 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 ).
On 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.
The 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.
Legislative Proposals
Legislative 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.
Improve the Child Welfare System
As 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.)
In justifying this FY2013 request, the Obama Administration noted that the child welfare system serves "vulnerable children" whose experience of "psychological trauma … 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:
Creating 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.
No 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 ).
Child Support Enforcement Proposal Related to Foster Care
Under 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.)
Because 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—the first year proposed for implementation of this proposal—rising 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.
Legislation 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 ).
Continue Funding for Child Welfare Study on Permanent Basis
The 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.
Funding 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.
Funds 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.
Requests to Increase, Eliminate, or Redirect Certain Funding
The 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.
Increase Child Welfare Research Funds to Address Commercial Exploitation of Children
The 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:
Each 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].
According 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.
Redirect Funds to Provide Grants to Reduce Pregnancy Among Foster Youth
The 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:
The 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—close and trusting relationships with adults, connections to school and community, and access to contraception and information on sexual health—are inconsistently available to youth in the foster care system.
The 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."
As 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."
This language is not included in the FY2013 final funding measure ( P.L. 113-6 ).
Eliminate Funding for Programs Under the Victims of Child Abuse Act
The 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.
The 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.
Court Appointed Special Advocates (CASA) Funding
Local 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.
The 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 ).
Federal funding authority for the CASA program (Section 219 of the Victims of Child Abuse Act, or 42 U.S.C. §13014) 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.
Child Abuse Training of Judicial Personnel and Practitioners
Support 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. §§13021-13024). 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.
The 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 .
Specific 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.
Children's Advocacy Centers
Federal 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. §§13001-13004) 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.
FY2013 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 .
Title IV-E Program Funding
As 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.
An Appropriated Entitlement
The 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.
To 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.
Assumptions Included in a Title IV-E Funding Request
Because 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.
Caseload
Figure 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.
The 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.
Adoption Assistance
For 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—$2.369 billion—to 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.
The 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.
States' 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.
As 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.
Foster Care
For 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.
In 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 ).
The 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—including 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)—are 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.
In 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).
Decline in Overall Foster Care Caseload
Despite 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.
The 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.
Erosion in Share of Foster Care Caseload Eligible for Federal Assistance
Not 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).
Kinship Guardianship Assistance
For 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.
The 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.
The 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.
Tribal Access to Title IV-E Funding
The 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.
States 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.
Funding for Child Welfare by Program
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. | 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.
Final 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).
Of 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.
The 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.
As 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. |
crs_RL34199 | crs_RL34199_0 | Introduction
German 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.
Merkel 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.
Although 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.
Current Domestic Context
Chancellor 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.
The 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.
Finance Minister Wolfgang Schäuble 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.
On 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.
Foundations of German Foreign Policy
Much 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—both 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.
German 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.
Since 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'—or foreign policy role concept as a 'civilian power'—and 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.
Multilateralism as National Interest
During 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.
Since 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.
Germany in the EU and NATO—The "Middle Path"
The 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.
Germany in the United Nations
Since 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.
German 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.
An 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 Schröder, 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.
Evolving Domestic Debate
As 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.
German 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.
Some analysts and politicians—primarily in conservative political circles—argue 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.
Germany in the EU
Germany'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.
To some analysts, Merkel's predecessor, Gerhard Schröder, 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.
As 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.
EU Enlargement
Germany 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.
Merkel 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."
Germany'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 Schröder 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.
Common Foreign and Security Policy (CFSP) and Relations with Russia
German 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.
Germany'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.
Some 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 Schröder, 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.
Merkel 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—both for Germany and the EU—based 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.
As noted earlier, Merkel is seen by some as taking a harder line on Russia than her predecessor Schröder, 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.
German 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.
European Security and Defense Policy (ESDP)
Germany 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.
Merkel 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."
European Leadership and Franco-German Relations
A 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 Schröder'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.
Merkel 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.
Analysts 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.
Evolving Security and Defense Policy
Perhaps 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.
Since 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.
In 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—NATO'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—militarily, when necessary—to 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.
Today, 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.
Germany in NATO
Germany'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.
Approximately 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—NATO's largest and most significant mission—has 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).
Despite 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.
To 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—especially its emphasis on Pakistan and its apparent willingness to engage Iran in discussions of the mission—and 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 ).
Some 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—despite the invocation of NATO's Article 5 collective defense clause—as 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.
Germany 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.
Force Transformation and Bundeswehr Reform
The 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—specifically, 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.
Observers 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.
In 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—they can only be deployed abroad on a volunteer basis—lead 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.
Transatlantic Implications
For 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.
Looking 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.
German 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.
Recent 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.
Germany'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.
Germany 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.
Domestic 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.
Appendix A. Selected Issues in U.S.-German Relations—Current Status
Economic Ties
Germany 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—primarily motor vehicles, machinery, chemicals, and heavy electrical equipment—totaled 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.
Like 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—measures 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.
Counterterrorism Cooperation
Most 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 Schäuble (CDU) proposed a series of domestic counterterrorism initiatives including for increased computer surveillance, and domestic military deployment in the event of a terrorist attack. Schäuble'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 Schäuble'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.
Also 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 Schäuble. 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.
German 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—reportedly all Uighurs originally from central and western China—scheduled 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.
The Middle East
Germany, 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.
Relations with Israel and the Israeli-Palestinian Conflict
Germany, 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.
Like 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.
Iran
As 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.
German 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).
Germany 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.
In 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.
Afghanistan
Germany 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.
German 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 €50 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.
Germany 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.
As 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 €50 million (about $70 million) to the Afghan National Army Trust Fund.
German 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.
In 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.
About 60 German police officials—mostly retirees—also 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.
As 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 €220 (about $304 million) to €430 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.
Appendix B. Key Dates | 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.
German 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.
Since 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.
President 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. |
crs_R41435 | crs_R41435_0 | Introduction
The 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.
Across all VA insurance programs, 7.1 million people have $1.3 trillion in face value of insurance coverage.
This 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.
Servicemembers' Group Life Insurance Program
In 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.
The 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.
Under 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.
Eligibility Requirements
Full-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:
commissioned, 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.
The 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:
commissioned, 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.
SGLI Coverage and Premium Rates
Currently, 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.
This 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.
Full-Time Coverage
Servicemembers 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.
The 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.
When 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.
Part-Time Coverage
Servicemembers 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.
Beneficiaries
Servicemembers 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:
1. 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.
If 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.
Premium Rates
The 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).
Currently, 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:
Extra Hazard of Duty Cost
Each 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.
Each 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.
If 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.
Family Servicemembers' Group Life Insurance Coverage
SGLI 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 ).
Family 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.
FSGLI Spousal Coverage
Spouses 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.
A 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:
The 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.
FSGLI Child Coverage
A 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.
The 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).
Coverage 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.
SGLI Traumatic Injury Protection Program
Since 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.
Eligibility
Servicemembers 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.
The VA Secretary prescribes by regulation which conditions are eligible for, or excluded from, TSGLI coverage. The losses covered by TSGLI include the following conditions:
total 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.
The 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.
Losses Excluded From TSGLI Payment
Injuries sustained while committing or attempting to commit a felony and losses caused by the following are excluded from TSGLI payment:
mental 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.
Benefit Amount
TSGLI 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.
Veterans' Group Life Insurance Program
On 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.
Eligibility Requirements
Veterans eligible for the VGLI program are:
Ready 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).
After 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.
Servicemembers 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.
VGLI Coverage and Premium Rates
The 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.
The 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.
Beginning on April 11, 2011, VGLI policyholders were allowed to increase their coverage under the following guidelines:
The 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.
To 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.
VGLI Payment of Premiums
The 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.
VGLI Coverage Reduction Schedule
As 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:
Commercial Conversion Criteria
VGLI 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.
To convert a VGLI policy, the veteran must
select 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.
Service-Disabled Veterans' Insurance Program
During 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.
Eligibility Requirements
To be eligible for S-DVI, a veteran must have
been 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.
Ratings 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.
S-DVI Premiums and Disability Provisions
Premiums charged for S-DVI coverage are
based 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.
Because the program insures many veterans who have severe disabilities, premium payments are insufficient to pay all claims and are supplemented yearly by congressional appropriations.
Premiums 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.
A 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:
the 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.
Because 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.
Some 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.
Eligibility Requirements
The 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
be 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.
In the period from December 1992 to September 2010, VA approved 39,336 applications for Supplemental RH.
Gratuitous S-DVI ("ARH")
In 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
issued posthumously, payable to a preferred class of a veteran's relatives, and payable solely in a lump sum.
Eligibility Requirements
Gratuitous S-DVI is granted posthumously to veterans who
met 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.
Applicants 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.
Gratuitous 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.
Payment of Gratuitous S-DVI is made to the following family members in the order listed below:
1. 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.
Management and Administration
In 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.
The 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.
In 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:
Secretary 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.
The 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.
How Policy Proceeds are Paid Out
SGLI 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.
Alliance 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.
Accelerated Benefit Option
SGLI 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:
Terminally 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.
The S-DVI program does not have an ABO.
Financial Counseling
Since 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.
BFCS 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.
Policy Issues
Coverage Limit for S-DVI
Currently, 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.
As 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
Government 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.
According 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.
In 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. | 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.
In 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.
On 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.
Servicemembers 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.
During 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.
This report provides information on the current VA life insurance programs available for servicemembers and veterans, management and administration issues, and associated policy issues. |
crs_R41935 | crs_R41935_0 | Introduction
The 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.
The 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.
Current Law
Families 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.
Amount: 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.
The 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.
Who Claims the Child Tax Credit?
The 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.
EGTRRA 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.
Although 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.
Taxpayers 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—and so would be able to reduce their tax liability by $1,000—if 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.
Economic Analysis
Generally, economists evaluate tax policy—like the child tax credit—through 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:
Equity: 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.
Efficiency: 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.
Administration: Tax policies—like the child tax credit—can 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.
The following section examines in detail the child tax credit in terms of its impact on equity, taxpayer behavior, and tax administration.
Equity of the Child Tax Credit
There 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.
The 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).
The 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.
Another standard of fairness used by economists—referred to as horizontal equity—suggests 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?
Some 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).
Other 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
Congress 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.
Policymakers 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.
Efficiency (Behavioral Effects) of the Child Tax Credit
Economists 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.
Impact on Work Choices
The 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.
Impact on Having Children
The 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.
Complexity of Administering Child-Related Tax Benefits
In 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.
Policy Options: Changing Other Parameters of the Credit
Policymakers 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.
Increasing the Maximum Amount of the Credit
Increasing 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—those with income tax liability less than the value of their credit—increasing 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.
Policymakers 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.
Reducing the Refundability Earnings Threshold and Increasing the Refundability Rate
Among 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.
On 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.
Economic 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.
Changing 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.
Increasing the Phase-out Limits of the Credit
Since 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.
Increasing 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.
Policy Options: Reducing Complexity by Creating Uniform Child Benefits
Tax 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—the 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.
Some 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."
Much 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 .
President 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.
More 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.
Appendix. The Impact of the EGTRRA and ARRA Changes to the Child Tax Credit
The 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.
The 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.
Impact of EGTRRA Versus ARRA Modifications to the Credit
EGTRRA 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.
Distributional Impact
A 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.
In 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.
Estimates 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.
Number of Children Affected by EGTRRA Versus ARRA Changes
According 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.
The 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).
Cost of Extending EGTRRA and ARRA Modifications to the Credit
Historical 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.
Of 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. | 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.
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.
In 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.
This 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.
This 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]. |
gao_GAO-03-1024T | gao_GAO-03-1024T_0 | GAO: A Unique Agency with a Hybrid System
As 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’s 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.
Given GAO’s 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’s mission. Carrying out GAO’s 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—at least 67 percent of whom have graduate degrees—hold 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.
Because 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’s 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.
Until 1980, our personnel system was indistinguishable from those of executive branch agencies—that is, GAO was subject to the same laws, regulations, and policies as they were. However, with the expansion of GAO’s 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’s 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’s personnel system more independent of the executive branch.
Along 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’ pay without regard to the federal government’s General Schedule (GS) pay system’s classification standards and requirements; and establish a merit pay system for appropriate officers and employees.
By 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 “broad banding,” or “pay banding,” 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.
Although GAO’s 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’s 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—the Personnel Appeals Board (PAB), and application of veterans’ 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’s 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 “will promote the efficiency of the service”—which for us includes such things as GAO’s ability to do its work and accomplish its mission.
Although we are not subject to OPM oversight, we are nevertheless subject to the oversight of the Congress including our appropriations committees—the Senate Committee on Appropriations’ Subcommittee on the Legislative Branch and the House Committee on Appropriations’ Subcommittee on Legislative—and our oversight committees—the Senate Committee on Governmental Affairs and the House Committee on Government Reform. In addition, GAO’s 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’ personnel grievances. The Congress authorized the establishment of the PAB specifically for GAO in order to protect GAO’s 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.
While 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.
Key Elements of GAO’s Proposal
GAO’s proposal combines diverse initiatives that, collectively, should further GAO’s 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’s 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’s legal name from the “General Accounting Office” to the “Government Accountability Office.”
I will go into more detail later in my testimony on the details and rationale for each of these proposals.
Process for Developing the Proposal
In 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’s 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.
In developing our preliminary proposal, we gathered suggestions for addressing GAO’s 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’s existing authority.
Mindful of the need to keep the Congress appropriately informed, my staff and I began our outreach to GAO’s 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 “good government” organizations.
Within 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’s workforce, and members of the EAC.
The 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’s 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’s issues and concerns to employees.
I have also used my periodic “CG chats,” 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.
I 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’s 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’s internal website, including Questions and Answers developed in response to employees’ 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.
Nature of GAO Employee Concerns
Based 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’s proposal to decouple GAO’s 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.
On 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’s GS system for various types of pay increases. There are others close to retirement who are concerned with their “high three” 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.
It 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.
GAO’s 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’s 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’s 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.
Following 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’ 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.
A distant third in terms of employee concern is the proposed name change from the “General Accounting Office’ to the “Government Accountability Office,” which would allow the agency’s 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’s Advisory Council, consisting of distinguished individuals from the public and private sectors, and the Comptroller General’s Educators Advisory Council, consisting of distinguished individuals from the academic community, and a variety of “good government” groups strongly support the proposed name change.
Changes Made in Response to Employee Feedback
The members of the EC and I took our employees’ 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.
A 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 “pay protection” 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.
The following represents additional information regarding our specific proposal.
Voluntary Early Retirement and Separation Incentive Payment Authorities
Section 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 “early outs”) and voluntary separation payments (commonly termed “buyouts”) to certain GAO employees when necessary to realign GAO’s 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.
GAO’s 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’s 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—authorizing the payment of voluntary separation incentives—permanent. 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.
Public 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’s 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.
Voluntary 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’s 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’s 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.
Since 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.
To 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’s institutional needs. Only employees whose release is consistent with the law and GAO’s objective in allowing early retirement are authorized to retire early. In some cases, this has meant that an employee’s request must be denied.
GAO 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.
As 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’s GS system; Band IIs or above, if covered by GAO’s banded systems for Analysts and Attorneys; or in any position in GAO’s SES or Senior-Level system.
In recommending that GAO’s 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’s 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’s senior managers and analysts reaching retirement eligibility and the small number of entry-level employees who were training to replace more senior staff.
As 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’s workforce at the midlevel (Band II) decreased by 16 percent.
Voluntary Separation Payments
In addition to authorizing voluntary early retirement for GAO employees, Public Law 106-303 permits the Comptroller General to offer voluntary separation incentive payments—buyouts—when 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.
The 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.
Annual Pay Setting Policy and Adjustments
Section 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’s pay for performance system. Second, GAO’s 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.
Our proposal seeks to take a constructive step in addressing what has been widely recognized as fundamental flaws in the federal government’s approach to white-collar pay. These flaws and the need for reform have been addressed in more detail in OPM’s April 2002 White Paper, A Fresh Start For Federal Pay: A Case for Modernization, and more recently the National Commission on the Public Service’s 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’s federal workforce is composed of much higher graded and knowledge-based workers.
Although 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 “one size fits all approach” 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’s highly educated and skilled workforce.
Our proposed pay adjustment provision along with the other provisions of GAO’s 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— currently allocated for automatic across-the-board pay adjustments to all employees—to 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.
Ultimately, 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’s workforce. The performance part of an employee’s annual raise would depend on the level of the employee’s performance and that employee’s 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.
How GAO Plans to Use This Authority
GAO’s 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.
I 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.
GAO’s Proposed Pay Authority Is Reasonable
GAO’s 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).
While 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’s 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’s 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.
In 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 “at will” 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.
Furthermore, 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’s China Lake demonstration, DOD’s Civil Acquisition Workforce demonstration, the Department of Air Force’s Research Laboratory demonstration, and the Department of Navy’s 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.
Currently, 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.
Safeguards Provided
As 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’s 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.
The 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’s current human capital infrastructure has most of these safeguards built in, and the others are in the process of being incorporated.
Assure that the agency’s performance management systems (1) link to the agency’s 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.
Involve employees, their representatives, and other stakeholders in the design of the system, including having employees directly involved in validating any related competencies, as appropriate.
Ensure 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).
Assure 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).
Transition Period
We 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’s performance.
For 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’s 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 “pay protection.” This guarantee would continue even after GAO’s authority to adjust pay is fully implemented.
We 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. “Pay Protection” Guarantee My predecessor, Comptroller General Charles A. Bowsher, provided the analysts and attorneys a “pay protection” 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.
Currently, 535 GAO employees are still covered by this “pay protection” 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’s 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.
Pay Retention
Section 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.
In 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— 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.
Relocation Expenses
Section 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.
Leave for Upper Level Hires
Section 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’s 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.
Executive Exchange Program
Section 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.
While the Information Technology Exchange Program only involves technology exchanges, GAO’s 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.
One 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.
Changing GAO’s Name to the “Government Accountability Office”
Section 9 would change the name of our agency from the “General Accounting Office” to the “Government Accountability Office.” At the same time, the well-known acronym “GAO,” 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’s strategic plan, our activities are designed to ensure the executive branch’s accountability to the American people. Indeed, the word accountability is one of GAO’s core values along with integrity and reliability. These core values are also incorporated in GAO’s strategic plan for serving the Congress.
The 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’s statutory work shifted to the comprehensive auditing of government agencies. Later, beginning during the tenure of Comptroller General Elmer B. Staats, GAO’s work expanded to include program evaluation and policy analysis. Whereas GAO’s 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.
Although 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 “expectation gaps” that exist outside of GAO.
Concluding Observations
In conclusion, I believe that GAO’s 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’s 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’s experience with pay for performance systems. Overall, we believe that this proposal represents a logical incremental advancement in modernizing GAO’s human capital policies, and with your support, we believe that it will make a big difference for the GAO of the future.
Chairwoman 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.
Contacts
For 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.
Analysts and Attorneys: Pay Increases under GAO’s Current System and Human Capital Proposal
(Broad band)
Pay Protection from Band Conversion)
Conversion) (Same percentage as executive branch GS; performers) performers) (Same percentage as executive branch GS; performers) performers)
EC annually) additional performance- based funds limited due will vary over time) guarantee)
N/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.
Professional Development Program (PDP) Staff: Pay Increases under GAO’s Current System and Human Capital Proposal
(Broad band/PDP) as executive branch GS; performers) performers) as executive branch GS; performers) performers)
EC annually)
EC annually)
EC annually)
N/A This element is not applicable The percentage allocated to each type of pay increase varies annually.
Executive Committee will determine on an annual basis which pay categories, if any, are eligible for PDP bonuses.
Administrative Professional Support Staff (APSS): Pay Increases under GAO’s Current System and Human Capital Proposal
(Broad band)
Pay Protection from Band Conversion (GS) branch GS) for all satisfactory performers) branch GS) for all satisfactory performers)
EC annually) amount will vary over time)
N/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.
Wage Grade (WG) Staff: Pay Increases under GAO’s Current System and Human Capital Proposal
(Wage Grade)
Quality step increase (QSI)
Within grade increase (WIG)
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The 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.
What GAO Found
As 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. |
crs_R42854 | crs_R42854_0 | Overview
Natural 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.
Other, 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.
This report describes these emergency agricultural land assistance programs. It presents background on the programs—purpose, activities, authority, eligibility requirements, and authorized program funding levels—as well as current congressional issues.
Federal Emergency Assistance for Agricultural and Rural Land
Agricultural land assistance programs help producers rehabilitate crop and forest land following natural disasters. These programs are described below.
Emergency Conservation Program
Purpose, Activities, and Authority
The 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.
Payments 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.
The 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.
Eligible Land
Land 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:
impair 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.
Land conservation issues that existed prior to the natural disaster are not eligible for assistance.
Eligible Participant
An 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.
Federal agencies and states, including all agencies and political subdivisions of a state, are ineligible to participate in ECP.
Funding and Allocation
Funding 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.
Funding 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.
Once 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.
Emergency Forest Restoration Program (EFRP)
Purpose, Activities, and Authority
The 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.
FSA 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.
The 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.
Eligible Land
For land to be eligible for EFRP, it must be nonindustrial private forest land and must:
have 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.
Land is ineligible if it is owned or controlled by the federal government, a state, a state agency, or a political subdivision of a state.
Eligible Participant
Eligible 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.
Funding and Allocation
The 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.
Emergency Watershed Protection (EWP) Program
Purpose, Activities, and Authority
The 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.
EWP 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).
The 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.
The 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.
Eligible Land
Private, 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.
Eligible Participant
All 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.
Sponsors are responsible for:
obtaining 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.
Funding and Allocation
Funding for EWP varies widely from year to year ( Table 3 ). Most funding is authorized through supplemental appropriations acts rather than annual appropriations.
NRCS 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.
Approval of funding is based on the following rank order:
exigency 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.
Emergency Watershed Protection (EWP) Program—Floodplain Easements
Purpose, Activities, and Authority
Floodplain 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:
1. 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.
Section 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)—a 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.
The 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.
Similar 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.
Eligible Land
Lands are considered eligible for an EWP floodplain easement if they are:
floodplain 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.
Land is considered ineligible if:
restoration 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.
Eligible Participants
EWP participants must have ownership of the land. Unlike the general EWP program, EWP floodplain easements do not require a project sponsor.
Funding and Allocation
The 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.
Other Programs
Emergency Disaster Loans
Emergency 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.
Conservation Programs
In 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.
Conservation Reserve Program (CRP)
The 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.
Environmental Quality Incentives Program (EQIP)
The 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).
Issues for Congress
Funding Mechanisms
Historically, 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.
Since 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.
Beginning 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.
The 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.
Stafford Act Limitations
The 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.
In 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.
Since 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—primarily 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.
For 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.
Mitigation
Another 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—the 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.
Some 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. | 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.
Both 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.
The 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.
Funding 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.
Restrictions 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. |
gao_GAO-04-241 | gao_GAO-04-241_0 | Background
Today, 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—or broadband—connection usually through either a cable modem or a digital subscriber line provided over a telephone connection.
Local 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.
Subscription 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—commonly referred to as program access rules—that 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.
High-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.
Figure 2 provides information on the extent of competition in the local telephone, subscription television, and high-speed Internet markets.
BSPs’ Business Strategy Focuses on Providing Bundled Telecommunications Services
Broadband 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.
A 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’ 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.
A 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.
In order to illustrate the savings available to consumers from BSPs’ 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 à 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.
Consumers Enjoy Lower Rates in Markets with BSPs
In 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’ response, is substantially lower prices for consumers.
Incumbent Cable Operators Responded to BSP Entry by Lowering Prices and Improving Services, but Incumbent Telephone Operators Show Less Response to BSP Entry
In 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’s 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.
Two 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’s entry into the market.
Some 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.
The 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.
Incumbent 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’ cable modem service—not because of competition from BSPs.
Consumers Benefited from Lower Prices for Telecommunications Services in the 6 Markets With BSPs That We Reviewed
Rates 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 “matched market” 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.
In 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’s 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.
It 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.
BSPs Consider Specific Demographic, Geographic, and Local Government Factors When Deciding Which Markets to Enter
The 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.
Demographic Factors Were Considered in Market Selection
Three 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.
All 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.
Five 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’ dissatisfaction with the incumbent—which 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.
Four 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.
Two 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.
Geographic Factors Were Considered in Market Selection
We 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.
Officials 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’s service area, which they said helps to leverage the parent company’s 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’s good reputation within the community as a power provider. The local franchising official in that market agreed that the community’s positive relationship with the parent power company gave citizens confidence in the BSP’s 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’s workforce to assist with the construction of the new infrastructure.
Two BSP representatives said that their BSP chose to enter markets on the basis of close proximity to their BSPs’ headquarters or physical network.
For 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’s 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.
Characteristics of Local Government Were Considered in Market Selection
We 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—which BSPs told us could be considerable—was a key factor for some BSPs when considering market entry.
Representatives 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.
During 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’s 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.
Five 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—which are laws that require any new cable franchiser to agree to the same terms and conditions that the incumbent cable provider must meet—was a factor in an interested competitive cable company’s (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’s 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.
BSPs Are Gaining Market Share, but a Variety of Factors May Hinder Their Success
BSPs 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.
BSPs Are Having Varied Success in Gaining Subscribers
On 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—ranging 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—that is, to achieve a higher level of penetration—than was the case for BSPs that entered the medium and the larger markets included in our case study.
Certain Factors in Local Markets Can Hinder BSPs’ Ability to Compete
All 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.
Program Access Concerns
In 4 markets, BSP officials said they have experienced problems obtaining certain cable networks—such as regional sports, weather, and local informational channels—that 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—that 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.
While 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’s 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.
Multiple Dwelling Units
Three 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 “multiple dwelling units.” We were told that owners of multiple dwelling units often enter into exclusive contracts with one cable provider, thereby limiting a competitor’s 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.
Recently, 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.
Burdensome Franchise Requirements
Some 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 “level playing field” 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.
BSPs May Have Underestimated the Level of Competition in Telecommunications Markets
One of the most significant factors that may hinder the BSP’s 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.
Competition 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.
In 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.
BSPs Serving the Markets We Reviewed Are Now Struggling to Obtain Adequate Access to Capital
The 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.
Despite 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.
Conclusions
Although 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.
Agency Comments
We 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.
Industry Association Comments and Our Evaluation
We 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.
NCTA 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 “implies vastly broader conclusions regarding the effect of BSPs on cable pricing than are warranted by the limited case studies.” 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.
GAO response: We agree that our approach in this report—a case study analysis—is 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’s 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.
NCTA 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.
GAO 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—as 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.
NCTA 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.
GAO 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.
NCTA 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’s line up is a key factor that may drive pricing differences across locations and providers.
GAO response: We agree with NCTA’s 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’s comments, we also examined the number of channels provided in the case study markets—which NCTA specifically cited as a possible cause of rate differences—and 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.
NCTA 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.
GAO 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.
NCTA 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’ ability to compete.
GAO response: We did not evaluate BSPs’ concerns about the effect of local market conditions on their entry and success. Similarly, we did not evaluate the veracity of incumbent providers’ statements on these issues. In this section of the report, we are simply reporting the views of these providers.
As 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.
Scope and Methodology
We employed a case-study approach in gathering information in responding to our four objectives. In particular, this report provides information on (1) BSPs’ business strategy; (2) the impact of BSPs’ market entry on incumbent cable and telephone companies’ 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.
In 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.
To 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— Seattle—to 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.
We 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).
Our 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.
Price and Channel Information in Six Market Pairs
The 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’s price in the non-BSP market, and then dividing that difference by the incumbent’s non-BSP market price.
Broadband Service Provider Association Member Markets as of February 2003
Minnesota: 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.
Several changes in the membership of BSPA have taken place since we selected our case-study markets in early 2003.
GAO Contacts and Staff Acknowledgments
GAO Contacts
Staff Acknowledgments
In 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.
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Public Affairs | Why GAO Did This Study
One 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.
What GAO Found
BSPs' 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. |
crs_R44603 | crs_R44603_0 | Overview
Prior 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.
Today, 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."
Financial Challenges Facing the U.S. Postal Service8
This 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.
On 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.
Financial Structure of the U.S. Postal Service
The 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.
Since the passage of the PRA, the USPS has generated nearly all of its funding—about $69 billion in FY2015 according to the USPS's most recent financial report—by charging users of the mail for the costs of the services it provides. Congress, however, does provide an annual appropriation—about $55 million in FY2016—to 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).
Financial Condition of the U.S. Postal Service
The 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.
What Happens When USPS Ends the Year with a Net Loss?
Constituents 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.
The 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.
USPS'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.
Additionally, 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.
As 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.
Postal Services, Revenue, and Expenses
The 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.
The PAEA also changed how postal rates are established and divided postal products into two distinct groups: market dominant products and competitive products.
Prior 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.
Postal Revenue
In 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.
As 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.
Within 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.
Historically, 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.
While market dominant products made up 97% of USPS's FY2015 volume, they generated less revenue per piece ($0.35) than competitive products ($4.17).
As 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:
Because 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.
Furthermore, 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.
Mail Volume
In 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%.
In 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.
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 .
Long-Term Trends
Total 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.
As 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.
From 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.
Exigent Price Increase
Under 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.
In 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.
In 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.
The 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.
On 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.
The exigent surcharge had been in place since January 26, 2014. Table 2 shows the estimated revenue from the exigent surcharge for FY2014 and FY2015.
In 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).
Expenses from Operations
To address its financial challenges, the USPS has made several operational adjustments intended to align its revenue, mail volume, and operating expenses, including
changes 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.
For FY2015, USPS's operating expenses were about $67.7 billion. Table 3 provides a further breakdown of expenses for FY2014 and FY2015.
Each 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—excluding 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.
This 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."
The 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).
While 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.
Prefunding Requirement for Retiree Health Benefits64
The 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.
The 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.
Pursuant 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.
Since the prefunding payment schedule began in FY2007, the USPS has made three of its annual payments in full—FY2007, 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.
The 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.
Current Issues Facing the USPS Workforce71
USPS'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.
Size and Cost of the USPS Workforce
The 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.
The 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.
Increased Use of Non-Career Employees
The 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).
The 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.
According 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.
Impact of USPS Workforce Initiatives on Costs
The 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—a 2.8% average decline per year between 2006 and 2015—has translated into cost savings.
A 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.
U.S. Postal Service's Current Strategies and Initiatives
This 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.
U.S. Postal Service's Five-Year Business Plan95
The 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―which include the closure and consolidation of selected mail processing facilities―are 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 :
continued 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.
Of 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.
Postal Service Delivery Standards99
The 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.
For 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.
The 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.
In 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.
Restructuring the Processing and Delivery Network105
The 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.
The 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.
In 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.
Unanticipated Effects of the NRI on the USPS Workforce
A 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."
Restructuring the Retail Business
Two 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.
Six- to Five-Day Delivery118
One 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—typically, 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.
Opponents of reducing USPS's delivery days argue that it will have a negative effect on postal delivery standards, which—according to the PRC's FY2015 Annual Compliance Report —have already suffered following the closure and consolidation of postal processing facilities prior to the 2015 suspension of the process.
According 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.
Also, 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.
Retail Post Office Closures126
In 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.
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.
Impact of Postal Facility Closures on Postal Workforce
The 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.
Possible Issues Facing the USPS Workforce132
Achievement of Workforce Reduction Goals
The 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.
The 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.
Limitations on Use of Non-Career Employees
The 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 .)
The 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.
Lower 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.
Employee Morale
Some 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.
On 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.
Further Postal Reform Issues for Congress
Updating the Postal Fleet153
To 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.
Given 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 —which 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.
The 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.
In 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—the design, build, and testing of the prototypes—will take about two years to complete.
The 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.
Nonpostal Products and Services175
The 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.
Under 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
USPS/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.
The nine competitive products are
private 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."
In 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.
The 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™), 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.
Select 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
public Internet access; drivers' license services; hunting and fishing license services; voter registration; and postal banking and financial services.
Further, 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.
Postal Banking202
In 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.
One 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.
To 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.
Following 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.
Beyond 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.
Arguments For and Against Postal Banking
The 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.
Recently, 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.
On 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,
At 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?
Without 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.
The U.S. Postal Savings System: 1911-1967
In 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.
Select Postal Banking Legislation
In 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."
As 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.
While 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.
Appendix A. USPS Revenue and Volume by Mail Category and Class
Appendix B. Postal Reform Legislation Introduced in the 113 th and 114 th Congresses | 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.
In 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).
The 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.
This 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.
Additional 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.
Appendix 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.
For 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). |
crs_RL33404 | crs_RL33404_0 | 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.
Ocean Resource Jurisdiction
Under 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
i. the establishment and use of artificial islands, installations and structures;
ii. marine scientific research; and
iii. the protection and preservation of the marine environment.
The 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.
Federal Jurisdiction
While 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.
State Jurisdiction
In 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.
Within 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.
Coastal State Regulation
State 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.
Federal Resources
The 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.
Federal Offshore Energy Development Moratoria and Withdrawals
In 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.
Congressional/Legislative Moratoria
Appropriations-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.
The 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.
OCSLA Section 12(a)
In 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.
On 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.
President 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."
In 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.
Other Statutory or Administrative Protections
While 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.
Leasing and Development
In 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) preleasing activity and the lease sale; (3) exploration; and (4) development and production.
The Five-Year Program
Section 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.
During 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.
The 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.
The 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.
Lease Sales
The 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.
The 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.
The 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.
The 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.
Although 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.
In 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 .
The 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.
Exploration
Lessees 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.
Under 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.
Development and Production
While 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.
As 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.
Lease Suspension and Cancellation
The 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.
Suspension 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) to 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...."
If 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...."
Upon 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.
The 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.
Lease Assignments and Transfers
The 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—of continued compliance with the OCSLA and the regulations issued pursuant to it, and of obtaining BOEM approval prior to transfer—are the only restrictions placed upon transfers by the OCSLA.
The 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.
Royalty Collection and Revenue Distribution
As 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.
Most 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.
Section 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.
Certain 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.
Legal Challenges to Offshore Leasing
Multiple 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.
The 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.
Suits Under the Outer Continental Shelf Lands Act
Jurisdiction 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:
When 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—in 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."
The 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.
Although 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:
First, 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.
The standards for review outlined in Watt have been upheld in subsequent litigation related to the five-year program.
Litigation 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.
Other 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.
The 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.
Section 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:
[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:
(1) 17.5 million barrels of oil equivalent for leases in water depths of 200 to 400 meters;
(2) 52.5 million barrels of oil equivalent for leases in 400 to 800 meters of water; and
(3) 87.5 million barrels of oil equivalent for leases in water depths greater than 800 meters.
It 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.
The 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.
In 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.
Suits Under the National Environmental Policy Act
In 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.
In 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.
As 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.
It 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. | 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.
Governance 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.
The 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.
In 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. |
gao_GAO-13-272 | gao_GAO-13-272_0 | Background
IHS 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’ (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—administered by the Department of Defense (DOD) and the Department of Veterans Affairs (VA)—have adopted Medicare rates as the basis for their standard payment rate for both hospital and nonhospital services.
CHS Program Organization
IHS 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.
Funds 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’s 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.
CHS Program Payment Rates
The 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—inpatient and outpatient services provided in Medicare- participating hospitals—are 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—including services provided by hospital- and office-based physicians—are 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.
In 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’s 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.
Federal CHS Program Payments for Services Provided in 2010
For services provided in calendar year 2010, IHS’s 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.)
CMS 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’s almost 49 million beneficiaries.
In 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’s standard for purchasing care from private-sector providers.
We 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—2.1 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’s 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.
DOD 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’s 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.
We 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’ access to care from civilian providers, the Congress directed DOD to monitor access through a survey of civilian providers.
As 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.
IHS’s Federal CHS Program Primarily Paid Physicians at Their Billed Charges, Which Were Significantly Higher than What Medicare and Private Insurers Would Have Paid
More than 80 percent of IHS’s 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’s 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.
IHS’s Federal CHS Program Paid More than 80 Percent of Total Payments to Physicians at Billed Charges for Services Provided in 2010
More than 80 percent of IHS’s 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’s 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.)
While IHS’s 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’s 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.
For those physicians whom IHS’s federal CHS programs paid under contracts for reduced rates, the programs achieved significant savings relative to the physicians’ 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’ 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’s federal CHS programs’ savings from contracts with other nonhospital providers showed similar trends, achieving estimated savings of 68 percent, or $25.3 million, relative to billed charges.
IHS’s 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.
IHS’s 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—approximately 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’s inability to pay for all needed services.
IHS’s 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.)
Most, 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’ 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.
Most 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
Most 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.
Physicians We Interviewed Said CHS Program Payments Were Generally Less than 10 Percent of Their Total Practice Payments and Were Often at Medicare Rates
According 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’ 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.
The 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’ billed charges, which is comparable to the federal CHS programs’ 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.
In 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.
Medicaid 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, “Trends in Medicaid Physician Fees, 2003-2008,” Health Affairs, vol. 28, no. 3 (2009).
Physicians We Interviewed Identified Both Advantages and Concerns with Capping CHS Program Payments at Medicare Rates
The 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.
Six 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 “good idea” 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’s 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.
Four 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’s 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.
Three 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.
The 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’s fees to physicians are scheduled to be reduced by about 27 percent in 2014. See 42 U.S.C. § 1395w-4(d).
When 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’ concerns about claims administration echoed those that we heard from physicians as part of a 2011 report examining the CHS program.
Most 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
Officials 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’s 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—29 percent and 28 percent, while the CHS program accounted for 0.02 percent.
Officials 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 “ridiculous” 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.
Medicare 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.
While 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.
We 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.
IHS 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
IHS 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.
IHS and Tribal Officials We Interviewed Said the MLR Requirement Allowed Them to Reduce Payments to Hospitals and Expand Access to Care
IHS 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.
IHS 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—cases 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.
IHS 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.
IHS 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
IHS 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.
Officials 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.
The other two area offices indicated that they did not expect a cap on nonhospital services to create any problems with patient access to care.
Medicare 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.
The 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’s 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.
IHS 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’ 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.
Conclusions
IHS’s 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.
As a steward of public resources, IHS is responsible and accountable for using taxpayer funds efficiently and effectively. Despite the OIG’s 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.
Matter for Congressional Consideration
Congress should consider imposing a cap on payments for physician and other nonhospital services made through IHS’s CHS program that is consistent with the rates paid by other federal agencies.
Recommendation for Executive Action
Should the Congress decide to cap payments for physician and other nonhospital services made through IHS’s 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.
Agency Comments and Our Evaluation
We 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.
We 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.
If 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.
Appendix I: Comments from the Department of Health and Human Services
Appendix II: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
Indians 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.
What GAO Found
The 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.
Although 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.
Seven 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.
IHS 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.
HHS 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.
What GAO Recommends
Congress 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. |
gao_GAO-05-613 | gao_GAO-05-613_0 | Background
The 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’s 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.
The major provisions of the 1990 amendments are contained in the first six titles. As requested, this report addresses EPA’s 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.
Although 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’s 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.
According to EPA, by many measures, the quality of the nation’s 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.
Despite 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—measured in hours or days—is 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.
EPA Has Implemented Almost All Required Actions, but Many Were Implemented Late
EPA 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.
The 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’s 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.
As 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.
Of the 114 requirements without statutory deadlines, all but 3 of the requirements have been completed.
On 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.
EPA officials cited several factors to explain why the agency missed deadlines for so many requirements. Among these factors was an emphasis on stakeholders’ 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’s 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’s 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.
As 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 “residual risk” 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 “risk-based” 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.
The 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’s 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.
Observations
The 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’s implementation of the myriad and diverse actions mandated in the 1990 amendments by providing a structure to guide and support the agency’s efforts to complete them.
As 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’s March 2005 rule on mercury emissions.
Agency Comments and Our Evaluation
We 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’s comments and our responses.
As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the 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.
If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report are listed in appendix VI.
Title I
The 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 “criteria” 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.
To 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.
As 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.
On 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.
According 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’s 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’s 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.
Currently, 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.
In 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.
In 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.
Title III
Title 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’s 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 “residual risk” 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.
EPA identified 237 requirements—either with statutory deadlines prior to April 2005 or without statutory deadlines—that 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.
As 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’s 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.
As 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.
In 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.
There 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 “catch-all” 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.
In 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.
Title IV
Title 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 “command and control” 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.
To 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—for 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.
As 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—EPA 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.)
On 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.
According 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.
EPA 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.
Two 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’s 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.
Objective, Scope, and Methodology
The 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.
To obtain information on the status of EPA’s implementation of requirements related to Titles I, III, and IV of the Clean Air Act Amendments of 1990—both those with and without statutory deadlines— we obtained lists of these requirements used for GAO’s 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’s 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—our 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.
To 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’s 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.
While 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.
Comments from the Environmental Protection Agency
The following are GAO’s comments on EPA’s letter dated May 18, 2005.
GAO Comments
1. 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’s assessment that using the signature date, rather than the Federal Register publication date, would not change the report’s conclusions, we revised the report to include EPA’s 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.
GAO Contacts and Staff Acknowledgments
GAO Contacts
John B. Stephenson, (202) 512-3841 (stephensonj@gao.gov) Christine Fishkin, (202) 512-6895 (fishkinc@gao.gov)
Staff Acknowledgments
In addition to the individuals named above, Nancy Crothers, Christine Houle, Karen Keegan, Judy Pagano, and Nico Sloss made key contributions to this report. | Why GAO Did This Study
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 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.
What GAO Found
As 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. |
gao_T-RCED-96-137 | gao_T-RCED-96-137_0 | Background
The 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’s list of the nation’s worst hazardous waste sites, and (2) removal cleanups, which mitigate more immediate threats at both NPL and non-NPL sites. EPA’s 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.
In 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’s survey results. We performed our work from September 1995 through March 1996 in accordance with generally accepted government auditing standards.
NTC Removals Can Provide Valuable Benefits but May Have Some Disadvantages
Compared 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.
NTC Removals Save Time and Money and Improve Environmental Protection
According 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.
According 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’s guidance requires that NTC removals generally meet states’ cleanup standards, the level of cleanup achieved with these removals is not expected to be significantly different from the level achieved with remedial cleanups.
The streamlined NTC process also results in reduced cleanup costs. According to EPA’s 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—at least half of the total cleanup costs. Savings of more than $1 million have also been reported for federally funded cleanups.
Faster 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.
NTC Removals Have Potential Disadvantages
While 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.
Under 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’s time and materials, but an EPA site manager directs the contractor’s 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.
Under 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.
Finally, NTC cleanups may shift some portion of the cleanup costs from the states to the federal government. Under CERCLA and EPA’s 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.
NTC Removals Can Be Used to Clean Up the High-Risk Portions of Most Superfund Sites
The 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.
Like 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.
NTC 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.
Site 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.
Several Factors Constrain the Use of NTC Removals
Several 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.
Funding for NTC Removals Is Limited
According 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.
Time and Cost Limits Set in Law Constrain the Use of NTC Removals
CERCLA 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—unlikely for an NTC removal—or that the action is “consistent with the remedial action to be taken.” EPA’s 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’s 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.
More than half of the NTC removals in EPA’s 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.
Mr. Chairman, this completes our prepared statement. We would be pleased to respond to any questions you or other Members of the Subcommittee may have.
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Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Why GAO Did This Study
GAO 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.
What GAO Found
GAO 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. |
gao_GAO-11-238T | gao_GAO-11-238T_0 | DHS Has Made Progress in Harmonizing International Aviation Security and Facilitating Compliance through Foreign Airport Assessments, but Can Further Strengthen Assessment Efforts
DHS Has Made Progress in Its Efforts to Harmonize International Aviation Security Standards and Practices
DHS 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—comprising the United States, the EU, Canada, and Australia—to 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’ technical representative on ICAO’s Aviation Security Panel and the panel’s various Working Groups.
In 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—Africa, the Asia/Pacific region, Europe, the Middle East, and the Western Hemisphere—with 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.
TSA 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—the 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.
TSA 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’s 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’s (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’s government with assistance and guidance on their air cargo screening procedures.
In 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—including the domestic and inbound flights of United States and foreign passenger operations—by 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’s 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.
In 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’s 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’s air cargo security program and is evaluating the comparability of France’s 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.
TSA 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.
Following TSA’s 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.
However, as discussed in our March 2010 testimony, TSA’s 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’s AIT deployment, and expect the final report to be issued in the summer of 2011.
DHS Has Made Progress in Its Efforts to Facilitate Compliance with ICAO Standards through Foreign Airport Assessments but Can Further Strengthen Its Efforts
TSA conducts foreign airport assessments. TSA efforts to assess security at foreign airports—airports served by U.S. aircraft operators and those from which foreign air carriers operate service to the United States—also serve to strengthen international aviation security. Through TSA’s 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’s 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.
In 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’s 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’ 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’s implementation of our 2007 recommendations during our ongoing review of TSA’s foreign airport assessment program, which we plan to issue in the fall of 2011.
Challenges Related to the Harmonization Process and TSA’s Foreign Airport Assessment Program May Affect DHS’s Progress
Challenges Related to Harmonization
A number of key challenges, many of which are outside of DHS’s 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’ 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.
Harmonization 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’ 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.
Countries view aviation security threats differently. As we reported in 2007 and 2010, some foreign governments do not share the United States government’s 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.
Resource 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—for example, trained staff—to 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’s ongoing cooperative efforts to develop commensurate security systems with international partners.
To help address the resource deficit and build management capacity in other nations, the United States provides aviation security assistance— such as training and technical assistance—to 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’s foreign airport assessments to identify a nation’s aviation security training needs and provide support. In addition, TSA’s Aviation Security Sustainable International Standards Team (ASSIST), comprised of security experts, conducts an assessment of a country’s 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—a snapshot of a country’s antiterrorism capability—to 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.
Legal and cultural factors can also affect harmonization. Legal and cultural differences among nations may hamper DHS’s 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’s 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.
Cultural 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—some 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 “stick figure” or “cartoon-like” 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.
Although 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 “one-stop security,” 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’ 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.
Challenges Related to TSA’s Foreign Airport Assessment Program
Our 2007 review of TSA’s 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’s 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— 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’s 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’s assessments. We plan to further assess this issue, as well as other potential challenges, as part of our ongoing review of TSA’s foreign airport assessment program, which we plan to issue in the fall of 2011.
Mr. 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.
Contacts and Acknowledgments
For 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.
In addition to the contact named above, staff who made key contributions to this statement were Steve D. Morris, Assistant Director; Carissa D.
Bryant; 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.
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Why GAO Did This Study
The 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.
What GAO Found
In 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. |
crs_RS21988 | crs_RS21988_0 | Background
DOE 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.
How 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.
Although 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.
Applicability of the Nuclear Waste Policy Act
How 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.
DOE 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.
DOE 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.
Waste Disposal Authority in P.L. 108-375
Prior 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 in 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 Idaho 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 authority is permanent, unless repealed by Congress, funding to implement it is subject to annual authorization and appropriation. An examination of provisions in Section 3116 of P.L. 108-375 follows.
Section 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.
The 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.
In 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.
Section 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.
Section 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.
Waste Determinations
In 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.
National Academy of Sciences Study
To 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.
The 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.
Potential Implications for Environmental Cleanup
DOE 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.
Grouting 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. | 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. |
gao_RCED-99-135 | gao_RCED-99-135_0 | Background
To 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’s employees’ 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.
Section 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
DOE should provide relocation assistance to transferred employees and should assist terminated employees in obtaining appropriate retraining, education, and reemployment.
While 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’s 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.
DOE Has Spent Over $1 Billion on Its Downsizing Efforts
For 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.
Of 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.
The 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.
At 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—$14 million at Oak Ridge and $13 million at Savannah River.
The 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.
Benefits Went to Most Separated Workers and Contained Similar Types of Benefits Provided in Public and Private Plans
DOE 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’ 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.
Benefits Were Provided to Most Separated Employees
While 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.
DOE’s criteria require that workforce restructuring plans for each facility minimize impacts for all workers and recognize a “special responsibility” 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.
For 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’ 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’s 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—many provided by an outside contractor. A hiring preference for involuntarily separated workers at other DOE contractors’ 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.
The Value of Benefits Varied Widely
While 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’ 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’ pay for each year of service, subject to a limit of 52 weeks. With the 52-week limit on separation payments, Lawrence Livermore’s average voluntary separation payment of $43,939 exceeded Portsmouth’s cap of $25,000.
Table 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’s 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.
DOE Generally Offered Types of Benefits That Were Similar to Those of Other Plans
DOE generally offered its separated contractor workers benefits that were similar to those offered in public and private sector severance packages—such as education assistance and preference in rehiring. However, some of DOE’s 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.
Table 2 shows the types of benefits generally offered and compares these generic benefits with the benefits offered in DOE’s workforce restructuring plans, the plans offered by DOE contractors in the absence of DOE’s 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.
We 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’s 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’s workforce restructuring benefits had formulas that could provide more benefits than the amount separated federal civilian employees could expect to receive. Some of DOE’s 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’ service and 2 weeks of salary per year for more than 10 years’ 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’s 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.
Among the DOE plans we reviewed, one plan offered enhanced retirement benefits that added years to a contractor worker’s 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.
In 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.
DOE’s Criteria Do Not Ensure That Most Assistance Goes to the Communites Most Affected by Downsizing or Those With the Highest Unemployment
The use of DOE’s criteria does not result in the most assistance going to the communities most affected by DOE’s 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’s criteria, the criteria used by the Department of Commerce’s 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’s 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’s assistance aided in the creation or retention of jobs is not clear.
Neediest Communities Have Not Received the Most Benefits
DOE’s criteria does not result in the most assistance going to the communities most affected by the Department’s downsizing. DOE’s community assistance guidance has evolved since the program’s inception in 1993. DOE’s February 1997 Policy and Planning Guidance for Community Transition Activities refined the Department’s 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’s downsizing. These plans “may be based upon community needs and may incorporate an analysis of the socio-economic strengths, weaknesses, opportunities, and threats.” In developing their plans, communities are asked to identify the primary and secondary economic impacts likely to result from DOE’s 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.
Although DOE requires communities to develop plans that include economic impact, DOE focuses its review on the merits of a plan’s individual projects, not on a community’s relative economic need. DOE uses a number of written criteria to evaluate individual projects. These include the project’s 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’s dependency on DOE. In addition to DOE’s 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’s guidance nor are the communities evaluated against these four criteria in the memorandums sent to the Secretary for funding approval.
After completing its review, DOE submits a community’s plan to EDA for its independent review. Under the National Defense Authorization Act of 1998, EDA is required to review and approve DOE’s community plans. However, rather than using its own criteria, EDA evaluates the community plans using DOE’s criteria, set out in DOE’s February 1997 guidance.
Table 3 shows the relative disparity between DOE’s assistance to the affected communities and communities’ 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.
Some Community Assistance Would Have Been Ineligible Under Other Criteria
Applying EDA’s job loss and unemployment criteria to DOE’s community assistance funding decisions for fiscal years 1995 through 1998, we found that some communities that received assistance under DOE’s criteria would not be eligible under EDA’s criteria. EDA—which helps communities recover from the effects of job losses—has threshold criteria for its economic assistance that are based on job loss and unemployment. Under EDA’s regulations in effect during this period, communities in a standard metropolitan statistical area suffering from sudden and severe economic distress were eligible for EDA’s assistance if, among other things, they met one of the following tests: (1) the area’s 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’s unemployment rate was greater than the national average and .5 percent of the employed population, or 4,000 jobs, were lost. While EDA’s 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’s criteria to assess DOE’s 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.
These 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’s written guidance.
The Effect of DOE’s Assistance Is Uncertain Because of a Strong Economy
Since 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’s 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’s 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.
While determining DOE’s 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’s impact. In doing this comparison, we found that DOE’s 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’s contribution to that growth was 1,191 jobs, or .7 percent. However, in Richland, DOE’s 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’s community assistance program.
While 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’s community assistance to job creation and retention. To illustrate this point, the Director of DOE’s 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.
Conclusions
DOE’s criteria for assessing community assistance requests focus on the merits of individual projects and not on a community’s 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’s 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.
Recommendation
In order to target financial assistance to those communities that need it the most, we recommend that the Secretary of Energy revise the Department’s 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’s unemployment rate and the impact of federal job loss on the local economy.
Agency Comments
We 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.
First, 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’s 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’ economic conditions, DOE’s written criteria do not. For example, DOE’s March 18, 1998, memorandum allocating $4.5 million for fiscal year 1998 for assistance to communities surrounding the Department’s Portsmouth facility, found that a four-county area surrounding the facility experienced unemployment rates double the state’s 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’s criteria could be improved by explicitly describing the economic factors it will consider in determining relative need when allocating funds among affected communities.
Second, 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’s 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.
DOE’s comments and our evaluation of them are provided in appendix V.
Scope and Methodology
To 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’s Office of Worker and Community Transition and the Office of the Chief Financial Officer.
To 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’s 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’s benefits with the value of the benefits provided by other federal and private organizations.
To examine the results of DOE’s criteria for determining which communities should receive assistance, we interviewed officials in DOE and the Department of Commerce’s Economic Development Administration. We also reviewed DOE’s policy, operating guidelines, and documentation of the approval process; the interagency agreement between DOE and Commerce; and individual communities’ 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’s Office of Worker and Community Transition annual reports for fiscal years 1993 through 1998.
To 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’ databases. This information identified those individuals who were separated during fiscal years 1997 and 1998 and those currently employed at defense facilities.
To 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’s supporting workpapers. We also interviewed the consultant’s investigators.
We did not independently verify the data provided by DOE, its contractors, or DOE’s consultant. The consultant verified a sample of DOE’s job creation data. Data on community assistance and job creation and retention are contained in DOE’s 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.
As 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.
If 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.
Length of Service of Workers Separated at DOE Defense Facilities, Fiscal Years 1997 and 1998
As 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—those workers hired on or before September 27, 1991—accounting for 4,094 of the separations and non-Cold War workers—those hired after September 27, 1991—accounting 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.
DOE 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.
Overall, 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.
Figure 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.
Length of Service of Remaining Work Force at DOE Defense Facilities, Fiscal Year 1998
In 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.
Consultant’s Study Estimated the Number of Jobs DOE Helped to Create and Retain
Under 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’s workforce restructuring plans. Booz-Allen & Hamilton, Inc., which was awarded the contract, issued its report on September 30, 1998. While the study’s methodology reasonably estimates the number of jobs that DOE “was helping” 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’s report, Study of the Effects of the Department of Energy’s Work Force Restructuring and Community Transition Plans and Programs, was based upon the consultant’s 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.
The 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’s 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.
Consultant’s Methodology Reasonably Estimates the Number of Jobs Created or Retained
Scope of the Consultant’s Job Creation and Retention Analysis Limited
While this methodology provides reasonable results for the jobs created or retained, the consultant’s 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.
First, 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’s program “was helping” to create or retain these jobs. The Director of DOE’s 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.
Second, another difficulty is separating DOE’s 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.
Application of Economic Development Adminstration Criteria to DOE Funding Decisions, Fiscal Years 1995 Through 1998
Met overall EDA eligibility?
Comments From the Department of Energy
GAO’s Comments
Our comments on DOE’s two main assertions are summarized in the body of the report. In its comments, DOE asserted the following:
The report draft did not accurately portray the Department’s 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.
The Department’s 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.
In this appendix, we address each of the comments made in the attachment to DOE’s 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’s defense-related reductions eligible for the Economic Development Administration’s (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’s claim to consistency is based on a provision of the act that allows communities affected by DOE’s defense-related funding reductions to qualify for assistance. However, the act was not effective until February 11, 1999. Furthermore, DOE’s guidance does not have any economic threshold criteria for determining affected communities’ 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.
Second, 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’s criteria for reviewing projects and programs, set out in DOE’s 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.
Third, 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’s criteria focus on the merits of the community’s individual projects, such as projected job creation, and not on the community’s relative economic need. Our analysis shows that communities differ in their degree of economic strength, and DOE’s 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, “Although 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.” However, none of the memorandums we reviewed considered threshold criteria or relative economic need.
Fourth, DOE notes that a 1998 independent audit found, “The 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.” 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 “by the Congress for such assistance.” We disagree with DOE’s response on several points. First, DOE’s 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’s economic threshold criteria that were in existence during fiscal years 1995 through 1998, when the bulk of DOE’s 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’s criteria for economic need.
Second, DOE’s analysis misapplies EDA’s economic threshold criteria in two ways. DOE’s comments applied EDA’s 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’s 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’ economic strength in its community assistance allocation criteria.
Additionally, DOE’s 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’s 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’s annual reports. Since the receipt of DOE’s 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.
According 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’s table shows a wide disparity in the range of community assistance per job lost—ranging from $949 to $14,601. Importantly, DOE’s table does not show the allocation amounts with the communities’ 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—2,832 and 2,922—respectively. 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.
Finally, 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’s memorandums approving community assistance allocations generally do not describe the communities’ 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—incorrect allocation and unemployment data. First, as discussed under comment 3, we incorporated DOE’s community assistance figures. Even though Richland received more community funding than Oak Ridge, it received less per worker separated—Richland 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’s (Roane) unemployment data for its Oak Ridge facility. As discussed in our second comment, this is a misapplication of EDA’s criteria. Following EDA’s 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’s 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’s 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’s study that shows DOE’s program helped create more than 22,000 jobs. Like the consultant’s study, our draft report concurred that DOE helped to create and retain these jobs. However, the consultant’s 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’s job creation efforts in any given area. Furthermore, the consultant’s 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’s 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.
DOE also commented that 17 of the 25 public and private sector employers identified in our 1995 report offered enhanced retirement. DOE’s 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’s comments, these benefits are limited to contractor-separated employees who cannot obtain coverage through an employer or spouse. We have revised our report accordingly.
DOE also commented that our draft report did not include the wide range of additional benefit categories offered by other organizations. Based on DOE’s 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’s 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’s 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.
Finally, 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.
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Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Why GAO Did This Study
Pursuant 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.
What GAO Found
GAO 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. |
crs_RL33311 | crs_RL33311_0 | 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.
This 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.
Current Law
Under 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.
Some 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).
Use 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—though 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%.
In 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.
A self-employed individual has two other options for obtaining health insurance coverage that offer significant tax benefits.
He 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.
Self-employed individuals may also open Archer medical savings accounts (MSAs)—though 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.
Health Insurance Coverage for the Self-Employed
An 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.
According 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.
The 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.
Legislative History of the Health Insurance Deduction for the Self-Employed
The 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.
Congress 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.
A 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.
For 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.
The 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.
The 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.
Effectiveness of the Deduction
One 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?
Coverage Rate Among the Self-Employed
The 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.
All 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.
Yet 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.
Is 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%).
These 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.
Tax Subsidies for Health Insurance for the Self-Employed and Wage Earners
Does 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.
The 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.
At 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.
Legislation in the 111th Congress That Could Affect Health Insurance Coverage for the Self-Employed
Numerous 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.
A 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.
At 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.
Health 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.
A 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:
require 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.
Such 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 —with its individual mandate, income-based subsidies for the purchase of health insurance through exchanges, and health insurance market reforms—would be likely to boost the coverage rate among the self-employed.
Policy Issues Related to the Deduction
The 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.
But 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.
First, 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.
Second, 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.
The 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.
There 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.
Third, 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.
Neither 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.
Finally, 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. | 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.
This 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.
Under 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.
The 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.
Several 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.
Some 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—and if so, what tax provisions it might contain—enough 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. |
gao_GAO-09-903T | gao_GAO-09-903T_0 | Background
FAMS 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’s 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.
FAMS 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’s 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.
At 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—as well as transportation security inspectors, transportation security officers, behavioral detection officers, and explosives detection canines—the 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.
FAMS’s 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’s budget provides for the salaries of federal air marshals and supports maintenance of infrastructure that includes 21 field offices.
FAMS’s Operational Approach to Achieving Its Core Mission Is Based on Risk-Related Factors
FAMS’s 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—such as the nonstop, long-distance flights targeted on 9/11—are given priority coverage by federal air marshals: Threat (intelligence): Available strategic or tactical information affecting aviation security is considered.
Vulnerabilities: Although FAMS’s 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.
Consequences: FAMS recognizes that flight routes over certain geographic locations involve more potential consequences than other routes.
FAMS 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.
In 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’s 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.
An Independent Assessment Concluded That FAMS’s Approach for Achieving Its Core Mission Was Reasonable; Recommendations for Enhancing the Approach Are Being Implemented
After evaluating FAMS’s 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’s overall approach to flight coverage: FAMS applies a structured, rigorous approach to analyzing risk and allocating resources.
The approach is reasonable and valid.
No other organizations facing comparable risk-management challenges apply notably better methodologies or tools.
As part of its evaluation methodology, the Homeland Security Institute examined the conceptual basis for FAMS’s approach to risk analysis. Also, the institute examined FAMS’s scheduling processes and analyzed outputs in the form of “coverage” 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’s evaluation methodology and generally found it to be reasonable.
Although the institute’s July 2006 report concluded that FAMS’s 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.
To address the Homeland Security Institute’s recommendations, FAMS officials stated that a broader approach for determining which flights to cover has been implemented—an 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’s 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.
FAMS Has Taken Positive Actions to Address Issues Affecting Its Workforce and to Help Ensure Continued Progress
To better understand and address operational and quality-of-life issues affecting the FAMS workforce, the agency’s previous Director—who served in that capacity from March 2006 to June 2008—established 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.
These 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’ quality of life—and 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—to replace the current, unreliable devices—and distribute them to air marshals to improve their ability to communicate effectively with management while in mission status.
All 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.
In 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’s results may not provide a complete assessment of employees’ 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 “not applicable” or “no basis to judge”— responses that would be appropriate when respondents had little or no familiarity with the topic in question.
In summary, our January 2009 report noted that obtaining a higher response rate to FAMS’s future surveys and modifying the structure of some questions could enhance the surveys’ potential usefulness by, for instance, providing a more comprehensive basis for assessing employees’ attitudes and perspectives. Thus, to increase the usefulness of the agency’s 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.
Congressional Oversight Issues
Federal 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.
Similarly, 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’s 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?
In 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?
To what extent have appropriate performance measures been developed for gauging the effectiveness and results of resource allocations and utilization?
How 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?
These types of questions warrant ongoing consideration by FAMS management and continued oversight by congressional stakeholders.
Mr. Chairman, this completes my prepared statement. I look forward to answering any questions that you or other members of the subcommittee may have.
Contacts and Acknowledgments
For 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.
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Why GAO Did This Study
By 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).
What GAO Found
Because 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. |
gao_GAO-05-412 | gao_GAO-05-412_0 | Background
Money 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—techniques to obscure the origin of funds and the ultimate destination—are 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.
Following 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’s 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.
Agencies 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.
Department of Justice components involved in efforts to combat money laundering and terrorist financing include the Criminal Division’s 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’s Bureau of Immigration and Customs Enforcement (ICE) also investigates cases involving money laundering and terrorist activities.
The federal financial regulators who oversee financial institutions and examine them for compliance with anti-money laundering laws and regulations include the federal banking regulators—the Federal Reserve, OCC, OTS, FDIC, and NCUA—and 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—NASD and NYSE—oversee 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.
Developing Regulations for CIP and Section 314 That Applied to a Wide Range of Financial Institutions Was Difficult and Complex
Treasury 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.
Development of the CIP Requirement Highlighted Difficulties in Applying Requirements Consistently to a Wide Range of Financial Products and Businesses
Treasury and the federal financial regulators had to resolve several issues through an interagency process when developing the regulations for CIP, such as defining “customer” and “account” 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.
Following 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.
Treasury 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.
In 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.
The 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’s 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.
Treasury 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.
Treasury 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.
Developing Section 314 Regulations Required Balancing the Needs of Law Enforcement and Industry
When 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.
For 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.
The 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.
FinCEN 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.
The rulemaking process for section 314(b) addressed the need to encourage information sharing among financial institutions while still protecting customers’ 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).
Treasury 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
Treasury 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’s 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’ 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.
Treasury and the Regulators Have Assisted Industry in Implementing CIP and Section 314 Requirements, but Interagency Coordination Has Slowed Issuance of Additional Guidance
Treasury 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’ 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.
Treasury and the federal financial regulators have provided specific guidance related to the CIP rule and section 314 in the form of responses to “frequently asked questions” or “FAQs.” 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’ guidance.
FinCEN issued FAQs for the 314 information sharing regulations in February 2003. These FAQs were initially posted on FinCEN’s 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.
According 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.
The 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.
Industry Officials Believe That More Guidance from FinCEN and Financial Regulators Would Help Address Some CIP Implementation Challenges
Industry officials we met with said that while regulators’ 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.
CIP 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’s implementation concerns. For example, the FAQs for banks discussed two issues banks raised during the public comment period in the rulemaking process—(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.
Despite 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’ 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’s 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’s risk ranking.
Some 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.
Additionally, 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 “give up” 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.
Industry Officials Faced Some Implementation Challenges and Question Whether the 314(a) Information Sharing Process Improves Communication with Law Enforcement
The implementation of the 314(a) information sharing process has created some practical challenges and highlighted the tension between law enforcement officials’ duty to protect sensitive information and industry’s 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.
Despite 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.
Also, 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’ 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.
In response to the industry’s 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’s 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’s new secure information sharing system to provide financial institutions additional feedback information.
Industry Officials Expressed Some Confusion about Types of Suspicious Activity That Can Be Shared under Section 314(b)
Although 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.
On 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.
Financial Regulators and SROs Have Updated Examination Guidance and Trained Examiners to Evaluate Compliance with CIP and Section 314
Since February 1 and October 1, 2003—when financial institutions were to be in compliance with regulations for sections 314 and CIP of the PATRIOT Act, respectively—banking, 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—a 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.
All 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
The 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’ 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’s 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.
Development 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.
All 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.
The 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’s 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.
Financial 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
All 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.
Banking Regulators Use Formal Training Courses and FFIEC to Provide Staff Training
All 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’s 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.
However, 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.
FDIC 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.
Banking regulators also send examiners to FFIEC’s 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’s anti-money laundering program. Table 1 provides additional information about training at each of the banking regulators.
Similar 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’s 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’s 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.
Securities 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.
Futures 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’s 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.
Examinations and Enforcement Actions Highlight Progress and Difficulties in Overseeing Compliance with the CIP Requirement and Section 314
The federal financial regulators and SROs responsible for examining financial institutions’ 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.
Most Examinations in Our Sample Reviewed CIP, but Coverage of Certain Aspects Varied
As shown in table 3, about 95 percent of the examinations in our sample (168 of 176) documented some type of review of financial institutions’ 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’ reviews, such as reviewing the financial institution’s methods of verifying customers’ 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.
Generally, we saw documentation showing that examiners reviewed the financial institution’s 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— approximately 56 percent (99 of 176)—assessed 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’s line of business, the process used to open the account, and whether the customer is in the United States or overseas.
Because it can be difficult to determine the customer’s 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’s 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’s interest to obtain and verify a greater volume of information on signatories and other individuals with control or authority over the firm’s 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.
The 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.
The 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’s review of the independent testing of an institution’s 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’s 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’s procedures that we reviewed for mutual funds included procedures for sampling accounts and testing CIP procedures for examinations of funds’ transfer agents that maintain customer account information. NASD and NYSE have instructions that include sampling accounts to determine whether the financial institution’s 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.
We 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.
Although 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’s 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’s 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.
The Results of Our Examination Review Highlighted Some Difficulties in Understanding CIP Requirements
Our 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.
CIP and Other Procedures That Require Customer Identification
A 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 “know-your-customer” or “customer due diligence” (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.
As 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—similar 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.
In 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’s 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’s 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–customer procedures as “customer due diligence.”
CIP Requirements for Checking Government Lists
In 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’s 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.
Applying CIP to Existing Customers
Two 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’ 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’ 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.
Most Examinations in Our Sample Covered Section 314(a), While about Half Covered Section 314(b) in Part Because It Is Voluntary
As shown in table 5, most of the examinations in our sample—about 76 percent—included 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.
Although 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.
The 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’s anti- money laundering program.
The 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’ revised examination guidance and procedures in February 2004 that were updated to include section 314(a).
Some 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’s 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.
As 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—NFA, CME, and CBOT—also 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.
Federal Financial Regulators and SROs Generally Used Informal Actions to Address CIP and Section 314(a) Deficiencies and Violations
Because 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.
The federal financial regulators and SROs used different terms to classify problems associated with section 314 and CIP and other elements of institutions’ anti-money laundering programs. For example, some regulators would generally identify section 314 or CIP problems as “violations” or “apparent violations,” while some of the banking regulators would use the term “deficiency” in some cases and “violation” 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’ 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.
The 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.
The 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.
In 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’s 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.
Recent Formal Enforcement Actions Have Cited Violations of CIP and Section 314(a)
Although 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’s Office of Compliance and Regulatory Enforcement evaluates enforcement matters that may result in a variety of remedies, including the assessment of civil money penalties.
The 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.
We 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—AmSouth—included 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.
Two 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’s cease and desist orders cited institutions for violations of 31 C.F.R. § 103.121 by “failing to implement an effective customer identification program and/or effective ‘Know Your Customer’ policies and procedures.” While 31 C.F.R. § 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.
We 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.
Regulators’ Processes for Tracking Examination Information Varied with Some Having Weaknesses That Could Affect Their Ability to Monitor Anti- Money Laundering Compliance
Reviewing 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’ anti-money laundering examinations and enforcement programs and SEC’s 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’ ability to monitor compliance with sections 314 and CIP as well as other anti-money laundering requirements.
Generally, 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’s 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.
The Federal Reserve had some difficulty responding to our request because the Federal Reserve’s 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’s 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.
SEC’s 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.
The 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.
Law Enforcement Officials Believe That Section 314(a) and CIP Have Been Valuable Tools in Terrorist and Money Laundering Investigations
Law 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.
Law Enforcement Officials Believe That the Section 314(a) Process Has Improved Coordination with Financial Institutions and Has Led to More Efficient Investigations
Officials 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.
Investigators 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.
Almost 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’s 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.
According 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.
Information Collected through CIP Can Assist Money Laundering and Terrorist Financing Investigations
Many 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.
Successful Prosecutions of Terrorist Financing and Money Laundering Cases Depend on Numerous Factors
Although 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.
Prosecutors in two U.S. Attorney’s 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.
Conclusions
Since 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’s 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’ 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.
FinCEN, 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.
Although 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’s 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.
Recommendations for Executive Action
To 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.
To 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—the examiner should determine whether a financial institution’s 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.
Agency Comments and Our Evaluation
We 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.
In 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.
Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to the 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.
If 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.
Scope and Methodology
To 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.
To identify the government’s 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.
To 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.
To 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.
After 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.
To 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.
We 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.
Comments from the Department of the Treasury
Comments from the National Credit Union Administration
Comments from the Securities and Exchange Commission
GAO Contacts and Staff Acknowledgments
GAO Contacts
Staff Acknowledgments
William Bates, Davi M. D’Agostino, David Nicholson, Carl Ramirez, Omyra Ramsingh, Adam Shapiro, and Kaya Leigh Taylor made key contributions to this report.
Related Products
Anti-Money Laundering: Issues Concerning Depository Institution Regulatory Oversight. GAO-04-833T. Washington, D.C.: June 3, 2004.
Combating Money Laundering: Opportunities Exist to Improve the National Strategy. GAO-03-813. Washington, D.C.: September 26, 2003.
Internet Gambling: An Overview of the Issues. GAO-03-89. Washington, D.C.: December 2, 2002.
Interim Report on Internet Gambling. GAO-02-1101R. Washington, D.C.: September 23, 2002.
Money Laundering: Extent of Money Laundering through Credit Cards is Unknown. GAO-02-670. Washington, D.C.: July 22, 2002.
Anti-Money Laundering: Efforts in the Securities Industry. GAO-02-111. Washington, D.C.: October 10, 2001.
Money Laundering: Oversight of Suspicious Activity Reporting at Bank- Affiliated Broker-Dealers Ceased. GAO-01-474. Washington, D.C.: March 22, 2001.
Suspicious Banking Activities: Possible Money Laundering by U.S. Corporations Formed for Russian Entities. GAO-01-120. Washington, D.C.: October 31, 2000.
Money Laundering: Observations on Private Banking and Related Oversight of Selected Offshore Jurisdictions. GAO/T-GGD-00-32. Washington, D.C.: November 9, 1999.
Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering. GAO/T-OSI-00-3. Washington, D.C.: November 9, 1999.
Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering. GAO/OSI-99-1. Washington, D.C.: October 30, 1998.
Money Laundering: Regulatory Oversight of Offshore Private Banking Activities. GAO/GGD-98-154. Washington, D.C.: June 29, 1998.
Money Laundering: FinCEN’s Law Enforcement Support Role Is Evolving. GAO/GGD-98-117. Washington, D.C.: June 19, 1998.
Money Laundering: FinCEN Needs to Better Manage Bank Secrecy Act Civil Penalties. GAO/GGD-98-108. Washington, D.C.: June 15, 1998.
Money Laundering: FinCEN’s Law Enforcement Support, Regulatory, and International Roles. GAO/GGD-98-83. Washington, D.C.: April 1, 1998.
Money Laundering: FinCEN Needs to Better Communicate Regulatory Priorities and Timelines. GAO/GGD-98-18. Washington, D.C.: February 6, 1998.
Private Banking: Information on Private Banking and Its Vulnerability to Money Laundering. GAO/GGD-98-19R. Washington, D.C.: October 30, 1997.
Money Laundering: A Framework for Understanding U.S. Efforts Overseas. GAO/GGD-96-105. Washington, D.C.: May 24, 1996. | Why GAO Did This Study
Title 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.
What GAO Found
Treasury (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. |
gao_GAO-06-747T | gao_GAO-06-747T_0 | Background
As you know, Mr. Chairman, for over two decades, we have reported on problems with DOD’s 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’s 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.
A critical step in the federal government’s 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’s 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’s 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’s legislative branch.
Problems 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.
Longstanding delays in completing hundreds of thousands of clearance requests for servicemembers, federal employees, and industry personnel as well as numerous impediments that hinder DOD’s 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.
Shortly after we placed DOD’s clearance program on our high-risk list, a major change in DOD’s 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.
Other recent significant events affecting DOD’s 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.
Using this context for understanding the interplay between DOD and OPM in DOD’s 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.
As 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.
Unexpected Volume of Clearance Requests and Funding Constraints Delay Security Clearances for Industry Personnel Further
DOD 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.
An 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’s personnel security investigations function to OPM.
The 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 “OPM may charge DOD for investigations at DOD’s 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.”
The Under Secretary’s 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’s 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’s and Associate Director’s correspondences and have indicated that they intend to issue reports on their reviews this summer.
If Not Effectively Addressed, Impediments Could Continue to Hinder Efforts to Provide Timely Clearances
Some 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.
An Existing and a Potential New Impediment Could Lead to Continuing Problems for All Types of Employees Seeking Clearances
A 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’s 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’s 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.
Another potential impediment that could slow improvements in personnel security clearance processes in DOD—as well as governmentwide—is 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’s general strategy for addressing the problems that led to our high-risk designation for DOD’s clearance program. Demonstrating strong management commitment and top leadership support to address a known risk is one of the requirements for removing DOD’s clearance program from GAO’s 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’s 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’ disputes with OPM—such as the current one regarding billing—may require a high-level third party to mediate a resolution that is perceived to be impartial.
Increased Demand for High-level Clearances and the Lack of Reciprocity Are Previously Identified Problems for Industry Personnel
As 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’s capacity to decrease the clearance backlog is reduced while the cost of the clearance program is increased.
When 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 “a 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.” 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.
Concluding Observations
We will continue to assess and monitor DOD’s 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.
Staff Contact and Acknowledgments
For 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.
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This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Why GAO Did This Study
The 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.
What GAO Found
The 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. |
crs_R44303 | crs_R44303_0 | Recent Developments
Earthquake
A 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.
New Constitution
Many 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."
United States-Nepal Relations
The 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.
U.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.
U.S. Assistance
Nepal 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."
The 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.
Congressional Engagement
A 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.
Peace Corps
More 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.
Political Developments
Government
Nepal 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.
Unrest in the Terai
An 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.
According 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.
The 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—that the agitation in the Terai is in some way backed by India—may well have the effect of delegitimizing Madhese or Tharu demands in the eyes of much of the rest of the country.
Historical Context
Religion 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.
Never 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.
In 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.
In 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.
The 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.
Constitutional Crisis
During 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.
Although 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.
The King's Takeover
The 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.
After 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.
When 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.
By 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."
Maoist Reaction
From 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.
Democratic Uprising
In 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:
The 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).
The 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.
A 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–Maoist (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).
The Economy
Nepal'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.
The 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.
Rebuilding 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.
Nepal'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%.
The 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."
Hydropower
Nepal'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.
Remittances
Remittances 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.
Human Rights
There 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."
Trafficking
Trafficking 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.
The 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.
Religious Freedom
Nepal 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.
Refugees
Lhotshampa
Tens 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.
Tibetans
Tibetan 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.
In 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."
The Environment
Nepal 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.
Climate Change
Studies 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.
Soil 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.
Wildlife Preservation
While 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.
External Affairs
Nepal 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.
Nepal-India Relations
India 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.
It 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."
Nepal-China Relations
China 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.
Peacekeeping
Nepal 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.
Chronology76 | 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.
New 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.
Among 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.
Nepal'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.
Nepal 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.
Nepal 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. |
crs_RL33907 | crs_RL33907_0 | 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.
This 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.
Overview of Project BioShield
The 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.
In 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.
Project BioShield Procurement Process
The 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.
DHS Roles
The 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.
DHS 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."
Homeland 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.
In 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.
HHS Roles
For 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 submit a recommendation for presidential approval to use BioShield funds to acquire such a countermeasure.
The 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.
HHS 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.
Presidential Roles
Presidential 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.
The 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).
Interagency Roles
Much 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 ).
Weapons of Mass Destruction Medical Countermeasures Subcommittee
In 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.
The 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 below).
Public Health and Emergency Medical Countermeasures Enterprise
The 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:
(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.
PHEMCE 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.
According 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.
HSPD-18
Homeland 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
establish an interagency committee to provide advice in setting medical countermeasure requirements and coordinate HHS research, development, and procurement activities.
HSPD-18 also requires the HHS Secretary to establish a
dedicated 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.
The Secretary is to align all relevant HHS programs to support this plan.
These 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.
The Pandemic and All-Hazards Preparedness Act
The 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
develop 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
This 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 .
Appropriations, Rescissions, and Future Funding Options
Appropriations
The 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."
Although 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 ).
The 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.
Rescissions
Although 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.
The 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 ).
The 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 ).
Future Funding Options
Across-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.
Acquisitions
The 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.
On 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 ).
Government 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.
A 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 ).
Agencies 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 anthrax therapeutic RFIs, and one of the two acute radiation syndrome RFIs ( Figure 2 ). RFIs are 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.
Contract 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.
HHS 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.
Of 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.
Anthrax
The 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.
rPA Vaccine
The 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.
In November 2004, HHS awarded VaxGen, Inc. an $877.5 million contract for the delivery of 75 million doses of rPA vaccine to the Strategic National Stockpile ($11.70 per dose). On December 17, 2006, HHS terminated this contract for VaxGen's failure to meet a contract milestone.
HHS 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.
This 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.
Following the cancellation of the contract, HHS restated its commitment to obtain an rPA-based anthrax vaccine for the Strategic National Stockpile.
AVA Vaccine
The 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.
The 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.
In 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.
This 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.
ABthrax
ABthrax is an antibody-based treatment that works in a manner similar to anti-venom treatments for snake bites. It is currently under development and it is not yet licensed by the FDA. In June 2006, HHS awarded a $165.2 million contract to Human Genome Sciences for the delivery of 20 thousand 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 action, 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.
Anthrax Immune Globulin
Anthrax 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.
Smallpox
Although 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 ® 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.
In 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.
Botulinum Toxin
Botulinum 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.
Botulinum 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).
Radiological and Nuclear Agents
In 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.
Potassium Iodide
The 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.
Potassium 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.
Chelators
In 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 zinc diethylenetriaminepentaacetate (Zn-DTPA). (a nominal average of $46 per dose). These chelators 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.
Radioactive 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.
Differences in HHS Contract Awards and Annual Budget Document Accounting
The 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.
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 ).
These 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.
According 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."
Another 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.
In 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.
Like 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.
Combining 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.
Remaining Available Funds
Effective 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.
According 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.
Concluding Observations
Project 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.
Many 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."
Appropriators 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.
Stakeholders, 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.
It 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.
Additional 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.
Some 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. | 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.
Congress 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.
Both 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.
The 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.
HHS 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.
This 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. |
gao_GAO-08-3 | gao_GAO-08-3_0 | Background
The 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.
In 1938 the Wagner-O’Day 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’Day 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.
Military 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.
In 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 “cafeteria” 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.
Congress 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 “no-poaching” provision).
For 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’s 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.
Congress 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.
Randolph-Sheppard Places Blind Individuals in Managerial Roles, while JWOD Employs Persons with Disabilities in Less Skilled Jobs
The 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.
Randolph-Sheppard Relies on State Licensing Agencies to Place Blind Vendors as Managers of Dining Facilities
Education 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.
Responding 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’s 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’s expectations of the blind vendor and defines the vendor’s job responsibilities.
Most 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—known as a teaming partner—to 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.
For 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.
In 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.
The Committee for Purchase Works with NISH and Local Nonprofit Agencies to Employ Individuals with Disabilities in DOD Dining Facilities
The Committee for Purchase works with NISH to match DOD’s 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—a large food service company—to 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.
Most 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—and NISH confirmed—that 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’ operating procedures.
Programs Differ Regarding How Contracts Are Awarded and Priced, and How Program Beneficiaries Are Compensated
The 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.
Significant Differences Exist in How Randolph- Sheppard and JWOD Contracts Are Awarded and Priced
Although 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’s 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 “competitive range.” 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.
The 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.
Under 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.
Randolph-Sheppard Vendors Generally Receive a Percentage of Profits, and JWOD Beneficiaries Are Paid Hourly Wages According to Federal Law
Compensation for Randolph-Sheppard blind vendors is computed differently from compensation paid to JWOD disabled workers. For the Randolph-Sheppard program, blind vendors’ compensation is generally based on a percentage of the profits generated by the dining facilities’ operations. Based on the 37 survey responses where we could determine the basis of how blind vendors’ compensation was computed, 34 reported that that the vendor’s 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’ 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.
As shown in figure 4, 15 of 38 Randolph-Sheppard blind vendors’ 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.
For the JWOD program, for most workers—including those with and without a disability—the 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’s wage rates. Of the six JWOD contracts in our sample, Holloman Air Force Base and the Marine Corps’ 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.
Another law that can affect the disabled worker’s 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’s 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.
Concluding Observations
The 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— 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.
Agency Comments and Our Evaluation
We 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’s technical comments and revised the draft as appropriate. The DOD comment letter is attached as appendix II.
The 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 “beneficiaries” 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.
Second, 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.
Fourth, 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.
We 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’s Web site at http://www.gao.gov.
If 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.
Appendix I: Scope and Methodology
To 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’Day (JWOD) programs. We also reviewed pertinent documents and regulations governing both programs. We reviewed a sample of 14 contracts—8 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.
To 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’s 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.
Appendix II: Comments from the Department of Defense
Appendix III: Comments from the Department of Education
Appendix IV: GAO Contacts and Staff Acknowledgments
Staff Acknowledgments
Jeremy 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.
Related GAO Products
Federal Disability Assistance: Stronger Federal Oversight Could Help Assure Multiple Programs’ Accountability. GAO-07-236. Washington, D.C.: January 26, 2007. | Why GAO Did This Study
Randolph-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.
What GAO Found
The 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. |
crs_RL33135 | crs_RL33135_0 | Background
In 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.
President 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.
The 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.
AIDS 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)
OGAC 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)
Global Fund Resource Gap
The 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.
U.S. Contributions
The 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 $300 billion. Some speculated that thisreflected recognition on the Administration's part that Congress favored larger contributions. Houseand Senate versions of FY2006 appropriations would again provide more for the Global Fund thanrequested.
Table 1. Funding for U.S. Contributions to the GlobalFund
($ millions)
Global 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.
The 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.
Global Fund and PEPFAR in U.S. Policy
Representatives 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.
Those 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.
U.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)
Despite 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.
Debate Over U.S. Funding for the Global Fund
Despite 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.
Many 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
The 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)
Moreover, 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)
Table 2. Contributions to the Global Fund by the G7 andEuropean Commission (%)
Sources: 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.
U.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.
For 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.
Nonetheless, 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)
Many 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.
Those 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.
Some 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.
The 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.
Policy Options
The 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.
The 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.
Another 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.
A 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. | 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.
The 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.
Representatives 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.
Advocates 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 . |
crs_R41750 | crs_R41750_0 | Introduction
In 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 .
Accordingly, 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.
The Second Amendment—An Individual or Collective Right?
The 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.
The 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.
An 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. § 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 .
The Second Amendment in the Supreme Court: United States v. Miller
Despite 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.
In 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:
In 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.
The 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.
The Second Amendment in Federal Court: Appellate Decisions Since Miller
The 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.
The 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."
The 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.
United States v. Emerson
The 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. § 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."
The 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:
Although, 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.
Applying 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. § 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."
Although 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.
Silveira v. Lockyer
In 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.
In 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:
In 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.
Upon 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.
The 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.
The District of Columbia v. Heller Decision
In 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.
Parker v. District of Columbia
In Parker , six residents of the District of Columbia challenged three provisions of the District's 1975 Firearms Control Regulation Act: DC Code § [phone number scrubbed].02(a)(4), which generally barred the registration of handguns, thus effectively prohibiting of possession of handguns in the District; § 22-4504(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 § [phone number scrubbed].02, which required all lawfully owned firearms be kept unloaded and disassembled or bound by a trigger lock or similar device.
The 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 § 22-4504(a) (prohibiting the carriage of a pistol without a license) and § [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."
The 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—'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."
The 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."
The 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."
The 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).
Applying 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 § [phone number scrubbed].02(a)(4) (prohibiting the registration of a pistol), the court stated: "Once it is determined—as we have done—that handguns are 'Arms' referred to in the Second Amendment, it is not open to the District to ban them." Turning to § 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—i.e., self defense." Finally, with respect to § [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."
District of Columbia v. Heller
On 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 §§ [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?"
Oral Argument
On 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:
I don't see how there's any, any, any contradiction between reading the second clause as a—as 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—that 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.
Additionally, 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.
The Decision in Heller
On 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.
After 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."
After 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."
The 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."
Regarding 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."
Having 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]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.]
The Court further stressed:
We 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]
The 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 (§ 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.
Subsequent 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].
The Second Amendment Post-Heller
Although 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.
The 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:
[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.
A 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:
We 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—even the Third Branch of Government—the 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.
Another 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.
The Second Amendment—Does It Apply to the States?
On 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.
Direct Application
Initially, 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.
Privileges or Immunities Clause of the Fourteenth Amendment
It 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."
Five 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 ).
Due Process Clause of the Fourteenth Amendment
In 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
[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.
Although 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."
Prior to McDonald , the Supreme Court had found the following provisions of the Bill of Rights to be incorporated:
The 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.
Over 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—whether, that is, a procedure is necessary to an Anglo-American regime of ordered liberty."
Has the Supreme Court Addressed Incorporation of the Second Amendment via the Due Process Clause?
Over 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—defined as "citizens capable of bearing arms"—to 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).
In Heller , the Court commented upon the issue of incorporation, stating:
With 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.
At 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.
Post-Heller Appellate Decisions and Incorporation of the Second Amendment
After 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 .
The Second and Seventh Circuit Decisions
The 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.'"
Similarly, 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."
The Ninth Circuit Decision
On 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.
Nordyke 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."
To 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.
After 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."
Typically, 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."
The McDonald v. City of Chicago Decision
On 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."
Petitioners 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.
Although 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.
Justice Alito's Majority and Plurality Opinion: Incorporation of the Second Amendment via the Due Process Clause of the Fourteenth Amendment
Justice 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."
Before 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
viewing "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."
Out 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.'"
With 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)."
Turning 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."
According 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.
According 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.
Although 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.
Justice Thomas's Concurring Opinion: Application of the Second Amendment via the Privileges or Immunities Clause
Although 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."
First, 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, § 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, § 2 and that of the Privileges or Immunities Clause (§ 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.
First, he asked if "the privileges or immunities of 'citizens of the United States' recognized by § 1 [are] the same as the privileges and immunities of 'citizens in the several States' to which Article IV, § 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 § 1 to those referred to in Article IV, § 2. 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."
The second question asked is if "§ 1 [of the Fourteenth Amendment], like Article IV, § 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 §1 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."
First, 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."
Justice Stevens's Dissenting Opinion: No Incorporation Under a Substantive Due Process Analysis
Justice 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.'"
He 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."
Justice 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."
With 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.
First, 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.
Justice 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.
Justice Breyer's Dissenting Opinion: No Incorporation Under Due Process Clause
Justice 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."
First, 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."
Justice 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—a 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.
Second, 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."
The 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).
The Second Amendment Post-McDonald
Although 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.
First, 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 ").
Since 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:
First, 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.
With 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 § 922(k) regulates protected conduct." Nonetheless, the court assumed that 18 U.S.C. § 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 § 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.
Second, 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."
Third, 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.
Fourth, 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.
It 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. § 922(g)(9)—prohibiting persons convicted of misdemeanor crimes of domestic violence from possessing firearms—on the basis that "logic and data" demonstrate "a substantial relation between § 922(g)(9) and [an important governmental] objective."
Faced 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."
Although the Fourth Circuit remanded the case to the district court, it noted that § 922(g)(9), like § 922(g)(1)—prohibiting convicted felons from possession—requires 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 —the right of a law-abiding , responsible citizen to possess and carry a weapon for self-defense—by virtue of [the defendant's] criminal history as a domestic violence misdemeanant." (emphasis in the original). | 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 § [phone number scrubbed].02, which generally barred the registration of handguns; DC Code § 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 § [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.
The 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.
After 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.
With 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. |
gao_GAO-07-400T | gao_GAO-07-400T_0 | Background
According 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’s total health care costs. Given the level of the federal government’s 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.
In 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—Framework 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’s Office of the National Coordinator for Health IT updated the framework’s goals in June 2006 and included an objective for protecting consumer privacy. It identified two specific strategies for meeting this objective—(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.
In 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’s 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’s 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— The Office of the National Coordinator: Goals, Objectives, and Strategies—identifies 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.
Health Insurance Portability and Accountability Act of 1996
Federal 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.
HIPAA 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.
HIPAA provides authority to the Secretary to enforce these standards. The Secretary has delegated administration and enforcement of privacy standards to the department’s Office for Civil Rights and enforcement of the security standards to the department’s Centers for Medicare and Medicaid Services.
Most 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.
The Secretary of HHS first issued HIPAA’s 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.
The Privacy Rule reflects basic privacy principles for ensuring the protection of personal health information. Table 1 summarizes these principles.
HHS Has Initiated Actions to Identify Solutions for Protecting Personal Health Information but Has Not Defined an Overall Approach for Addressing Privacy
HHS 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.
HHS’s Contracts Are to Address Privacy and Security Policy and Standards for Nationwide Health Information Exchange
HHS awarded four major health IT contracts in 2005 intended to advance the nationwide exchange of health information—Privacy 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.
HHS’s 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.
The 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.
The National Committee on Vital and Health Statistics Made Recommendations for Addressing Privacy and Security within a Nationwide Health Information Network
In 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.
In 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.
The American Health Information Community’s Confidentiality, Privacy, and Security Workgroup Is to Develop Recommendations to Establish a Privacy Policy Framework
AHIC, 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.
The work group has defined two initial work areas—identity proofing and user authentication—as 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.
HHS’s Collective Initiatives Are Intended to Address Aspects of Key Privacy Principles, but an Overall Approach for Addressing Privacy Has Not Been Defined
HHS 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’ 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’s 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.
HHS 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.
HHS 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’s 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.
The Health Care Industry Faces Challenges in Protecting Electronic Health Information
The increased use of information technology to exchange electronic health information introduces challenges to protecting individuals’ 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’ 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.
Understanding 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.
Several 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’ 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.
Ensuring Individuals’ 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’ 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’ information. The challenges associated with meeting this requirement are expected to become more prevalent as the numbers of organizations exchanging health information increases.
Implementing 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.
Implementation of GAO Recommendations Should Help Ensure that HHS’S Goal to Protect Personal Health Information is Met
To 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’ rights to request access and amendments to health information, and security measures for protecting health information within a nationwide exchange of health information.
In commenting on a draft of our report, HHS disagreed with our recommendation and referred to “the department’s comprehensive and integrated approach for ensuring the privacy and security of health information within nationwide health information exchange.” However, an overall approach for integrating the department’s 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’s 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’s plans and goals for protecting personal health information as part of its efforts to achieve nationwide implementation of health IT.
HHS did not comment on the need to identify an entity responsible for the integration of the department’s 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.
In 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.
In 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.
HHS’s 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’s goal to safeguard personal health information as part of its national strategy for health IT will not be met.
Mr. 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.
Contacts and Acknowledgments
If 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. | Why GAO Did This Study
In 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.
What GAO Found
HHS 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. |
gao_GGD-96-166 | gao_GGD-96-166_0 | Introduction
Changes 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.
According 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.
The 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.
The 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 “market basket” 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’ cost of living. The CPI, therefore, is not a cost-of-living index.
A 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.
Some 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.
Background
The 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.
The 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.
The 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.
In 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’s 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.
Major 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’s 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—CPI-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.
Conceptual Change to the CPI Recommended in 1961
In 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’s 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’ standard of living if the marketplace did not change. However, given that consumers’ 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’s 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.
According to BLS, the Stigler committee’s 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’s 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’s 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.
The commission’s 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’s final report is scheduled to be issued by December 1996.
Objectives, Scope, and Methodology
The 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.
We 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’ costs before 1983, and the measurement of medical care. We recognize that these concerns and issues we identified are not exhaustive.
To 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.)
We 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’ 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.)
We 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.)
We 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.
We 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.
Methodological Changes to Homeownership Measure Made the CPI More Suitable as a Cost-of-Living Measure
In the 1980s, BLS began using the rental equivalence method of measuring homeowners’ 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’s structure of measuring price changes of a fixed market basket of goods and services.
Historical Development of Housing Measures in the CPI
Homeownership 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—the asset-price approach—was 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.
BLS Adopted the Rental Equivalence Method
Following 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.
BLS 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.
Rental 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.
In 1977, when it was time to implement methodological changes for the 1978 major revision to the CPI, BLS’ 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.
BLS, 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—high prices of housing and high interest rates—drew attention to the limitations of the approach used to measure homeowners’ 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.
In January 1983, BLS changed the measurement of homeowners’ 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.
Experts Said That the Rental Equivalence Method Makes CPI More Suitable as a Cost-of-Living Measure
We 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.
All 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’ 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 “concept is based on consumer utility theory which suggests that utility comes from consumption, or use. Since rent is the ‘price of using,’ rental equivalence enhances the use of the CPI as a proxy for the cost of living.” 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.
Experts Agreed That Concerns About the Asset-Price Approach Were Adequately Addressed With the Rental Equivalence Method
All 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.
A few experts mentioned alternative methods to the rental equivalence method. These experts’ general comments indicated some interest in using variations of current mortgage payments, down payments, or mortgage interest to measure homeowners’ costs. However, there was no consensus on any one variation. As one of these experts noted, the “suggestion is not in any way intended to invite a return to the asset-price approach used until 1982.”
Mixture of Issues With the Rental Equivalence Method
Overall, the experts’ 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 “could lead to errors, but in both directions.”
A 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 “government 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.”
BLS Views Rental Equivalence as Consistent With Fixed Market Basket Definition
BLS 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.
Advantages and Disadvantages Cited for Changing Measurement of Medical Care
Medical 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.
The 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.
All 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.
Determining Medical Care Costs in the CPI
The 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.
Difference Between Weighting and Pricing
The 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.
To further illustrate how weighting and pricing differ, consider a hypothetical example of a consumer who receives medical care at a physician’s 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 “lists” for the service provided, $20. In computing the CPI, such a transaction may have the following effects:
The $5 co-payment is the “out-of-pocket” 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’s 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.
BLS Tried Different Methods to Price Medical Care Costs
Medical 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.
Originally, 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’ 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.
In 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.)
Trends in Medical Care Expenditures
In 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.
The 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.
Researchers’ View of the CPI’s Measurement of Medical Care
Like 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’s use of list prices rather than transaction prices.
Concerns About Medical Care Weight
The 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’ medical care expenses, then the employees’ 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.
Cost shifting over time can be illustrated by employers’ 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.
A 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.
Concerns About How Medical Care Expenses Are Priced
In 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.)
In 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.
However, HCFA disputes CBO’s 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.
The 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’s 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.
Experts’ Views on Changing Medical Care Measurement Were Mixed
We 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.
Advantages and Disadvantages Cited by Experts of Moving to a Cost-of-Living Concept
All 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’ 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:
A 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.
A 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.
The change would improve the Gross Domestic Product’s (GDP) implicit price deflator thereby improving research that used the implicit price deflator.
All 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’s 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:
A change would mean a break in the continuity of the price data, which would affect long-term trend analyses.
Measures based on cost-of-living concepts were susceptible to manipulation because of the subjectivity of measuring satisfaction.
It 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.
In 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.
Most Experts Said Additional Expenses Should Be Included in the Weighting of Medical Care
In addition to obtaining the experts’ 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.
Our analysis of the experts’ 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.
There was no consensus on how to implement weighting that is based on cost-of-living concepts. The experts’ 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.
Experts Agree That Transaction Prices Should Be Used
All 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’ (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:
List prices could be transaction prices in some instances.
Transaction prices are available for data collection.
BLS was not recording the appropriate transaction prices.
List prices usage in the CPI has led to the overstatement of inflation, especially in pharmaceutical drugs.
BLS’ 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’s CPI.
BLS’ methodologies are not capturing the substitution of new treatments for items in the CPI’s 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’ 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.
In 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.
BLS 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.)
According 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.
While 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.
Other Comments
When 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
The CPI cannot be used for their work because the CPI uses list prices.
They 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.
The 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.
Also, 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.
BLS Does Not Plan to Include Third-Party Payments
BLS does not plan to include third-party payments in the medical care component. BLS officials hold this position for several reasons.
BLS views the CPI as an index that measures the changes in prices of goods and services that consumers purchase directly—the 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.
BLS considers medical care provided through employment as a cost of doing business rather than a consumer expenditure.
BLS 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.
According to the Commissioner of Labor Statistics, methodologies have “not advanced to the point where anyone knows how to construct true cost-of-living measures” for medical care and other CPI components.
According 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.
Observations
According 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’s 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.
Since the Stigler committee’s 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.
BLS 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’ out-of-pocket expenditures, which was in keeping with the concept it follows to construct the CPI.
BLS 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.
We 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.
The 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.
Taking 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.
Agency Comments and Our Evaluation
OMB and BLS commented on a draft of this report. At a July 15, 1996, meeting, OMB’s 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.
The BLS Commissioner focused her comments on the medical care component. Appendix VI contains a copy of the Commissioner’s 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 “the cost-of-living concept.” 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.
Elaborating 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’ 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.
We 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.
As 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’ 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. | Why GAO Did This Study
Pursuant 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.
What GAO Found
GAO 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. |
gao_GAO-08-84 | gao_GAO-08-84_0 | Background
Calls 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.
In 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’s 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.
In 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.
In April 2006, we reported on weaknesses in the UN’s 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’s 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.
In October 2006, we reported slow progress in five key UN management reform areas—management 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’s 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.
Progress on UN Management Reform Efforts Has Varied
Since 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—ethics, oversight, procurement, management operations of the Secretariat, and review of programs and activities (known as mandates).
Steps to Improve Ethics Have Been Taken
The 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’s lack of jurisdiction over UN funds and programs and weaknesses in the UN’s 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.
In 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.
Some Progress Has Been Made in Developing and Sharing Ethics Guidance
As 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.
The 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’s 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.
The 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.
Substantial Progress Has Been Made in Enforcing a Whistleblower Protection Policy
The 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.
Several Concerns Have Been Identified with the UN’s Whistleblower Protection Policy
UN and State officials have raised concerns regarding the UN’s 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’s whistleblower protection policy could be, in part, dependent on successful reform of the UN’s 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.
UN 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’s 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.
Some Progress Has Been Made in Collecting and Analyzing Financial Disclosures
The 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’ 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.
The financial disclosure statements for 2005 were reviewed by a private contractor and analyzed to determine any potential conflicts of interest between the staff members’ 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.
The 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.
The 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.
Steps to Improve Oversight Have Been Taken
Steps 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’s ability to audit high-risk areas, and the General Assembly has not authorized OIOS’s financial and operational independence. Progress on UN oversight reform is shown in figure 2.
The 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.
In approving the creation of IAAC in June 2007, the General Assembly also established the committee’s 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.
The IAAC’s responsibilities include, but are not limited to examining OIOS’s work plan, taking into account the work plans of the other UN oversight bodies; reviewing the adequacy of OIOS’s budget, taking into account OIOS’s work plan; advising on the effectiveness, efficiency, and impact of OIOS’s audit and advising the General Assembly on potential oversight issues based on review of UN financial statements and Board of Auditors reports.
The 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.
Some Progress Has Been Made in Strengthening OIOS
The 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.
Since 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—fully staffed with six regular staff and three general services staff—that is responsible for (1) implementing OIOS’s 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.
Several steps have also been taken to improve OIOS’s investigations division. Member states decided to keep investigations in OIOS rather than move it to the Secretariat’s Office of Legal Affairs, despite a July 2006 external evaluation’s recommendation to shift the investigations function to a department in the Secretariat. OIOS argued that such a shift would significantly diminish the UN’s 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.
Finally, 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.
Funding 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’s 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’s resources and personnel. These risks include fraud, waste, abuse, inefficiencies, and mismanagement. In April 2006, we reported that UN funding arrangements adversely affect OIOS’s 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.
Discussion of the revision of OIOS’s 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.
Steps to Improve Procurement Have Been Taken
The 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’s procurement reform efforts. Progress on UN procurement reform is shown in figure 3.
The 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’s 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.
Some Progress Has Been Made in Developing a Training Program for UN Procurement Staff
The 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—those 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.
Some Progress Has Been Made in Developing a Risk Management Framework
The 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—including 10 instances of fraud and corruption in cases with an aggregate value of over $610 million—resulting 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.
Little or No Progress Has Been Made in Establishing an Independent Bid Protest System
As 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.
Little or No Progress Has Been Made in Establishing a Lead Agency Concept for Procurement
The 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’s 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.
Several Procurement-Related Issues Have Not Moved Forward Due to DPKO Reorganization
The General Assembly did not consider several procurement reform issues during the recently completed 61st session because of the UN’s 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.
Steps to Improve the Management Operations of the Secretariat Have Been Taken
The 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’s 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.
The 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.
In late September 2006—too late for inclusion in our October 6, 2006 report—the Secretary-General released a report entitled Investing in People that included a human resources management framework aimed at strengthening the UN’s 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’s 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’s 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’s changing priorities, while facilitating retirement or separation of staff who can no longer meet their career aspirations.
The 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.
From 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’s 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.
Some Progress Has Been Made in Improving Information Technology
The 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’s 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—known as the Enterprise Resource Planning (ERP) system—to 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.
The 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.
Little or No Progress Has Been Made in Reforming the UN’s Internal Justice System
The 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’s internal justice system was outdated, ineffective, and compromised. The panel’s 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.
Little or No Progress Has Been Made in Reforming Certain Budgetary and Financial Management Functions
Since 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’ 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.
Little or No Progress Has Been Made in Improving the Delivery of Certain Services
The 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.
The 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.
Limited Steps Have Been Taken on the Review of UN Programs and Activities
Although 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.
In 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’ 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.
Phase 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.
Member 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.
On 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.
Various Factors Have Slowed the UN’s Management Reform Efforts
Various factors have slowed the UN’s 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.
Disagreements among Member States Continue to Impede Efforts
Disagreements 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’s ability to fully implement them.
From 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—two of the goals of the process, according to State.
Representatives 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—Chile, South Africa, Sweden, and Thailand—have 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 “credible effort” by member states that complements the UN management reform process. However, he added that other member states’ views on this initiative and the potential of the initiative to overcome disagreements among member states are unclear.
Lack of Comprehensive Implementation Plans Continues to Impede Management Reform Efforts
The 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’s 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.
Administrative Policies and Procedures Continue to Complicate Human Resource Reform Efforts
Administrative 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’s 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’s 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.
Competing Priorities Slow UN Management Reform Efforts
Since 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’s 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.
Conclusions
Reforming 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.
Recommendation for Executive Action
To 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’s annual U.S. Participation in the United Nations report an assessment of the effectiveness of the reforms.
Agency Comments and Our Evaluation
We requested comments on a draft of this report from the Department of State and the UN Secretariat. State’s comments are reprinted in appendix II, along with our responses to specific points. The UN Secretariat did not provide written comments.
State 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.
State did not agree with our statement that successful whistleblower protections cannot be established without substantial reform of the UN’s 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’s approval of the creation of an independent bid protest system was a critical first step toward enhancing transparency in the UN’s procurement award process. However, per our methodology, we categorize this reform effort under “little or no progress” 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.
State and the UN Secretariat provided technical comments that we have incorporated into the report, as appropriate.
We 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.
If 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.
Appendix I: Scope and Methodology
To 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.
We 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’s 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.
To 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.
Some progress: There is evidence that some steps have been taken on the reform effort, while others remain.
Substantial progress: There is evidence that the reform effort has been mostly or fully implemented.
During 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.
To 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.
Many 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.
We conducted our work from March to November 2007 in accordance with generally accepted government auditing standards.
Appendix II: Comments from the Department of State
GAO Comments
1. 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’s approval of the creation of an independent bid protest system was a critical first step toward enhancing transparency in the UN’s 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 “little or no progress” 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.
Appendix III: Typical Management Reform Decision-Making Process for Issues Requiring General Assembly Approval
The 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’s 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.
Appendix IV: Funds Approved to Implement Certain Management Reform Initiatives, as of October 2007
We reported in October 2006 that the Secretariat’s 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’s revised cost estimate, as of October 2007, had risen by about $13 million to approximately $53 million, as shown in table 1 below.
Appendix V: GAO Contact and Staff Acknowledgments
Staff Acknowledgments
In 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.
Related GAO Products
United Nations Organizations: Oversight and Accountability Could Be Strengthened by Further Instituting International Best Practices. GAO-07-597. Washington, D.C.: June 18, 2007.
United Nations: Management Reforms Progressing Slowly with Many Awaiting General Assembly Review. GAO-07-14. Washington, D.C.: October 5, 2006.
United 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.
United Nations: Oil for Food Program Provides Lessons for Future Sanctions and Ongoing Reform. GAO-06-711T. Washington, D.C.: May 2, 2006.
United Nations: Internal Oversight and Procurement Controls and Processes Need Strengthening. GAO-06-710T. Washington, D.C.: April 27, 2006.
United Nations: Funding Arrangements Impede Independence of Internal Auditors. GAO-06-575. Washington, D.C.: April 25, 2006.
United 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.
United Nations: Procurement Internal Controls Are Weak. GAO-06-577. Washington, D.C., April 25, 2006.
United Nations: Preliminary Observations on Internal Oversight and Procurement Practices. GAO-06-226T. Washington, D.C.: October 31, 2005.
United Nations: Sustained Oversight Is Needed for Reforms to Achieve Lasting Results. GAO-05-392T. Washington, D.C.: March 2, 2005.
United Nations: Oil for Food Program Audits. GAO-05-346T. Washington, D.C.: February 15, 2005. | Why GAO Did This Study
The 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.
What GAO Found
The 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. |
gao_GAO-08-967 | gao_GAO-08-967_0 | Background
In 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’s 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 “Road Map Initiative,” 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 “Road Map” countries seeking admission into the Visa Waiver Program—Bulgaria, Cyprus, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and South Korea.
Following 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’s 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.
An electronic travel authorization system is “fully operational.” 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.
In 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.
When 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’s 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’s cooperation with (1) the United States’ 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’s assessment of countries seeking to join the Visa Waiver Program.
Executive Branch Is Moving Quickly to Expand the Visa Waiver Program without a Transparent Process
The 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—an 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.
DHS Has Not Followed a Transparent Process for Visa Waiver Program Expansion
We 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’s 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’s actions since August 2007. Although State has only nominated one country—Greece— DHS has nonetheless conducted security reviews for countries that State has not yet nominated—Czech 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’s statutory requirements, State does not plan to nominate any other countries. DHS’s 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 “make up the process as it went along,” in part because DHS had never expanded the program before and because Congress significantly changed the program’s legislative requirements in August 2007.
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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’ offices and at U.S. embassies overseas, as well as foreign governments seeking to join the program. For example, DHS’s standard procedures were not updated to account for the department’s 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 “implementing arrangements” 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— 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—concerns that the United States also has about its citizens’ information. In response to our request, in late April 2008, DHS provided us with an outline of the department’s 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.
The 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’s 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.)
According 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—including countries’ achievement of refusal rates below 10 percent—State 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’s 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.
DHS Has Achieved Some Results in Visa Waiver Program Expansion Negotiations
DHS’s 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’s statutory provision to report to the United States or Interpol in a timely manner the loss or theft of passports—a 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’s dialogue on Visa Waiver Program expansion is helping to stimulate U.S. negotiations on other terrorist watch-list- sharing arrangements with Road Map countries.
DHS Has Not Fully Developed Tools Aimed at Assessing and Mitigating Risks in the Visa Waiver Program
As 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.
DHS Has Not yet Implemented Key Security Provisions of 9/11 Act That Are Necessary to Admit Certain Countries into the Visa Waiver Program
On February 28, 2008, we testified that DHS’s 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.
Plan to Verify the Air Departure of Foreign Nationals Will Not Help DHS Mitigate Program Risks
As 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’s 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’s 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’s 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—useful 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’s plan to match visitor records using departure data as a starting point with a methodology that would use arrival data as a starting point.
Second, 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—in other words, matching a new departure record back to a previous departure record from the country. DHS’s 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.
Third, DHS’s methodology does not address the accuracy of airlines’ 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—a process that provides information that can be used to verify arrival manifest data—and, 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.
An 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’s planned methodology for meeting the “97 percent provision” 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.
DHS’s Planned Implementation of ESTA by January 2009 Will Face Challenges
In 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.
We 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.
DHS 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.
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We identified four potential challenges to DHS’s 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’s 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’s 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—to 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—before 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.
Impact 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’s 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.
ESTA 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.
Developing 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’s 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.
Implementation of Biometric Air Exit System before July 2009 Will Be Difficult
A third provision of the 9/11 Act requires that DHS implement a biometric air exit system before July 1, 2009, or else the department’s authority to waive the 3 percent refusal rate requirement—and thereby consider admitting countries with refusal rates between 3 percent and 10 percent— 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’ biometrics. During the public comment period on the proposed rule, airlines, Members of Congress, and other stakeholders have raised concerns about DHS’s proposal, and resolving these concerns could take considerable time. For example, the airline industry strongly opposes DHS’s 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’s proposed rule and plan to report later this year on our findings.
DHS Does Not Fully Consider Overstay Rates to Assess the Illegal Immigration Risks of the Visa Waiver Program
Some 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’ 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’s consular officers to aid in visa adjudication. For example, US-VISIT sends regular reports to ICE’s Compliance Enforcement Unit on potential overstays, and ICE officials told us they use these data regularly during investigations. In fiscal year 2007, ICE’s 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.
However, 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’s 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’s data.
Since 2004, however, the Data Integrity Group has worked to improve the accuracy of US-VISIT’s 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.
In addition to US-VISIT, State’s 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’s membership or admitting additional countries into the Visa Waiver Program.
DHS Has Implemented Many of GAO’s Prior Recommendations Aimed at Improving Efforts to Assess and Mitigate Risks in the Visa Waiver Program
In 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’s risks.For example, at the time of our report, DHS had only two full-time staff charged with monitoring countries’ compliance with the program’s requirements and working with countries seeking to join the program. We identified several problems with the process by which DHS was monitoring countries’ 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’s 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.
To 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.
In 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—including a definition of “timely reporting” and an explanation of to whom in the U.S. government countries should report—as part of the MOUs it is negotiating with participating and Road Map countries.
Furthermore, 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’s 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’s database has intercepted passports that were not identified by DHS’s 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.
While 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.
Conclusions
The 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.
Recommendations for Executive Action
To 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’s legislative requirements; designate an office with responsibility for developing overstay rate information for the purposes of monitoring countries’ 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.
Agency Comments and Our Evaluation
We 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.
DHS 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’s overstay data. DHS also provided additional details about its continued outreach efforts to the department’s 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’ reporting of lost and stolen passport data to Interpol. In addition, Justice discussed its efforts, in collaboration with DHS, to include screening against Interpol’s lost and stolen passport database as part of ESTA. Justice noted that use of Interpol’s database continues to demonstrate significant results in preventing the misuse of passports to fraudulently enter the United States.
We 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.
If 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.
Appendix I: Objectives, Scope, and Methodology
To 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’s 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’s (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—France, Japan, and the United Kingdom—whose nationals comprise a large percentage annually of visa waiver travelers to the United States. We also visited U.S. embassies in four countries—Czech Republic, Estonia, Greece, and South Korea—with 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—Hungary, Latvia, Lithuania, and Slovakia—that 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’s relatively small number of annual Visa Waiver Program travelers to the United States.
To assess actions taken to mitigate potential risks in the Visa Waiver Program, we focused on DHS’s 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’s plans for air exit system implementation, we collected and analyzed documentation and interviewed officials from DHS’s 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.
Second, to analyze plans for the implementation of the Electronic System for Travel Authorization (ESTA), we collected and analyzed documentation and interviewed officials from DHS’s 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’s legal position regarding the statutory requirements for ESTA implementation, on May 5, 2008, we requested, in writing, DHS’s legal position on certain ESTA statutory requirements, which the department provided to us on June 6, 2008.
Third, regarding DHS’s 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 “overstays”), we assessed the reliability of the US-VISIT data on potential overstays, which are based on air and sea carriers’ 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’s 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.
Fourth, 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’s 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’s Interpol-U.S. National Central Bureau to discuss the status of DHS’s access to Interpol’s database of lost and stolen travel documents. We concluded that a recommendation was (1) “implemented,” if the evidence indicated that DHS had taken a series of actions addressing the recommendation; (2) “partially implemented,” if the evidence indicated that DHS had taken some action toward implementation; and (3) “not implemented,” if the evidence indicated that DHS had not taken any action.
We 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.
Appendix II: Worldwide Refusal Rates for Short-term Business and Tourism Visas, Fiscal Year 2007
The 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 “refusals”), the number of visas that were subsequently issued after further administrative consideration (referred to as “overcomes”)—or, in short, refusals minus overcomes (see table 2). This resulting number is then divided by the number of visa issuances plus refusals minus overcomes—that 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.
Appendix III: Key Legislative Requirements for Inclusion in the Visa Waiver Program
The 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—currently up to a maximum of 10 percent—provided that the country meets other security requirements.
A 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.
Reciprocity. The country must offer visa-free travel for U.S. citizens.
Persons 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.
Appendix IV: Comments from the Department of Homeland Security
Following are GAO’s comments on the Department of Homeland Security’s letter dated August 27, 2008.
GAO Comments
1. 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’ 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’s 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 “fully operational.” 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’s 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—and again following our receipt of DHS’s formal comments on the draft of this report—the 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’s 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.
Appendix V: Comments from the Department of Justice
Appendix VI: GAO Contact and Staff Acknowledgments
Staff Acknowledgments
In 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. | Why GAO Did This Study
The 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.
What GAO Found
The 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. |
crs_RL34517 | crs_RL34517_0 | 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.
It 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.
Some 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.
This 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.
Background: Fires Happen
In temperate ecosystems, wildfires are inevitable. The combination of biomass plus dry conditions—in the short term (e.g., the annual dry season) or in the long term (e.g., drought or climate change)—equals 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—fuel, heat, and oxygen—remain available. Fire control focuses on removing one of those elements.
There 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.
The other principal kind of wildfire is a crown fire , also called a conflagration. Crown fires burn biomass at all levels—from the surface through the tops of the crowns of the trees—although 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.
Not 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).
Nearly 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.
Protecting Structures from Wildfires
Wildfires 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 .
Home Ignitability
Research 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—direct contact, radiation, and firebrands.
The 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.
Adjacent 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."
Finally, landscaping—the character of the vegetation surrounding the house—is 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—95% 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.
The 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—83% of the homes within the fire perimeter—survived 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—rather the nature of the fire—primarily determines whether a structure survives a wildfire.
Responsibility for Protecting Structures
Owners 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.
The 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—almost 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.
When 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.
Given 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—such as technical assistance, low-cost loans, and cost-sharing on projects—might 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).
Protecting Wildlands and Natural Resources
Wildlands 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—related to endangered species concerns and public involvement in decision-making—can affect the cost of fuel treatments.
Wildland Ecosystems and Wildfire
Ecosystem 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.
Surface Fire Ecosystems
Surface 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—shortleaf, slash, loblolly, and especially longleaf pine. Surface fire ecosystems account for about 34% of all U.S. wildlands.
Over 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.
Many 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.
Research 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.
Stand-Replacement Fire/Crown Fire Ecosystems
Stand-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—from a few years (prairie grasses) to more than 1,000 years (coastal Douglas fir)—depending 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° 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.
It 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.
Activities 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."
Mixed-Fire-Intensity Ecosystems
Many 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.
Less 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.
Wildfire Effects
The effects of wildfires on natural resources are difficult to assess and are commonly overstated for two reasons. First, burned areas look bad—blackened trees and ground cover—even 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.
The 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.
Severe 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—directly 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.
Protecting Wildlands and Resources
The federal government is generally responsible for protecting federal lands and their natural resources from wildfire. Wildfire protection of other wildlands and natural resources—state, local government, and private lands—is 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.
The 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.
The 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.
Prescribed Burning
Prescribed 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.
Prescribed 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.
Prescribed 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.
Finally, prescribed burning is expensive. Actually starting the prescribed fire is cheap—matches 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.
Mechanical Treatment
Mechanical 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:
pruning—removing lower tree branches, which eliminates fuel ladders and can reduce crown density. release—removing several to many trees from a young stand (saplings or smaller) to concentrate wood growth on desirable trees, which reduces crown density. thinning—removing 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:
—low thinning, or thinning from below, to remove the smallest and poorest specimens, which eliminates fuel ladders and can reduce crown density;
—crown thinning, or thinning from above, to open the canopy to stimulate growth on the remaining trees, which substantially reduces crown density;
—selection thinning, to remove the least desirable trees for the future stand, which reduces crown density and can eliminate fuel ladders; and
—mechanical thinning, to provide appropriate spacing for the remaining trees, which reduces crown density and can eliminate fuel ladders.
salvage harvesting—removing 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.
Treatment Choices
Mechanical fuel treatment clearly involves choices—about 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.
Benefits and Limitations
The primary benefit of mechanical fuel treatment is the high degree of control over the results. One report stated:
Mechanical 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.
The authors also observed some of the limitations of mechanical fuel treatment:
However, 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....
Thinning 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—conditions that can increase surface fire intensity.... An increase in surface fire intensity may increase the likelihood that overstory tree crowns ignite.
Other sources have similarly reported the limitations of thinning:
Depending 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.
Thus, 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."
Commercial operations—commercial thinning, stewardship contracting, and salvage logging—have 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:
The 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—the branches, seedlings and saplings which contribute so significantly to the "ladder effect" in wildfire behavior.
Others have also noted the likely net cost of thinning to reduce the risk of crown fires:
Although 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.
Combined Operations
The 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:
A 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.
In addition, the cost of combined operations is substantially greater than the cost of either alone.
Area Needing Treatment
The 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—low risk (Class 1), moderate risk (Class 2), and high risk (Class 3) of losing key ecosystem components in a wildfire.
Based 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.
The 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—$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.
It 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.
Delays and Changes in Federal Decision-Making
Some 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. §§1531-1544), and to public involvement under the National Environmental Policy Act of 1969 (NEPA; P.L. 91-190, 42 U.S.C. §§4321-4347) and the Forest Service Appeals Reform Act (ARA; §322 of P.L. 102-381 , the FY1993 Interior Appropriations Act, 16 U.S.C. §1612 note).
Involving 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.
This 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—roughly 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—5.4% of Idaho's wildlands burned in 2007, for example—but this is offset by much lower risks for those areas in other years and for other areas in the same year—0.2% 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.
In 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—to Class 1 surface fire ecosystem lands or to lands in other fire regimes—the probability of treating a particular acre to prevent a crown fire diminishes further.
Nonetheless, 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.
ESA Consultations65
The 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.
Fuel 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.
Nonetheless, 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.
NEPA Environmental Analysis and Public Involvement67
NEPA 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.
Environmental Analysis
The 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—individually and cumulatively—the 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.
Advocates 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—which can take a year or more for large, complex projects—can the agency undertake the action. Thus, proponents of expeditious fuel reduction projects often advocate various approaches to accelerate the process, discussed below.
Categorical Exclusions (CEs)
As 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:
a 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.
CEs 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.)
In certain situations—such as those involving controversial issues (e.g., wetlands and roadless areas) or specifically protected resources (e.g., endangered species and archaeological sites)—known 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.
The 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 ):
6. 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....
10. 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)
Forest 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.
Forest Service Appeals Reform Act
In 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—review by a higher-ranking official—for those who had commented on the proposal and object to the decision.
GAO 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.
A 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.
These 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.
Expedited Procedures
Proponents 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.
Expedited ESA Consultations
As 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.
The 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.
Expedited NEPA Reviews (Other than Through CEs)
In 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.
For fuel treatment, NEPA alternative arrangements will rarely provide a means of accelerated action. First, alternative arrangements are not used very often—42 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.
Healthy Forests Restoration Act
The Healthy Forests Restoration Act of 2003 (HFRA; P.L. 108-148 , 16 U.S.C. §§6501-6591) 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.
Title 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.
In Title IV, HFRA allows the use of CEs for "applied silvicultural assessments"—timber 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.
Other Possibilities
Congress 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.
Congress 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. §1753) and under Title II of the Secure Rural Schools and Community Self-Determination Act of 2000 ( P.L. 106-393 ; 16 U.S.C. §500 note). Other advisory or collaborative groups have been established or acknowledged statutorily, commonly to provide supplemental public involvement.
Considerations in Expediting Decisions
Public 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.
Conclusions
As 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.
To 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.
Protecting 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.
Appendix. Excerpts from Forest Service Handbook on NEPA Categorical Exclusions Related to Structural or Resource Protection From Wildfires
The following materials are excerpts from the Forest Service handbook on NEPA categorical exclusions— FSH 1909.15 — Environmental Policy and Procedures Handbook. Chapter 30 — Categorical Exclusion from Documentation , Amendment No. 1909.15-2007-1 (February 15, 2007). Emphases (underscoring and boldface font) are in the original.
30.3 - Policy
...
2. 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:
a. Federally listed threatened or endangered species or designated critical habitat, species proposed for Federal listing or proposed critical habitat, or Forest Service sensitive species.
b. Flood plains, wetlands, or municipal watersheds.
c. Congressionally designated areas, such as wilderness, wilderness study areas, or national recreation areas.
d. Inventoried roadless areas.
e. Research natural areas.
f. American Indians or Alaska Native religious or cultural sites.
g. Archaeological sites, or historic properties or areas.
...
31.2 - Categories of Actions for Which a Project or Case File and Decision Memo Are Required
...
6. 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: ...
b. Thinning or brush control to improve growth or to reduce fire hazard including the opening of an existing road to a dense timber stand.
c. Prescribed burning to control understory hardwoods in stands of southern pine.
d. Prescribed burning to reduce natural fuel build-up and improve plant vigor.
...
10. 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:
a. Shall be limited to areas:
(1) In the wildland-urban interface; or
(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;
b. 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";
c. Shall be conducted consistent with agency and Departmental procedures and applicable land and resource management plans;
d. Shall not be conducted in wilderness areas or impair the suitability of wilderness study areas for preservation as wilderness; and
e. 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.
...
12. Harvest of live trees not to exceed 70 acres, requiring no more than ½ 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:
a. Removal of individual trees for sawlogs, specialty products, or fuelwood.
b. Commercial thinning of overstocked stands to achieve the desired stocking level to increase health and vigor.
13. Salvage of dead and/or dying trees not to exceed 250 acres, requiring no more than ½ 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:
a. 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.
b. Harvest of fire-damaged trees.
14. Commercial and non-commercial sanitation harvest of trees to control insects or disease not to exceed 250 acres, requiring no more than ½ 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:
a. Felling and harvest of trees infested with southern pine beetles and immediately adjacent uninfested trees to control expanding spot infestations.
b. 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. | 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—more people and houses in and near the forests—and 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.
Wildfires are inevitable—biomass, 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.
Homes 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.
Wildland 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.
Prescribed 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. |
gao_GAO-05-169 | gao_GAO-05-169_0 | Background
The 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.
The 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’s 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.
In 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.
All 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.
For 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.
Recent AWACS Parts Prices Are Significantly Higher Than Prior Purchase Prices
Since 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).
The 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.
The 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—which 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’s 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.
Air Force Did Not Obtain and Evaluate Information Needed to Negotiate Fair and Reasonable Prices
In negotiating contracts for the outboard ailerons, cowlings, and radomes, the Air Force did not obtain and evaluate information needed to knowledgeably assess Boeing’s 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.
Pricing Information Not Sought for Commercial Item to Ailerons
Boeing 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’s 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.
In reviewing the contractor’s submissions of data to the government, both DCMA and DCAA found Boeing’s 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’s 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’s 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’s price negotiation documentation. In January 2003, DCAA reported that the proposed price was “unsupported” 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’s concerns. Instead, the Air Force relied on the analysis prepared by Boeing and paid $464,133 per unit.
The 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.
Boeing representatives agreed that the Boeing analysis was subjective, but they said the analysis represented the best estimate based on their assumptions and limitations.
Air Force Did Not Act on DCMA’s Recommendation to Investigate the Use of Existing Tools for Cowlings
When negotiating the purchase price for the cowlings, the Air Force again did not use information provided by DCMA or address DCMA’s 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’s 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–Monthan 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.
Subsequent to the contract award, Boeing—not the Air Force— 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.
Cost Information from Recent Radome Purchase Not Considered
A 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’s 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—almost twice the 2001 unit price.
Based 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’s 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’s technical expertise. Second, and most importantly, the Air Force did not consider Boeing’s 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.
No Competition Used for AWACS Spare Parts Purchases
In 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’s 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.
From 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’s 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’s approval.
It 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.
In contrast, senior contracting officials at Tinker—who have oversight responsibilities for the contracting activities that support the AWACS program—have 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 “captured customer” 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.
Conclusions
The 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—like other Air Force weapon systems—continue 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.
Recommendations for Executive Action
To 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’s access to AWACS drawings and technical data including the Air Force’s and Boeing’s rights to the data.
Agency and Company Comments and Our Evaluation
We received written comments on a draft of this report from DOD and The Boeing Company.
In its comments, DOD concurred with GAO’s recommendations and identified actions it plans to take to implement the recommendations. DOD’s comments are included in appendix II. DOD also provided technical comments, which we incorporated into the report as appropriate.
In its comments The Boeing Company provided information that augments the information in the report and provides the company’s 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’s comments are included in appendix III.
We 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.
If 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.
Appendix I: Scope and Methodology
To 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—the 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.
To determine whether the Air Force contracting officers obtained and evaluated sufficient information to ensure that Boeing’s 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’s 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.
To 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.
We conducted our review from August 2003 to November 2004 in accordance with generally accepted government auditing standards.
Appendix II: Comments from the Department of Defense
Appendix III: Comments from The Boeing Company
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Public Affairs | Why GAO Did This Study
Over 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.
What GAO Found
Since 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. |
crs_RS22491 | crs_RS22491_0 | Introduction
Problems 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—and thus solutions to—the rapid increase in many pharmaceutical prices, policymakers have explored a number of options, including the recycling of unadulterated surplus drugs.
Currently, 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.
Current 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.
Federal Laws Affecting Reuse of Drugs
Federal 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) —thus 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).
Controlled Substances Act
One 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.
The 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.
However, 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—or any entity not registered with the DEA—from 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.
An 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.
Federal Food, Drug, and Cosmetics Act
Recycling 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.
The 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.
Health Insurance Portability and Accountability Act
A 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—the 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.
Current State Practice
In 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.
Authorized Participants
Most 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.
Authorized Medications
Some 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.
Additional Precautions
States 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.
Despite 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. | 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. |
gao_GAO-12-343 | gao_GAO-12-343_0 | Background
Currently, public safety officials primarily communicate with one another using LMR systems that support voice communication and usually consist of handheld portable radios, mobile radios, base stations, and repeaters, as described:
Handheld portable radios are typically carried by emergency responders and tend to have a limited transmission range.
Mobile radios are often located in vehicles and use the vehicle’s power supply and a larger antenna, providing a greater transmission range than handheld portable radios.
Base station radios are located in fixed positions, such as dispatch centers, and tend to have the most powerful transmitters. A network is required to connect base stations to the same communication system.
Repeaters increase the effective communication range of handheld portable radios, mobile radios, and base station radios by retransmitting received radio signals.
Figure 1 illustrates the basic components of an LMR system.
LMR systems are generally able to meet the unique requirements of public safety agencies. For example, unlike commercial cellular networks, which can allow seconds to go by before a call is set up and answered, LMR systems are developed to provide rapid voice call-setup and group- calling capabilities. When time is of the essence, as is often the case when public safety agencies need to communicate, it is important to have access to systems that achieve fast call-set up times. Furthermore, LMR systems provide public safety agencies “mission critical” voice capabilities—that is, voice capabilities that meet a high standard for reliability, redundancy, capacity, and flexibility. Table 1 describes the key elements for mission critical voice capabilities, as determined by the National Public Safety Telecommunications Council (NPSTC).
According to NPSTC, for a network to fully support public safety mission critical voice communications, each of the elements in table 1 must address part of the overall voice communications services supported by the network. In other words, NPSTC believes a network cannot be a mission critical network without all of these elements. Furthermore, unlike commercial networks, mission critical communication systems rely on “hardened” infrastructure, meaning that tower sites and equipment have been designed to provide reliable communications even in the midst of natural or man-made disasters. To remain operable during disasters, mission critical communications infrastructure requires redundancy, back- up power, and fortification against environmental stressors such as extremes of temperature and wind.
Nationwide, there are approximately 55,000 public safety agencies. These state and local agencies typically receive a license from FCC to operate and maintain their LMR voice systems. Since these systems are supported by state and local revenues, the agencies generally purchase equipment and devices using their own local budgets without always coordinating their actions with nearby agencies, which can hinder interoperability. Since 1989, public safety associations have collaborated with federal agencies to establish common technical standards for LMR systems and devices called Project 25 (P25). The purpose of these technical standards is to support interoperability between different LMR systems, that is, to enable seamless communication across public safety agencies and jurisdictions. While the P25 suite of standards is intended to promote interoperability by making public safety systems and devices compatible regardless of the manufacturer, it is a voluntary standard and currently incomplete. As a result, many LMR devices manufactured for public safety are not compatible with devices made by rival manufacturers, which can undermine interoperability.
The federal government plays an important role in public safety communications by providing funding for emergency communication systems and working to increase interoperable communication systems. Congress, in particular, has played a critical role by designating radio frequency spectrum for public safety use. Furthermore, Congress can direct action by federal agencies and others in support of public safety. For example, through the Homeland Security Act of 2002, Congress established DHS and required the department, among other things, to develop a comprehensive national incident management system comprising all levels of government and to consolidate existing federal government emergency response plans into a single, coordinated national response plan.
The number of licenses excludes the 700 MHz public safety broadband license, the 4.9 GHz band, and public safety point-to-point microwave licenses. for public safety broadband use.its Public Safety and Homeland Security Bureau (PSHSB), which is responsible for developing, recommending, and administering FCC’s policies pertaining to public safety communications issues. FCC has issued a series of orders and proposed rulemakings and adopted rules addressing how to develop a public safety broadband network, some of which are highlighted: In September 2006, FCC established In 2007, FCC adopted an order to create a nationwide broadband network with the 10 MHz of spectrum designated for a public safety broadband network and the adjacent 10 MHz of spectrum––the Upper 700 MHz D Block, or “D Block.” As envisioned by FCC, this nationwide network would be shared by public safety and a commercial provider and operated by a public/private partnership. However, when FCC presented the D Block for auction in 2008 under these conditions, it received no qualifying bids and thus was not licensed. Subsequently it was found that the lack of commercial interest in the D Block was due in part to uncertainty about how the public/private partnership would work. Although many stakeholders and industry participants called for the D Block to be reallocated to public safety, an alternate view is that auctioning the D Block for commercial use would have generated revenues for the U.S. Treasury. As noted previously, a provision in pending legislation, the Middle Class Tax Relief and Job Creation Act of 2012, reallocates the D Block to public safety.
In 2007, FCC licensed the 10 MHz of spectrum that FCC assigned for public safety broadband use to the Public Safety Spectrum Trust (PSST), a nonprofit organization representing major national public safety associations. This 10 MHz of spectrum, located in the upper 700 MHz band is adjacent to the spectrum allocated to public safety for LMR communications. As the licensee, the PSST’s original responsibilities included representing emergency responders’ needs for a broadband network and negotiating a network sharing agreement with the winner of the D Block auction. However, since the D Block was not successfully auctioned, FCC stayed the majority of the rules guiding the PSST.
In 2009, public safety entities began requesting waivers from FCC’s rules to allow early deployment of broadband networks in the 10 MHz of spectrum licensed to the PSST, and since 2010, FCC granted waivers to 22 jurisdictions for early deployment. These jurisdictions had to request waivers because the rules directing the deployment of a broadband network were not complete. In this report, we refer to the 22 entities receiving waivers as “waiver jurisdictions.” As a condition of these waivers, FCC required that local or regional networks would interoperate with each other and that all public safety entities in the geographic area would be invited to use the new networks. In addition, FCC required that all equipment operating on the 700 MHz public safety broadband spectrum comply with Long Term Evolution (LTE), a commercial data standard for wireless technologies.shown in table 2, of the 22 jurisdictions that successfully petitioned for waivers, only 8 received federal funding. Seven waiver jurisdictions received funding from NTIA’s Broadband Technology Opportunities Program (BTOP), a federal grant program authorized through the American Recovery and Reinvestment Act of 2009 that had several As purposes, including promoting the expansion of broadband infrastructure.
In January 2011, FCC adopted rules and proposed further rules to create an effective technical framework for ensuring the deployment and operation of a nationwide, interoperable public safety broadband network. As part of this proceeding, FCC sought comment on technical rules and security for the network as well as testing of equipment to ensure interoperability. The comment period for the proceeding closed on April 11, 2011, and FCC received comments from waiver jurisdictions, consultants, and manufacturers, among others. As of February 7, 2012, FCC did not have an expected issuance date for its final rules.
In addition to FCC, DHS has been heavily involved since its inception in supporting public safety by assisting federal, state, local, and regional emergency response agencies and policy makers with planning and implementing interoperable communication networks. Within DHS, several divisions have focused on improving public safety communications. DHS also has administered groups that bring together stakeholders from all levels of government to discuss interoperability issues:
The Emergency Communications Preparedness Center (ECPC) was created in response to Hurricane Katrina by the 21st Century Emergency Communications Act of 2006 to help improve intergovernmental emergency communications information sharing.
The ECPC has 14 member agencies with a goal, in part, to support and promote interoperable public safety communications through serving as a focal point and clearing house for information. It has served to facilitate collaboration across federal entities involved with public safety communications.
SAFECOM is a communications program that provides support, including research and development, to address interoperable communications issues. Led by an executive committee, SAFECOM has members from state and local emergency responders as well as intergovernmental and national public safety communications associations. DHS draws on this expertise to help develop guidance and policy. Among other activities, SAFECOM publishes annual grant guidance that outlines recommended eligible activities and application requirements for federal grant programs providing funding for interoperable public safety communications.
Within Commerce, NTIA and NIST are also involved in public safety communications by providing research support to the PSCR program. The PSCR serves as a laboratory and advisor on public safety standards and technology. It provides research and development to help improve public safety interoperability. For example, the PSCR has ongoing research in many areas related to communications, including the voluntary P25 standard for LMR communication systems, improving public safety interoperability, and the standards and technologies related to a broadband network. PSCR also conducts laboratory research to improve the audio and video quality for public safety radios and devices.
Even With Investment of Significant Resources, Current Public Safety Communication Systems Provide Mission Critical Voice Capabilities but Are Not Fully Interoperable
Public Investment
Congress has appropriated billions in federal funding over the last decade to public safety in grants and other assistance for the construction and maintenance of LMR voice communication systems and the purchase of communication devices. Approximately 40 grant programs administered by nine federal agencies have provided this assistance for public safety. Some of the grants provided a one-time infusion of funds, while other grants have provided a more consistent source of funding. For example, in 2007, the one-time Public Safety Interoperable Communications Grant Program awarded more than $960 million to assist state and local public safety agencies in the acquisition, planning, deployment, or training on interoperable communication systems.Grant Program has provided $6.5 billion since 2008, targeting a broad scope of programs that enhance interoperability for states’ emergency medical response systems and regional communication systems, as well as planning at the community level to improve emergency preparedness. See appendix II for more information about the grant programs.
However, the Homeland Security State and local governments have also invested millions of dollars of their own funds to support public safety voice communications, and continue to do so. Jurisdictions we visited that received federal grants to support the construction of a broadband network have continued to invest in the upgrade and maintenance of their current LMR voice systems. For example, Adams County, Colorado, has spent about $19.7 million since 2004 on its LMR system, including $6.9 million in local funds, supplemented with $12.8 million in federal grants. Mississippi, another jurisdiction we visited that is constructing a statewide broadband network, has spent about $214 million on its LMR network, including $57 million in general revenue bonds and $157 million in federal grants. Officials in the jurisdictions we contacted stressed the importance of investing in the infrastructure of their LMR networks to maintain the reliability and operability of their voice systems, since it was unclear at what point the broadband networks would support mission critical voice communications. In addition to upgrading and maintaining their LMR networks, many jurisdictions are investing millions of dollars to meet FCC’s requirement that communities use their spectrum more efficiently by reducing the bandwidth on which they operate.
In addition to direct federal funding, the federal government has allocated more than 100 MHz of spectrum to public safety over the last 60 years. The spectrum is located in various frequency bands since FCC assigned frequencies to public safety in new bands over time as available frequencies became congested and public safety’s need for spectrum Figure 2 displays the spectrum allocated to public safety, increased.which is located between 25 MHz and 4.9 GHz. As noted previously, the Middle Class Tax Relief and Job Creation Act of 2012 requires FCC to reallocate the D Block from commercial use to public safety use.
Public safety agencies purchase radios and communication devices that are designed to operate on their assigned frequency. Since different frequencies of radio waves have different propagation characteristics, jurisdictions typically use the spectrum that is best suited to their particular location. For example, very high frequency (VHF) channels— those located between 30 and 300 MHz—are more useful for communications that must occur over long distances without obstruction from buildings, since the signals cannot penetrate building walls very well. As such, VHF signals are well suited to rural areas. On the other hand, ultra high frequency (UHF) channels—those located between 300 MHz and 3 GHz—are more appropriate for denser urban areas as they have more capacity and can penetrate buildings more easily. When we visited Adams County, Colorado, we learned that public safety officials in the mountainous areas of Colorado use the 150 MHz and 450 MHz bands because of the range of the signals and their ability to navigate around the natural geography. However, public safety officials in the Denver, Colorado, metropolitan area operate on the 700 and 800 MHz frequency bands which can support more simultaneous voice transmissions, such as communications between fire, police, public utility, and transportation officials.
Current Public Safety Communications Capabilities
The current public safety LMR systems use their allocated spectrum to facilitate reliable mission critical voice communications. Such communications need to be conveyed in an immediate and clear manner regardless of environmental and other operating conditions. For example, while responding to a building fire, firefighters deep within the building need the ability to communicate with each other even if they are out of range of a wireless network. The firefighters are able to communicate on an LMR system because their handheld devices operate on as well as off network. Currently, emergency response personnel rely exclusively on their LMR systems to provide mission critical voice capabilities. One waiver jurisdiction we visited, Mississippi, is constructing a new statewide LMR system and officials there noted a high degree of satisfaction with the planned LMR system. They said the new system is designed to withstand most disasters and when complete, will provide interoperability across 97 percent of the state. Public safety officials in the coastal region of the state have already used the system to successfully respond to problems caused by the Mississippi River flooding in the spring of 2011.
LMR public safety communication systems also are able to provide some data services but the systems are constrained by the narrowband channels on which they operate. These channels allow only restricted data transfer speeds, thus limiting capacity to send and receive data such as text and images, or to access existing databases. Some jurisdictions supplement their LMR systems with commercial data services that give them better access to applications that require higher data transfer rates to work effectively. However, commercial service also has limitations, such as the lack of priority access to the network in an emergency situation.
Interoperability of Current Communication Systems Remains a Limitation
According to DHS, interoperability of current public safety communications has improved as a result of its efforts. In particular, the DHS National Emergency Communications Plan established a strategy for improving emergency communications across all levels of government, and as a result, all states have a statewide interoperability coordinator and governing body to make strategic decisions within the state and guide current and future communications interoperability. According to DHS, it has worked with states to help them evaluate and improve their emergency communications abilities. DHS also helped to develop the Interoperability Continuum, which identifies five critical success elements to assist emergency response agencies and policy makers to plan and implement interoperability solutions for data and voice communications. Furthermore, DHS created guidance to ensure a consistent funding strategy for federal grant programs that allow recipients to purchase communications equipment and enhance their emergency response capabilities. As we have reported in the past, interoperability has also improved due to a variety of local technical solutions. For example, FCC established mutual aid channels, whereby specific channels are set aside for the sole purpose of connecting incompatible systems. Another local solution is when agencies maintain a cache of extra radios that they can distribute during an emergency to other first responders whose radios are not interoperable with their own.
However, despite decades of effort, a significant limitation of current LMR systems is that they are not fully interoperable. One reason for the lack of interoperability is the fragmentation of spectrum assignments for public safety, since existing radios are typically unable to transmit and receive in all these frequencies. Therefore, a rural area using public safety radios operating on VHF spectrum will not be interoperable with radios used in an urban area that operate on UHF spectrum. While radios can be built to operate on multiple frequencies, which could support greater interoperability, this capability can add significant cost to the radios and thus jurisdictions may be reluctant to make such investments. In addition, public safety agencies historically have acquired communication systems without concern for interoperability, often resulting in multiple, technically incompatible radio systems. This is compounded by the lack of mandatory standards for the current LMR systems or devices. Rather, the P25 technical standards remain incomplete and voluntary, creating incompatibility among vendors’ products. Furthermore, local jurisdictions are often unable to coordinate to find solutions. Public safety communication systems are tailored to meet the unique needs of individual jurisdictions or public safety entities within a given region. As such, the groups are reluctant to give up management and control of their systems.
Planning for a Nationwide Public Safety Broadband Network Progresses, but Such a Network Will Not Support Mission Critical Voice for the Foreseeable Future
Federal Role
Numerous federal entities have helped to plan and begin to define a technical framework for a nationwide public safety broadband network. In particular, FCC, DHS, and Commerce’s PSCR program, have coordinated their planning and made significant contributions by developing technical rules, educating emergency responders, and creating a demonstration network, respectively.
Since 2008, FCC has:
Created a new division within its PSHSB, called the Emergency Response Interoperability Center (ERIC), to develop technical requirements and procedures to help ensure an operable and interoperable nationwide network.
Convened two advisory committees, the ERIC Technical Advisory Committee and the Public Safety Advisory Committee, that provide advice to FCC. The Technical Advisory Committee’s appointees must be federal officials, elected officers of state and local government, or a designee of an elected official. It makes recommendations to FCC and ERIC regarding policies and rules for the technical aspects of interoperability, governance, authentication, and national standards for public safety. ERIC’s Public Safety Advisory Committee’s members can include representatives of state and local public safety agencies, federal users, and other segments of the public safety community, as well as service providers, equipment vendors, and other industry participants. Its purpose is to make recommendations for a technical framework that will ensure interoperability on a nationwide public safety broadband network.
Defined technical rules for the broadband network, including identifying LTE as the technical standard for the network, which FCC and public safety agencies believe is imperative to the goal of achieving an interoperable nationwide broadband network. In addition, FCC sought comments on other technical aspects and challenges to building the network in its most recent proceeding, which FCC hopes will further promote and enable nationwide interoperability. FCC officials said they continue to monitor the waiver jurisdictions that are developing broadband networks to ensure they are meeting the network requirements by reviewing required reports and quarterly filings.
Since 2010, DHS has:
Partnered with FCC, Commerce, and the Department of Justice to conduct three forums for public safety agencies and others. These forums provided insight about the needs surrounding the establishment of a public safety broadband network as they relate to funding, governance, and the broadband market.
Coordinated federal efforts on broadband implementation by bringing together the member agencies of ECPC. Also, ECPC updated its grant guidance for federal grant programs to clarify that broadband deployment is an allowable expense for emergency communications grant programs. These updates could result in more federal grant funding going to support the development of a broadband network.
Updated its SAFECOM program’s grant guidance targeting grant applicants to include information pertaining to broadband deployment, based on input from state and local emergency responders.
Worked with public safety entities to define the LTE standard and write educational materials about the broadband network.
Partnered with state and regional groups and interoperability coordinators in preparing broadband guidance documentation.
Represented federal emergency responders and advocated for sharing agreements between the federal government and the PSST that will enable federal users, such as responders from the Federal Emergency Management Agency, to access the broadband network.
Since 2009, PSCR has:
Worked with public safety agencies to develop requirements for the network and represents their interests before standards-setting organizations to help ensure public safety needs are met.
Developed a demonstration broadband network that provides a realistic environment for public safety and industry to test and observe public safety LTE requirements on equipment designed for a broadband network. According to PSCR representatives, the demonstration network has successfully brought together more than 40 vendors, including manufacturers and wireless carriers. Among many goals, PSCR aims to demonstrate to public safety how the new technology can meet their needs and encourage vendors to share information and results. FCC requires the 22 waiver jurisdictions and their vendors to participate in PSCR’s demonstration network and provide feedback on the challenges they have faced while building the network. PSCR representatives told us that the lessons learned from the waiver jurisdictions would be applied to future deployments.
Tested interoperable systems and devices and provided feedback to manufacturers. Currently, there are five manufacturers working with PSCR to develop and test systems and devices.
Broadband Network Could Improve Incident Response
With higher data speeds than the current LMR systems, a public safety broadband network could provide emergency responders with new video and data applications that are not currently available. Stakeholders we contacted, including waiver jurisdictions, emergency responders, and federal agencies, identified transmission of video as a key potential capability. For example, existing video from traffic cameras and police car mounted cameras could provide live video feeds for dispatchers. Dispatchers could use the video to help ensure that the proper personnel and necessary equipment are being deployed immediately to the scene of an emergency. Stakeholders we contacted predict that numerous data applications will be developed once a broadband network is complete, and that these applications will have the potential to further enhance incident response. These could range from a global positioning system application that provides directions based on traffic patterns to a 3D graphical floor plan display that supports firefighters’ efforts to battle building fires. In addition, unlike the current system, a public safety broadband network could provide access to existing databases of information, such as fire response plans and mug shots of wanted criminals, which could help to keep emergency responders and the public safe. As shown in figure 3, moving from lower bandwidth voice communications to a higher bandwidth broadband network unleashes the potential for the development of a range of public safety data applications.
Besides new applications, a public safety broadband network has the potential to provide nationwide access and interoperability. Nationwide access means emergency responders and other public safety officials could access their home networks from anywhere in the country, which could facilitate a better coordinated emergency response. Interoperability on a broadband network could allow emergency responders to share information irrespective of jurisdiction or type of public safety agency. For example, officials from two waiver jurisdictions indicated that forest fires are a type of emergency that brings together multiple jurisdictions, and in these situations a broadband network could facilitate sharing of response plans. However, an expert we contacted stressed that broadband applications should be tailored to the bandwidth needs of the response task. For example, responders should not use high-definition video when grainy footage would suffice to enable them to pursue a criminal suspect.
Limitations of Broadband Results in Continued Reliance on LMR Voice Systems
A major limitation of a public safety broadband network is that it would not provide mission critical voice communications for many years. LTE, the standard FCC identified for the public safety broadband network, is a wireless broadband standard that is not currently designed to support mission critical voice communications. Commercial wireless providers are currently developing voice over LTE capabilities, but this will not meet public safety’s mission critical voice requirements because key elements needed for mission critical voice, such as push-to-talk, are not part of the LTE standard. While one manufacturer believes mission critical voice over LTE will be available as soon as 5 years, some waiver jurisdictions, experts, government officials, and others told us it will likely be 10 years or more due to the challenges described in table 3.
Absent mission critical voice capabilities on a broadband network, emergency responders will continue to rely on their current LMR voice systems, meaning a broadband network would supplement, rather than replace, LMR systems for the foreseeable future. Furthermore, until mission critical voice communications exist, issues that exacerbated emergency response efforts to the terrorist attacks on September 11, 2001—in particular, that emergency responders were not able to communicate between agencies—will not be resolved by a public safety broadband network. As a result, public safety agencies will continue to use devices operating on the current LMR systems for mission critical voice communications, and require spectrum to be allocated for that purpose. Additionally, public safety agencies may be reluctant to give up their LMR devices, especially if they were costly and are still functional. As jurisdictions continue to spend millions of dollars on their LMR networks and devices, they will likely continue to rely on such communication systems until they are no longer functional.
In addition to not having mission critical communications, emergency responders may only have limited access to the public safety broadband network from the interior of large buildings. While the 700 MHz spectrum provides better penetration of buildings than other bands of the spectrum, if emergency responders expect to have access to the network from inside large buildings and underground, additional infrastructure will need to be constructed. For example, antennas or small indoor cellular stations could be installed inside buildings and in underground structures to support access to the network. FCC is seeking comment on this issue as part of its most recent proceeding. Without this added infrastructure, emergency responders using the broadband network may not have access to building blue prints or fire response plans during building emergencies, such as a fire. In fact, one jurisdiction constructing a broadband network that we visited told us their network would not support in-building access in one city of the jurisdiction because the plan did not include antennas for inside the buildings.
A final limitation to a public safety broadband network could be its capacity during emergencies. Emergencies tend to happen in localized areas that may be served by a single cell tower or even a single cellular antenna on a tower. With emergency responders gathering to fight a fire or other emergency, the number of responders and the types of applications in use may exceed the capacity of the network. If the network reaches capacity it could overload and might not send life saving information. Therefore, the network would have to be managed during emergencies to ensure that the most important data are being sent, which could be accomplished by prioritizing data. Furthermore, capacity could be supplemented through deployable cell sites to emergency locations.
Various Challenges Could Jeopardize the Implementation and Functionality of a Public Safety Broadband Network
Although the federal agencies have taken important steps to advance the broadband network, challenges exist that may slow its implementation. Specifically, stakeholders we spoke with prioritized five challenges to successfully building, operating, and maintaining a public safety broadband network. These challenges include (1) ensuring interoperability, (2) creating a governance structure, (3) building a reliable network, (4) designing a secure network, and (5) determining funding sources. FCC, in its Fourth Further Notice of Proposed Rulemaking, sought comment on some of these challenges, and as explained further, the challenge of creating a governance structure has been addressed by recent law. However, the other challenges currently remain unresolved and, if left unaddressed, could undermine the development of a public safety broadband network.
Ensuring interoperability. To avoid a major shortcoming of the LMR communication systems, it is essential that a public safety broadband network be interoperable across jurisdictions and devices. DHS, in conjunction with its SAFECOM program, developed the Interoperability Continuum which identifies five key elements to interoperable networks— governance, standard operating procedures, technology, training, and usage—that waiver jurisdictions and other stakeholders discussed as important to building an interoperable public safety broadband network, as shown in figure 4. For example, technology is critical to interoperability of the broadband network and most stakeholders, including public safety associations, experts, and manufacturers believe that identifying LTE as the technical standard was a good step towards interoperability. To further promote interoperability, stakeholders indicated that additional technical functionality, such as data sharing and roaming capabilities, should be part of the technical design. If properly designed to the technical standard, broadband devices will support interoperability regardless of the manufacturer. Testing devices to ensure they meet the identified standard could help eliminate devices with proprietary applications that might otherwise limit interoperability. In its Fourth Further Notice, FCC solicited input on the technical design of the network and testing of devices to ensure interoperability.
Creating a governance structure. As stated previously, governance is a key element for interoperable networks. A governance authority can promote interoperability by bringing together federal, state, local, and emergency response representatives. Each of the waiver jurisdictions we contacted had identified a governance authority to oversee its broadband network. Jurisdictions we visited, as well as federal agencies, told us that any nationwide network should also have a nationwide governance entity to oversee it. Although several federal entities are involved with the planning of a public safety broadband network, at the time we conducted our work no entity had overall authority to make critical decisions for its development, construction, and operation. According to stakeholders, decisions on developing a common language for the network, establishing user rights for federal agencies, and determining network upgrades, could be managed by such an entity. Pending legislation, the Middle Class Tax Relief and Job Creation Act of 2012, establishes a First Responder Network Authority as an independent authority within NTIA and gave it responsibility for ensuring the establishment of a nationwide, interoperable public safety broadband network. Among other things, the First Responder Network Authority is required to (1) ensure nationwide standards for use and access of the network; (2) issue open, transparent, and competitive requests for proposals to private sector entities to build, operate, and maintain the network; (3) encourage that such requests leverage existing commercial wireless infrastructure to speed deployment of the network; and (4) manage and oversee the implementation and execution of contracts and agreements with nonfederal entities to build, operate, and maintain the network.
Building a reliable network. A public safety broadband network must be as reliable as the current LMR systems but it will require additional infrastructure to do so. As mentioned previously, emergency responders consider the current LMR systems very reliable, in part because they can continue to work in emergency situations. Any new broadband network would need to meet similar standards but, as shown in figure 5, such a network might require up to 10 times the number of towers as the current system. This is because a public safety broadband network is being designed as a cellular network, which would use a series of low powered towers to transmit signals and reduce interference. Also, to meet robust public safety standards, each tower must be “hardened” to ensure that it can withstand disasters, such as hurricanes and earthquakes. According to waiver jurisdictions and other stakeholders, this additional infrastructure and hardening of facilities may be financially prohibitive for many jurisdictions, especially those in rural areas that currently use devices operating on VHF spectrum—spectrum that is especially well suited to rural areas because the signals can travel long distances.
Designing a secure network. Secure communications are important. Designing a protected and trusted broadband network will encourage increased usage and reliance on it. Security for a public safety network will require authentication and access control. By defining LTE as the technical standard for the broadband network, a significant portion of the security architecture is predetermined because the standard governs a certain level of security. Given the importance of this issue, FCC required waiver jurisdictions to include some security features in their networks and FCC’s most recent proceeding seeks input on security issues. Furthermore, FCC’s Public Safety Advisory Committee has issued a report making several security-related recommendations. For example, it recommended that standardized security features be in place to support roaming to commercial technologies. However, one expert we contacted expressed concern that the waiver jurisdictions were not establishing sufficient network security because they had not received guidance. He believes this would result in waiver jurisdictions using security standards applied to previous networks.
Determining funding sources. It is estimated that a nationwide public safety broadband network could cost up to $15 billion or more to construct, which does not take into account recurring operation and maintenance costs. As noted previously, of the 22 waiver jurisdictions, 8 have received federal grants to support deployment of a broadband network. Some of the other waiver jurisdictions have obtained limited funding from nonfederal sources, such as through issuing bonds. Several of the jurisdictions we spoke with stressed that in addition to the upfront construction costs, the ongoing costs associated with operating, maintaining, and upgrading a public safety broadband network would need to be properly funded. As previously indicated, the ECPC and SAFECOM have updated grant guidance to reflect changing technologies but this does not add additional funding for emergency communications. Rather, it defines broadband as an allowable purpose for emergency communications funding grants that may currently support the existing LMR systems. Since the LMR systems will not be replaced by a public safety broadband network, funding will be necessary to operate, maintain, and upgrade two separate communication systems.
Limited Competition and High Manufacturing Costs Increase the Price of Handheld LMR Devices, but Options Exist to Reduce Prices
Competition for Handheld LMR Devices is Limited
Handheld LMR devices often cost thousands of dollars, and many stakeholders, including national public safety associations, state and local public safety officials, and representatives from the telecommunications industry, attribute these high prices to limited competition. Industry analysts and stakeholders estimate that the approximately $4 billion U.S. market for handheld LMR devices consists of one manufacturer with about 75 to 80 percent market share, one or two strong competitors, and several device manufacturers with smaller shares of the market. According to industry stakeholders, competition is weak because of limited entry by device manufacturers; this may be due to (1) the market’s relatively small size and (2) barriers to entry that confront nonincumbent device manufacturers.
Small size of the public safety market. The market for handheld LMR devices in the United States includes only about 2 to 3 million customers, or roughly 1 percent of the approximately 300 million customers of commercial telecommunication devices. According to an industry estimate in 2009, approximately 300,000 handheld LMR devices that are P25 compliant are sold each year. Annual sales of handheld LMR devices are small in part because of low turnover. For example, device manufacturers told us that public safety devices are typically replaced every 10 to 15 years, suggesting that less than 10 percent of handheld LMR devices are replaced annually. In contrast, industry and public safety sources indicate that commercial customers replace devices roughly every 2 to 3 years, suggesting that about 33 to 50 percent are replaced annually. Together, low device turnover and a small customer base reduce the potential volume of sales by device manufacturers, which may make the market unattractive to potential entrants.
The size of the market is reduced further by the need for manufacturers to customize handheld LMR devices for individual public safety agencies. Differences in spectrum allocations across jurisdictions have the effect of decreasing the customer base for any single device. As previously discussed, public safety agencies operate on different frequencies scattered across the radio spectrum. For example, one jurisdiction may need devices that operate on 700 MHz frequencies, whereas another jurisdiction may need devices that operate on both 800 MHz and 450 MHz frequencies. Existing handheld LMR devices typically do not transmit and receive signals in all public safety frequencies. As a result, device manufacturers cannot sell a single product to customers nationwide, and must tailor devices to the combinations of frequencies in use by the purchasing agency.
Barriers to entry by nonincumbent manufacturers. Device manufacturers wishing to enter the handheld LMR device market face barriers in doing so, which further limits competition. The use of proprietary technologies represents one barrier to entry. The inclusion of proprietary technologies often makes LMR devices noninteroperable with one another. This lack of interoperability makes it costly for customers to switch the brand of their devices, since doing so requires them to replace or modify older devices. These switching costs may continually compel customers to buy devices from the incumbent device manufacturer, preventing less established manufacturers from making inroads into the market. For example, in a comment filed with FCC, one of the jurisdictions we visited said that device manufacturers offer a proprietary encryption feature for free or at only a nominal cost. When a public safety agency buys devices that incorporate this proprietary encryption feature, the agency cannot switch its procurement to a different manufacturer without undertaking costly modifications to its existing fleet of devices. Switching costs are particularly high when a device manufacturer has installed a communication system that is incompatible with competitors’ devices. In this scenario, a public safety agency cannot switch to a competitor’s handheld device without incurring the cost of new equipment or a patching mechanism to resolve the incompatibility. Even where devices from different manufacturers are compatible, a fear of incompatibility may deter agencies from switching to a nonincumbent brand. According to industry stakeholders—and as we have confirmed in the past—devices marketed as P25 compliant often are not interoperable This lack of confidence in the P25 standard may encourage in practice.agencies to continue buying handheld LMR devices from their current brand, placing less established device manufacturers at a disadvantage and thus discouraging competition.
At the same time that less established manufacturers are at a disadvantage, the market leader enjoys distinct “incumbency advantages.” These advantages refer to the edge that a manufacturer derives from its position as incumbent, over and above whatever edge it derives from the strength of its product:
According to an industry analyst, some public safety agencies are reluctant to switch brands of handheld LMR devices because their emergency responders are accustomed to the placement of the buttons on their existing devices.
According to another industry analyst, the extensive network of customer representatives that the market leader has established over time presents an advantage. According to this analyst, less established device manufacturers face difficulty winning contracts because their networks of representatives are comparatively thin.
The well-recognized brand of the market leader also represents an advantage. According to one stakeholder, some agencies mistakenly believe that only the market leader is able to manufacturer devices compliant with P25, and thus conduct sole-source procurements with this manufacturer. Even where procurements are competitive, the market leader is likely to enjoy an upper hand over its competitors; according to an industry analyst, local procurement officers prefer to buy handheld LMR devices from the dominant device manufacturer because doing so is an uncontroversial choice in the eyes of their management.
High Manufacturing Costs and Lack of Buying Power Increase Device Prices
Competition aside, handheld LMR devices are costly to manufacture, so their prices will likely exceed prices for commercial devices regardless of how much competition exists in the market. First, this is in large part because these devices need to be reinforced for high-pressure environments. Handheld LMR devices must be able to withstand extremes of temperature as well physical stressors such as dust, smoke, impact, and immersion in water. Second, they also have much more robust performance requirements than commercial devices––including greater transmitter and battery power––to enable communication at greater ranges and during extended periods of operation. Third, the devices are produced in quantities too small to realize the cost savings of mass production. Manufacturers of commercial telecommunication devices can keep prices lower simply because of the large quantities they produce. For example, one industry stakeholder told us that economies of scale begin for commercial devices when a million or more devices are produced per manufacturing run. In contrast, LMR devices are commonly produced in manufacturing runs of 25,000 units. Fourth, the exterior of handheld LMR devices must be customized to the needs of emergency responders. For example, the buttons on these devices must be large enough to press while wearing bulky gloves.
In addition, given that the P25 standard remains incomplete and voluntary, device manufacturers develop products based on conflicting interpretations of the standard, resulting in incompatibilities between their products. Stakeholders from one jurisdiction we visited said that agencies can request add-on features––such as the ability to arrange channels according to user preference or to scan for radio channels assigned for particular purposes—which fall outside the P25 standard. These features increase the degree of customization required to produce handheld LMR devices, pushing costs upward.
Furthermore, public safety agencies may be unable to negotiate lower prices for handheld LMR devices because they cannot exert buying power in relationship with device manufacturers. We found that public safety agencies are not in an advantageous position to negotiate lower prices because they often request customized features and negotiate with device manufacturers in isolation from one another. According to a public safety official in one jurisdiction we contacted, each agency has unique ordinances, purchasing mechanisms, and bidding processes for devices. Because public safety agencies contract for handheld LMR devices in this independent manner, they sacrifice the quantity discounts that come from placing larger orders. Moreover, they are unlikely to know what other agencies pay for similar devices, enabling device manufacturers to offer different prices to different jurisdictions rather than set a single price for the entire market. One public safety official told us that small jurisdictions therefore pay more than larger jurisdictions for similar devices. As we have reported in the past, agencies that require similar products can combine their market power—and therefore obtain lower prices—by engaging in joint procurement.procurement at the state, regional, or national level are likely to increase the buying power of public safety agencies and help bring down prices.
Therefore, wider efforts to coordinate Although these factors drive up prices in the current market for handheld LMR devices, industry observers said that many of these factors diminish in the future market for handheld broadband devices. As described earlier, FCC has mandated a commercial standard, LTE, for devices operating on the new broadband networks. The use of this standard may reduce the prevalence of proprietary features that inhibit interoperability. In addition, the new broadband networks will operate on common 700 MHz spectrum across the nation, eliminating the need to customize devices to the frequencies in use by individual jurisdictions. Together, the adoption of a commercial standard and the use of common spectrum are likely to increase the uniformity of handheld public safety devices, which in turn is likely to strengthen competition and enable the cost savings that come from bulk production. In addition, industry analysts and federal officials told us that they expect a heightened level of competition in the market for LTE devices because multiple device manufacturers are expected to develop them.
Options Exist to Reduce the Prices of Handheld LMR Devices
Options exist to reduce prices in the market for handheld LMR devices by increasing competition and the bargaining power of public safety agencies. One option is to reduce barriers to entry into the market. As described above, less established manufacturers may be discouraged from entering the market for handheld LMR devices because of the lack of interoperability between devices produced by different manufacturers. Consistent implementation of the P25 standard would increase interoperability between devices, enabling public safety agencies to mix and match handheld LMR devices from different brands. As we have reported in the past, independent testing is necessary to ensure compliance with standards and interoperability among products.past several years, NIST and DHS have established a Compliance In the Assessment Program (CAP) for the P25 standard. CAP provides a government-led forum in which to test devices for conformance with P25 specifications. If the CAP program succeeds in increasing interoperability, it may reduce switching costs—that is, the expense of changing manufacturers—and thus may open the door to greater competition. Although CAP is a promising means to lower costs in this way, it is too soon to assess its effectiveness.
A second option is for public safety agencies to engage in joint procurement to lower costs. Joint procurement of handheld LMR devices could increase the bargaining power of agencies as well as facilitate cost savings through quantity discounts. One public safety official we interviewed said that while local agencies seek to maintain control over operational matters—such as which emergency responders operate on which channels—they are likely to cede control in procurement matters if As described earlier in this report, DHS provides doing so lowers costs. significant grant funding, technical assistance, and guidance to enhance the interoperability of LMR systems. For example, as described in its January 2012 Technical Assistance Catalog, DHS’s Office of Emergency Communications supports local public safety entities to ensure that LMR design documents meet P25 specifications and are written in a vendor- neutral manner. Based on its experience in emergency communications and its outreach to local public safety representatives, DHS is positioned to facilitate and incentivize opportunities for joint procurement of handheld LMR devices.
Conclusions
An alternative approach to fostering joint procurement is through a federal supply schedule. In 2008, the Local Preparedness Acquisition Act, Pub. L. No. 110-248, 122 Stat. 2316 (2008), gave state and local governments the opportunity to buy emergency response equipment through GSA’s Cooperative Purchasing Program. The Cooperative Purchasing Program may provide a model for extending joint procurement to state and local public safety agencies. mission critical voice. As a result, a public safety broadband network would likely supplement, rather than replace, current LMR systems for the foreseeable future. Although a public safety broadband network could enhance incident response, it would have limitations and be costly to construct. Furthermore, since the LMR systems will still be operational for many years, funding will be necessary to operate, maintain, and upgrade two separate public safety communication systems.
At the time of our work, there was not an administrative entity that had the authority to plan, oversee, or direct the public safety broadband spectrum. As a result, overarching management decisions had not been made to guide the development or deployment of a public safety broadband network. According to SAFECOM’s interoperability continuum, governance structures provide a framework for collaboration and decision making with the goal of achieving a common objective and therefore foster greater interoperability. In addition to ensuring interoperability, a governance entity with proper authority could help to address the challenges identified in this report, such as ensuring the network is secure and reliable. Pending legislation, the Middle Class Tax Relief and Job Creation Act of 2012, establishes an independent authority within NTIA to manage and oversee the implementation of a nationwide, interoperable public safety broadband network.
Handheld communication devices used by public safety officials can cost thousands of dollars, mostly due to limited competition and high manufacturing costs. However, public safety agencies also lack buying power vis-à-vis the device manufacturers, which may result in the agencies overpaying for the devices. In particular, since public safety agencies negotiate individually with device manufacturers, they are unlikely to know what other agencies pay for comparable devices and they sacrifice the increased bargaining power and economies of scale that accompany joint purchasing. Especially in rural areas, public safety agencies may be overpaying for handheld devices. We have repeatedly recommended joint procurement as a cost saving measure for situations where agencies require similar products because it allows them to combine their market power and lower their procurement costs. Given that DHS has expertise in emergency communications and relationships with local public safety representatives, we believe it is well-suited to facilitate opportunities for joint procurement of handheld communication devices.
Recommendation for Executive Action
To help ensure that public safety agencies are not overpaying for handheld communication devices, the Secretary of Homeland Security should work with federal and state partners to identify and communicate opportunities for joint procurement of public safety LMR devices.
Agency Comments and Our Evaluation
We provided a draft of this report to Commerce, DHS, the Department of Justice, and FCC for their review and comment. In the draft report we sent to the agencies, we included a matter for congressional consideration for ensuring that a public safety broadband network has adequate direction and oversight, such as by creating a governance structure that gives authority to an entity to define rules and develop a plan for the overarching management of the network. As a result of pending legislation that addresses this issue, we removed the matter for congressional consideration from the final report.
Commerce provided written comments, reprinted in appendix III, in which it noted that NIST and NTIA will continue to collaborate with and support state, local, and tribal public safety agencies and other federal agencies to help achieve effective and efficient public safety communications.
In commenting on the draft report, DHS concurred with our recommendation that it should work with federal and state partners to identify and communicate opportunities for joint procurement of public safety LMR devices. While DHS noted that this recommendation will not likely assist near-term efforts to implement a public safety broadband network, assisting efforts for the broadband network was not the intention of the recommendation. Rather, we intended this recommendation to help ensure that public safety agencies do not overpay for handheld LMR devices by encouraging joint procurement. DHS suggested in response to our recommendation that a GSA solution may be more appropriate than DHS contracting activity. Although we recognize that a GSA solution is one possibility for joint procurement of handheld LMR devices, other opportunities and solutions might exist. We believe DHS, based on its experience in emergency communications and its outreach to state and local public safety representatives, is best suited to identify such opportunities and solutions for joint procurement and communicate those to the public safety agencies. In its letter, DHS also noted that it continues to work with federal, state, local, and private-sector partners to facilitate the deployment of a nationwide public safety broadband network, and stressed that establishing an effective governance structure is crucial to ensuring interoperability and effective use of the network. DHS’s written comments are reprinted in appendix IV.
Commerce, DHS, the Department of Justice, and FCC provided technical comments on the draft report, which we incorporated as appropriate.
We are sending copies of this report to the Secretary of Homeland Security, the Attorney General, the Secretary of Commerce, the Chairman of FCC, and appropriate congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me at (202) 512-2834 or 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.
Appendix I: Objectives, Scope, and Methodology
This report examines current communication systems used by public safety and issues surrounding the development of a nationwide public safety broadband network. Specifically, we reviewed (1) the resources that have been provided for current public safety communication systems and their capabilities and limitations, (2) how a nationwide public safety broadband network is being planned and its anticipated capabilities and limitations, (3) the challenges to building a nationwide public safety broadband network, and (4) the factors that influence competition and cost in the development of public safety communication devices and the options that exist to reduce prices.
To address all objectives, we conducted a literature review of 43 articles from governmental and academic sources on public safety communications. We reviewed these articles and recorded relevant evidence in workpapers, which informed our report findings. To identify existing studies, we conducted searches of various databases, such as EconLit, ProQuest, Academic OneFile, and Social SciSearch. We also pursued a snowball technique—following citations from relevant articles— to find other relevant articles and asked external researchers that we interviewed to recommend additional studies. These research methods produced 106 articles for initial review. We vetted this initial list by examining summary level information about each piece of literature, giving preference to articles that appeared in peer-reviewed journals and were germane to our research objectives. As a result, the 43 studies that we selected for our review met our criteria for relevance and quality. For the 13 articles related to our fourth objective—factors that affect competition and cost in the market for public safety communication devices—a GAO economist performed a secondary review and confirmed the relevance to our objective. Articles were then reviewed and evidence captured in workpapers. The workpapers were then reviewed for accuracy of the evidence gathered. We performed these searches and identified articles from June 2011 to September 2011.
We also interviewed government officials or stakeholders in 6 of the 22 jurisdictions that are authorized to build early public safety broadband networks and obtained information concerning each objective. In particular, we obtained information concerning their current communication systems and its capabilities, including any funding received to support the current network. We discussed their plan for building a public safety broadband network and the challenge they had faced thus far, including the role each thought the federal government should play in developing a network. We also discussed their views on the communication device market and the factors shaping the market. We selected jurisdictions to contact based on three criteria: (1) whether the jurisdiction received grant funds from the National Telecommunications and Information Administration (NTIA) to help build the network, (2) whether the planned network would be a statewide or regional network, and (3) geographic distribution across the nation. Table 4 lists the jurisdictions we selected based on these criteria. We selected jurisdictions based on NTIA grant funding because these jurisdictions had received the most significant federal funds dedicated towards developing a broadband network. Other jurisdictions either had not identified any funding or applied smaller grant funding that was not primarily targeted at emergency communications. We selected the size of the network, statewide or regional, to determine if challenges differed based on the size of the network and the number of entities involved. Finally, we selected sites based on the geographic region to get a geographic mix of jurisdictions from around the country. In jurisdictions that received NTIA funding, we met with government officials and emergency responders. In jurisdictions that did not receive NTIA funding we met with the government officials since the network had not progressed as much.
To determine the resources that have been provided for current public safety communication systems, we reviewed Federal Communications Commission (FCC) data on spectrum allocations for land mobile radio (LMR) systems. In addition, we reviewed relevant documentation and interviewed officials from offices within the Departments of Commerce (Commerce), Homeland Security (DHS), and Justice that administer grant programs or provide grants that identify public safety communications as an allowable expense. We selected these agencies to speak with because they had more grant programs providing funds or were regularly mentioned in interviews as providing funds for public safety communications. We also reviewed documents from agencies, such as the Departments of Agriculture and Transportation, which similarly operate grant programs that identify public safety communications as an allowable expense. The grants were identified by DHS’s SAFECOM program as grants that can support public safety communications.
To identify the capabilities and limitations of current public safety communication systems, we reviewed relevant congressional testimonies, academic articles on the capabilities and limitations of LMR networks, and relevant federal agency documents, including DHS’s National Emergency Communications Plan. We interviewed officials from three national public safety associations—the Association of Public-Safety Communications Officials (APCO), National Public Safety Telecommunications Council (NPSTC), and the Public Safety Spectrum Trust (PSST)—as well as researchers and consultants referred to us for their knowledge of public safety communications and identified during the literature review process.
To determine the plans for a nationwide public safety broadband network and its expected capabilities and limitations, we reviewed relevant congressional testimonies and academic articles on services and applications likely to operate on a public safety broadband network, the challenges to building, operating, and maintaining a network. We interviewed officials from APCO, NPSTC, and PSST, as well as researchers and consultants who specialize in public safety communications to understand the potential capabilities of the network. In addition, we reviewed FCC orders and notices of proposed rulemaking relating to broadband for public safety, as well as comments on this topic submitted to FCC.
To determine the federal role in the public safety broadband network, we interviewed multiple agencies involved in planning this network. Within FCC, we interviewed officials from the Public Safety and Homeland Security Bureau (PSHSB), the mission of which is to ensure public safety and homeland security by advancing state-of-the-art communications that are accessible, reliable, resilient, and secure, in coordination with public and private partners. Within Commerce, we interviewed officials from NTIA and the National Institute of Standards and Technology (NIST), two agencies that develop, test, and advise on broadband standards for public safety. We also interviewed officials from the Public Safety Communications Research (PSCR) program, a joint effort between NIST and NTIA that works to research, develop, and test public safety communication technologies. Within DHS, we interviewed officials from the Office of Emergency Communications (OEC) and the Office of Interoperability and Compatibility (OIC), two agencies that provide input on the public safety broadband network through their participation on interagency coordinating bodies.
To determine the technological, historical, and other factors that affect competition in the market for public safety devices, as well as what options exist to reduce the cost of these devices, we reviewed the responses to FCC’s notice seeking comment on competition in public safety communications technologies. In addition, we reviewed our prior reports and correspondence on this topic between FCC and the House of Representatives Committee on Energy and Commerce that occurred in June and July of 2010 and April and May of 2011. We also conducted an economic literature review that included 13 academic articles examining markets for communications technology and, in particular, how issues of standards, compatibility, bundling, and price discrimination affect entry and competition in these markets. These articles provided a historical and theoretical context for communication technology markets, which helped shape our findings. We asked about factors affecting the price of public safety devices, as well as how to reduce these prices, during our interviews with national public safety organizations, local and regional public safety jurisdictions, and the federal agencies we contacted during our audit work. We also interviewed two researchers specifically identified for their knowledge of communication equipment markets based on their congressional testimony or publication history. In addition, we interviewed representatives from four companies that produce public safety devices or network components, as well as two financial analysts who track the industry.
We conducted this performance audit from March 2011 to February 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Appendix II: Federal Grant Programs for Emergency Communications
SAFECOM, a program administered by DHS, has identified federal grant programs across nine agencies, including the Departments of Agriculture, Commerce, Education, Health and Human Services, Homeland Security, Interior, Justice, Transportation, and the U.S. Navy that allow grant funds to fund public safety emergency communications efforts. These grants include recurring grants that support emergency communications, research grants that fund innovative and pilot projects, and past grants that may be funding ongoing projects. While the funding from these grants can support emergency communications, the total funding reported does not mean it was all spent on emergency communications. We provided the amounts of the grants and the years funded when this information was available.
Department of Commerce
Two agencies within Commerce—NTIA and NIST—administer grants that allow funds to be directed towards public safety emergency communications (see table 5).
Department of Homeland Security
Two agencies within DHS administer grants that allow funds to be directed towards public safety emergency communications—the Federal Emergency Management Agency (FEMA) and the Science and Technology Directorate. Another agency, OEC, has administered one such grant program. Furthermore, DHS maintains an authorized equipment list to document equipment eligible for purchase under its grant programs, including interoperable communications equipment.(See table 6.)
Department of Justice
Two offices within Department of Justice, the Community Oriented Policing Services (COPS) and the Office of Justice Programs (OJP), administer grants that allow funds to be directed towards public safety emergency communications (see table 7).
Six additional federal agencies administer grants that can fund public safety emergency communications, including the Departments of Agriculture (USDA), Transportation (DOT), Health and Human Services (HHS), Education, Interior, and the U.S. Navy (see table 8).
Appendix III: Comments from the Department of Commerce
Appendix IV: Comments from the Department of Homeland Security
Appendix V: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In addition to the contact named above, Sally Moino, Assistant Director; Namita Bhatia-Sabharwal; Dave Hooper; Eric Hudson; Josh Ormond; Bonnie Pignatiello Leer; Ellen Ramachandran; Andrew Stavisky; Hai Tran; and Mindi Weisenbloom made significant contributions to this report.
Related GAO Products
Emergency Communications: National Communications System Provides Programs for Priority Calling, but Planning for New Initiatives and Performance Measurement Could Be Strengthened. GAO-09-822. Washington, D.C.: August 28, 2009.
Emergency Communications: Vulnerabilities Remain and Limited Collaboration and Monitoring Hamper Federal Efforts. GAO-09-604. Washington, D.C.: June 26, 2009.
First Responders: Much Work Remains to Improve Communications Interoperability. GAO-07-301. Washington, D.C.: April 2, 2007.
Homeland Security: Federal Leadership and Intergovernmental Cooperation Required to Achieve First Responder Interoperable Communications. GAO-04-740. Washington, D.C.: July 20, 2004.
Project SAFECOM: Key Cross-Agency Emergency Communications Effort Requires Stronger Collaboration. GAO-04-494. Washington, D.C.: April 16, 2004.
Homeland Security: Challenges in Achieving Interoperable Communications for First Responders. GAO-04-231T. Washington, D.C.: November 6, 2003. | Why GAO Did This Study
Emergency responders across the nation rely on land mobile radio (LMR) systems to gather and share information and coordinate their response efforts during emergencies. These public safety communication systems are fragmented across thousands of federal, state, and local jurisdictions and often lack interoperability, or the ability to communicate across agencies and jurisdictions. To supplement the LMR systems, in 2007, radio frequency spectrum was dedicated for a nationwide public safety broadband network. Presently, 22 jurisdictions around the nation have obtained permission to build public safety broadband networks on the original spectrum assigned for broadband use. This requested report examines (1) the investments in and capabilities of LMR systems; (2) plans for a public safety broadband network and its expected capabilities and limitations; (3) challenges to building this network; and (4) factors that affect the prices of handheld LMR devices. GAO conducted a literature review, visited jurisdictions building broadband networks, and interviewed federal, industry, and public safety stakeholders, as well as academics and experts.
What GAO Found
After the investment of significant resourcesincluding billions of dollars in federal grants and approximately 100 megahertz of radio frequency spectrumthe current land mobile radio (LMR) systems in use by public safety provide reliable mission critical voice capabilities. For public safety, mission critical voice communications must meet a high standard for reliability, redundancy, capacity, and flexibility. Although these LMR systems provide some data services, such as text and images, their ability to transmit data is limited by the channels on which they operate. According to the Department of Homeland Security (DHS), interoperability among LMR systems has improved due to its efforts, but full interoperability of LMR systems remains a distant goal.
Multiple federal entities are involved with planning a public safety broadband network and while such a network would likely enhance interoperability and increase data transfer rates, it would not support mission critical voice capabilities for years to come, perhaps even 10 years or more. A broadband network could enable emergency responders to access video and data applications that improve incident response. Yet because the technology standard for the proposed broadband network does not support mission critical voice capabilities, first responders will continue to rely on their current LMR systems for the foreseeable future. Thus, a broadband network would supplement, rather than replace, current public safety communication systems.
There are several challenges to implementing a public safety broadband network, including ensuring the networks 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 legislationthe Middle Class Tax Relief and Job Creation Act of 2012, among other thingsestablishes a new entity, the First Responder Network Authority, with responsibility for ensuring the establishment of a nationwide, interoperable public safety broadband network.
The price of handheld LMR devices is highoften thousands of dollarsin 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.
What GAO Recommends
The Department of Homeland Security (DHS) should work with partners to identify and communicate opportunities for joint procurement of public safety LMR devices. In commenting on a draft of this report, DHS agreed with the recommendation. GAO also received technical comments, which have been incorporated, as appropriate, in the report. |
gao_RCED-98-8 | gao_RCED-98-8_0 | Background
Established 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’s 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’s (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’s motor carrier safety information with states’ motor vehicle registration systems. The Commercial Vehicle Information System project led to the development of OMC’s Safety Status Measurement System (SafeStat) program.
The 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’s compliance with federal safety regulations by assessing its policies, management controls, and operations. Typically, investigators examine a sample of the carrier’s records, including drivers’ hours-of-service logs, commercial drivers’ 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’s vehicles. The investigators give the carrier a satisfactory, conditional, or unsatisfactory rating on the basis of this review.
From 1983 through 1995, the rate of fatal accidents involving large trucks dropped by 42 percent—from 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’s 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.)
The interstate trucking industry has grown rapidly in recent years from about 213,000 firms in 1990 to about 379,000 in 1996.
MCSAP and Other Initiatives Have Contributed to Improved Commercial Motor Vehicle Safety
OMC 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’s 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’ 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.
States Conduct Almost All Roadside Inspections
With 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’s 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.
State 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—such as tires and lights but not the brakes—accounted for 30 percent of the inspections; level 3 inspections, which focus on such driver-related items as hours of service and the commercial driver’s 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.
An 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.
States Are Performing More Compliance Reviews
While 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.
The 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’s 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.
OMC 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 “U.S. DOT numbers” to intrastate carriers and enter them into OMC’s 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.
MCSAP 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’s 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.
OMC Requires Performance-Based State Safety Plans
Effective 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.
In fiscal year 1996, OMC provided the states with $54 million for MCSAP’s 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’s designated program funding to MCSAP’s 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’s limited resources, adding that their state could use these funds more productively in other motor carrier safety programs.
SafeStat Is Designed to Better Target Compliance Reviews
OMC 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.
In 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’s 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.
OMC’s SCE List Used Descriptive and Performance Data
As 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’ out-of-service rate; (5) their drivers’ 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’ operations; 4 percent were in response to carriers’ 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’s vehicle was involved in a major accident that resulted in multiple fatalities or closed down an interstate highway for several hours.
Compliance 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.
In a March 1997 report, the DOT Office of Inspector General found that OMC’s 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’s actual accident record. The report also stated that a carrier’s 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’s 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’s intent.
SafeStat Uses Safety Data to Improve Targeting
To 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.)
Table 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’s Motor Carrier Safety Improvement Process until its on-the-road performance improves sufficiently for SafeStat not to subsequently identify them.
The Volpe National Transportation Systems Center tested SafeStat’s 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’s criteria. OMC officials noted that if SafeStat targets problem carriers better than the SCE list does, OMC and state investigators could improve the program’s 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.
In 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’s 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.
OMC’s 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’s 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.
SafeStat is part of the larger Commercial Vehicle Information System demonstration program. The program links OMC’s databases with states’ 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.
Many States Have Improved the Completeness and Timeliness of Their Safetynet Data
A 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’s 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’ 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.
To 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’s electronic database. Using ASPEN, instead of paper forms, improves accuracy because the software alerts inspectors to inconsistent information, particularly if the carrier’s 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’s database.
In 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’s 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’s 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.
Improving 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’ Association for reporting commercial vehicle accidents. Similarly, some states are incorporating the supplemental form’s 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.
In 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’s 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’s 21-day standard for paper forms, and only Connecticut met OMC’s 7-day standard for electronically uploading inspection data. OMC’s 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’s former 180-day standard for uploading accident data during fiscal year 1997.
Eight 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’s 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’s 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’s central office. OMC officials acknowledged that if commercial motor carriers’ 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.
OMC Has Used Compliance Reviews to Rate a Carrier’s Safety Fitness
OMC uses a compliance review to assess a commercial motor carrier’s management controls that results in a safety fitness rating. Trucking industry representatives have opposed using compliance reviews to rate a carrier’s safety fitness, stating that too much weight is given to record-keeping requirements that may not correlate with a firm’s 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’s safety fitness, including the possible use of performance-based criteria.
Drivers’ Hours-Of-Service Regulations Result in the Most Safety Violations
In a compliance review, trained investigators assess a motor carrier’s 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’s 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’s 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.
Each compliance rating factor is evaluated to determine whether the carrier violated any of the acute and critical regulations. A carrier’s 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.)
Of 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—the second highest unsatisfactory category. (See table V.2 in app. V.) A substantial number of carriers violated at least one critical driver’s 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.
OMC 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’s 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’s 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’s maximum allowable hours of service in fatigue-related accidents. A 1996 study by the Northwestern University Traffic Institute examined the relationship between a carrier’s 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’s 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).
Few Motor Carriers Appealed Their Safety Fitness Ratings in Fiscal Year 1996
Of 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’s 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’s 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’s 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.
A 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’s Safetynet database.
Alternatively, 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’s 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.
OMC Plans to Reexamine Its Criteria for Rating Safety Fitness
In 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’s 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.
The notice of proposed rule making states that the safety fitness rating methodology is a short-term approach needed to address the court of appeals’ 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.
Conclusions
OMC’s 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’s 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’s score, thus affecting SafeStat’s 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.
We agree in concept with OMC’s 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’ 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’s reporting requirements.
Recommendations
To 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.
Agency Comments and Our Evaluation
We 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’s 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’s performance is influenced by multiple states.
We 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’s technical accuracy, which we incorporated as appropriate.
Scope and Methodology
To 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.
While we did not verify the accuracy of the data that the states submitted to OMC’s 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.
As 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.
If 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.
Commercial Vehicle Safety Data
Data are not available.
Table I.5: Federal MCSAP Grants to the States by Category, Fiscal Year 1996 (1,499)
Selective Compliance and Enforcement Criteria for Selecting Motor Carriers for a Compliance Review
Commodity transported (1 to 8 points):
8 points for a passenger carrier
5 points for hazardous materials in a tank
2 points for hazardous materials in a package
1 point for everything else Annual carrier mileage (1 to 4 points):
4 points for at least 5 million miles
3 points for from 1 million to 4,999,999 miles
2 points for from 150,000 to 999,999 miles
1 point for less than 150,000 miles If mileage is unavailable, then a driver census would be used
4 points for at least 72 drivers
3 points for from 16 to 71 drivers
2 points for from 6 to 15 drivers
1 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
4 points for at least 72 power units
3 points for from 16 to 71 power units
2 points for from 6 to 15 power units
1 point for from 1 to 5 power units
Neutral value if 0, blank, or unknown Months since last safety fitness rating (0 to 4 points):
4 points for more than 36 months
3 points for from 25 to 36 months
2 points for from 13 to 24 months
1 point for from 7 to 12 months
0 points for from 0 to 6 months
2 points for an unrated carrier Vehicle out-of-service rate (1 to 5 points):
5 points for an out-of-service rate of at least 40 percent
4 points for an out-of-service rate from 33.34 to 39.99 percent
3 points for an out-of-service rate from 25 to 33.33 percent
2 points for an out-of-service rate from 16.67 to 24.99 percent
1 point for an out-of-service rate of from 0 to 16.66 percent Driver out-of-service rate (2 to 10 points):
10 points for an out-of-service rate of at least 15 percent
8 points for an out-of-service rate from 10 to 14.99 percent
6 points for an out-of-service rate from 7 to 9.99 percent
4 points for an out-of-service rate from 3.25 to 6.99 percent
2 points for an out-of-service rate of from 0 to 3.24 percent Preventable, recordable accident rate (1 to 5 points):
5 points for an accident rate of at least 1.0
4 points for an accident rate from 0.67 to 0.99
3 points for an accident rate from 0.34 to 0.66
2 points for an accident rate from 0.01 to 0.33
1 point for an accident rate of 0
Neutral value for a blank or missing accident rate Overall safety fitness rating (1 to 5 points):
5 points for an unsatisfactory rating
3 points for a conditional rating
1 point for a satisfactory rating
Neutral 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’s SCE score by seven (the total number of factors) and divides by the number of factors for which data are available. A carrier’s final SCE score is the total of its scores for the seven factors.
The 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.
SafeStat Criteria for Selecting Motor Carriers for a Compliance Review
Accident Safety Evaluation Area (SEA) 1. Motor carriers’ accidents that states report to OMC’s 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.
SafeStat 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.
Selected State Initiatives to Improve the Collection and Use of Safety Data
States 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.
Oregon: Accident Reporting
The Motor Carrier Transportation Branch, within Oregon’s 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.
Oregon 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’s 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’s report is the only source of information about an accident because local police departments do not always file an accident report.
Unlike many states, Oregon makes an effort to determine the cause of a commercial vehicle accident and who was at fault. Oregon’s 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’s 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’s 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.
Utah: Reducing Fatigue-Related Accidents
Utah, like other states, is adopting performance-based standards to implement its truck safety programs. In 1996, Utah’s 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’s 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’s running off the road, suggesting that the accidents were related to driver fatigue.
Through 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’s DOT focused on the carrier’s operations by looking at the carrier’s collective driver records and conducting a full compliance review, if warranted. In addition, Utah’s 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.
Connecticut: Real-Time Wireless Communication
The 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’s 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.
Several 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.
By entering a truck’s U.S. DOT number at a roadside stop, an inspector will be able to obtain a motor carrier’s 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’s 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.
Compliance Review Rating Factors
Requiring or permitting driver to drive more than 10 hours.
Requiring or permitting driver to drive after having been on duty 15 hours.
Requiring 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.
Failing to require driver to make a record of duty status.
False reports of records of duty status.
Failing to require driver to forward, within 13 days of completion, the original of the record of duty status.
Failing to preserve driver’s records of duty status and supporting documents for 6 months.
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Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Why GAO Did This Study
Pursuant 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.
What GAO Found
GAO 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. |
gao_GAO-02-160T | gao_GAO-02-160T_0 | The Nature of the Threat Facing the United States
The 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.
Hostile 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.
Key Elements to Improve Homeland Security
A 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.
Leadership Provided by the Office of Homeland Security
On 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.
For 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.
In 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’s 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.
Both 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?
How 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?
How can the coordinator have a real impact in the budget and resource allocation process?
Should the coordinator’s roles and responsibilities be based on specific statutory authority? And if so, what functions should be under the coordinator’s control?
Depending 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?
A 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.
Developing a Comprehensive Homeland Security Strategy
I 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 – federal, state, and local – 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.
An 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.
Managing Risks to Homeland Security
The 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. “Risk management” 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.
We 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.
Threat 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.
Vulnerability assessments identify weaknesses that may be exploited by identified threats and suggest options that address those weaknesses. For example, a vulnerability assessment might reveal weaknesses in an organization’s 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.
Criticality 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.
We 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— consistent with the elements I have described—could 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.
As 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.
Short- and Long-Term Fiscal Implications
The 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’s 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.
As 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’s immediate needs against our long-term fiscal challenges. This is an important note to sound—while some short-term actions are understandable and necessary, long-term fiscal discipline is still an essential need.
As we seek to meet today’s 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–reclaiming the fiscal flexibility necessary to address these and other emerging challenges is a major task facing this generation.
None 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.
As 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—and the need to address the gaps these events surfaced—will 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.
With 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.
Given 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’s urgent needs with tomorrow’s 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—either on the tax or spending side of the budget—may 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—although 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—on the spending and/or the tax side—may 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.
As 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’t 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.)
Once 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.
A 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 “fit” of any federal program or activity in today’s world and for the future. In fact, we have a stewardship responsibility to both today’s taxpayers and tomorrow’s 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—which are often considered to be “in the base”—while exercising continued prudence and fiscal discipline in connection with new initiatives.
In 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’s 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—and could receive increased attention—given increased awareness of bioterrorism issues.
GAO 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.
This 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 “wants” from those investments that have greater promise to effectively address more critical “needs.”
In sorting through these proposals, we might apply certain investment criteria in making our choices. Well-chosen enhancements to the nation’s 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—grants, loans, tax expenditures, direct federal administration. The involvement of a wide range of third parties—state and local governments, nonprofits, private corporations, and even other nations—will be a vital part of the national response as well.
In 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?
To 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?
How 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?
Do 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?
Are the proposal’s time frames, cost projections, and promises realistic in light of past experience and the capacity of administrators at all levels to implement?
We 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.
Ultimately, 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.
Conclusion
The 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—and the American people—recognize, 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.
As 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.
The 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’s ability to assist you in this task.
You 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.
I would be happy to answer any questions that you may have.
Appendix I: Prior GAO Work Related to Homeland Security
GAO 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.
Combating Terrorism
Given 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.
Progress 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.
We 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’s 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.
Aviation Security
Since 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— that is, as tests more closely approximate how a terrorist might attempt to penetrate a checkpoint—screener 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.
Cyber Attacks on Critical Infrastructure
Federal 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’s 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’ 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’s 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’s critical infrastructure-protection strategy and last week, announced appointment of a Special Advisor to the President for Cyberspace Security.
International Crime Control
On 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.
Public Health
The 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.
In 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’s 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’s 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’s 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.
Related GAO Products
Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts (GAO-02-208T, Oct. 31, 2001).
Homeland Security: Need to Consider VA’s Role in Strengthening Federal Preparedness (GAO-02-145T, Oct. 15, 2001).
Homeland Security: Key Elements of a Risk Management Approach (GAO-02-150T, Oct. 12, 2001).
Homeland Security: A Framework for Addressing the Nation’s Efforts, (GAO-01-1158T, Sept. 21, 2001).
Combating Terrorism
Combating Terrorism: Considerations for Investing Resources in Chemical and Biological Preparedness (GAO-02-162T, Oct. 17, 2001).
Combating Terrorism: Selected Challenges and Related Recommendations (GAO-01-822, Sept. 20, 2001).
Combating Terrorism: Actions Needed to Improve DOD’s Antiterrorism Program Implementation and Management (GAO-01-909, Sept. 19, 2001).
Combating Terrorism: Comments on H.R. 525 to Create a President’s Council on Domestic Preparedness (GAO-01-555T, May 9, 2001).
Combating Terrorism: Observations on Options to Improve the Federal Response (GAO-01-660T, Apr. 24, 2001).
Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement (GAO-01-463, Mar. 30, 2001).
Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy (GAO-01-556T, Mar. 27, 2001).
Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response (GAO-01-15, Mar. 20, 2001).
Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination (GAO-01- 14, Nov. 30, 2000).
Combating Terrorism: Linking Threats to Strategies and Resources (GAO/T-NSIAD-00-218, July 26, 2000).
Combating Terrorism: Action Taken but Considerable Risks Remain for Forces Overseas (GAO/NSIAD-00-181, July 19, 2000).
Weapons of Mass Destruction: DOD’s Actions to Combat Weapons Use Should Be More Integrated and Focused (GAO/NSIAD-00-97, May 26, 2000).
Combating Terrorism: Comments on Bill H.R. 4210 to Manage Selected Counterterrorist Programs (GAO/T-NSIAD-00-172, May 4, 2000).
Combating Terrorism: How Five Foreign Countries Are Organized to Combat Terrorism (GAO/NSIAD-00-85, Apr. 7, 2000).
Combating Terrorism: Issues in Managing Counterterrorist Programs (GAO/T-NSIAD-00-145, Apr. 6, 2000).
Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, Mar. 21, 2000).
Combating Terrorism: Chemical and Biological Medical Supplies are Poorly Managed (GAO/HEHS/AIMD-00-36, Oct. 29, 1999).
Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism (GAO/T-NSIAD-00-50, Oct. 20, 1999).
Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO/NSIAD-99-163, Sept. 7, 1999).
Combating Terrorism: Analysis of Federal Counterterrorist Exercises (GAO/NSIAD-99-157BR, June 25, 1999).
Combating Terrorism: Observations on Growth in Federal Programs (GAO/T-NSIAD-99-181, June 9, 1999).
Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs (GAO/NSIAD-99-151, June 9, 1999).
Combating Terrorism: Use of National Guard Response Teams Is Unclear (GAO/NSIAD-99-110, May 21, 1999).
Combating Terrorism: Issues to Be Resolved to Improve Counterterrorist Operations (GAO/NSIAD-99-135, May 13, 1999).
Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives (GAO/T-NSIAD-99-112, Mar. 16, 1999).
Combating Terrorism: Observations on Federal Spending to Combat Terrorism (GAO/T-NSIAD/GGD-99-107, Mar. 11, 1999).
Combating Terrorism: FBI's Use of Federal Funds for Counterterrorism-Related Activities (FYs 1995-98) (GAO/GGD-99-7, Nov. 20, 1998).
Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO/NSIAD-99-3, Nov. 12, 1998).
Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program (GAO/T-NSIAD-99-16, Oct. 2, 1998).
Combating Terrorism: Observations on Crosscutting Issues (GAO/T- NSIAD-98-164, Apr. 23, 1998).
Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments (GAO/NSIAD-98-74, Apr. 9, 1998).
Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination (GAO/NSIAD-98-39, Dec. 1, 1997).
Combating Terrorism: Federal Agencies' Efforts to Implement National Policy and Strategy (GAO/NSIAD-97-254, Sept. 26, 1997).
Combating Terrorism: Status of DOD Efforts to Protect Its Forces Overseas (GAO/NSIAD-97-207, July 21, 1997).
Terrorism and Drug Trafficking: Responsibilities for Developing Explosives and Narcotics Detection Technologies (GAO/NSIAD-97-95, Apr. 15, 1997). Federal Law Enforcement: Investigative Authority and Personnel at 13 Agencies (GAO/GGD-96-154, Sept. 30, 1996).
Terrorism and Drug Trafficking: Technologies for Detecting Explosives and Narcotics (GAO/NSIAD/RCED-96-252, Sept. 4, 1996).
Terrorism and Drug Trafficking: Threats and Roles of Explosives and Narcotics Detection Technology (GAO/NSIAD/RCED-96-76BR, Mar. 27, 1996).
Aviation Security
Aviation Security: Vulnerabilities in, and Alternatives for, Preboard Screening Security Operations, (GAO-01-1171T, Sept. 25, 2001).
Aviation Security: Weaknesses in Airport Security and Options for Assigning Screening Responsibilities, (GAO-01-1165T, Sept. 21, 2001).
Aviation Security: Terrorist Acts Demonstrate Urgent Need to Improve Security at the Nation’s Airports (GAO-01-1162T, Sept. 20, 2001).
Responses of Federal Agencies and Airports We Surveyed About Access Security Improvements (GAO-01-1069R, Aug. 31, 2001).
Aviation Security: Additional Controls Needed to Address Weaknesses in Carriage of Weapons Regulations (GAO/RCED-00-181, Sept. 29, 2000).
Aviation Security: Long-Standing Problems Impair Airport Screeners’ Performance (GAO/RCED-00-75, June 28, 2000).
Aviation Security: Breaches at Federal Agencies and Airports (GAO/T- OSI-00-10, May 25, 2000).
Aviation Security: Vulnerabilities Still Exist in the Aviation Security System (GAO/T-RCED/AIMD-00-142, Apr. 6, 2000).
Aviation Security: Slow Progress in Addressing Long-Standing Screener Performance Problems (GAO/T-RCED-00-125, Mar. 16, 2000).
Aviation Security: FAA’s Actions to Study Responsibilities and Funding for Airport Security and to Certify Screening Companies (GAO/RCED- 99-53, Feb. 25, 1999).
Aviation Security: Progress Being Made, but Long-term Attention Is Needed (GAO/T-RCED-98-190, May 14, 1998).
Aviation Security: FAA's Procurement of Explosives Detection Devices (GAO/RCED-97-111R, May 1, 1997).
Aviation 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).
Aviation Security: Technology’s Role in Addressing Vulnerabilities (GAO/T-RCED/NSIAD-96-262, Sept. 19, 1996).
Aviation Security: Urgent Issues Need to Be Addressed (GAO/T- RCED/NSIAD-96-151, Sept. 11, 1996).
Aviation Security: Immediate Action Needed to Improve Security (GAO/T-RCED/NSIAD-96-237, Aug. 1, 1996).
Aviation Security: Development of New Security Technology Has Not Met Expectations (GAO/RCED-94-142, May 19, 1994).
Aviation Security: Additional Actions Needed to Meet Domestic and International Challenges (GAO/RCED-94-38, Jan. 27, 1994).
Cyber Attacks on Critical Infrastructure
Information Sharing: Practices That Can Benefit Critical Infrastructure Protection (GAO-02-24, Oct. 15, 2001).
Critical Infrastructure Protection: Significant Challenges in Safeguarding Government and Privately-Controlled Systems from Computer-Based Attacks, (GAO-01-1168T, Sept. 26, 2001).
Critical Infrastructure Protection: Significant Challenges in Protecting Federal Systems and Developing Analysis and Warning Capabilities (GAO-01-1132T, Sept. 12, 2001).
Information Security: Serious and Widespread Weaknesses Persist at Federal Agencies (GAO/AIMD-00-295, Sept. 6, 2000).
Critical Infrastructure Protection: Significant Challenges in Developing Analysis, Warning, and Response Capabilities (GAO-01-769T, May 22, 2001).
Critical Infrastructure Protection: Significant Challenges in Developing National Capabilities (GAO-01-232, Apr. 25, 2001).
Critical Infrastructure Protection: Challenges to Building a Comprehensive Strategy for Information Sharing and Coordination (GAO/T-AIMD-00-268, July 26, 2000).
Security 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).
Critical Infrastructure Protection: Comments on the Proposed Cyber Security Information Act of 2000 (GAO/T-AIMD-00-229, June 22, 2000).
Critical Infrastructure Protection: “I LOVE YOU” Computer Virus Highlights Need for Improved Alert and Coordination Capabilities (GAO/T-AIMD-00-181, May 18, 2000).
Critical Infrastructure Protection: National Plan for Information Systems Protection (GAO/AIMD-00-90R, Feb. 11, 2000).
Critical Infrastructure Protection: Comments on the National Plan for Information Systems Protection (GAO/T-AIMD-00-72, Feb. 1, 2000).
Critical Infrastructure Protection: Fundamental Improvements Needed to Assure Security of Federal Operations (GAO/T-AIMD-00-7, Oct. 6, 1999).
Critical Infrastructure Protection: The Status of Computer Security at the Department of Veterans Affairs (GAO/AIMD-00-5, Oct. 4, 1999).
Critical Infrastructure Protection: Comprehensive Strategy Can Draw on Year 2000 Experiences (GAO/AIMD-00-1, Oct. 1, 1999).
Information Security: The Proposed Computer Security Enhancement Act of 1999 (GAO/T-AIMD-99-302, Sept. 30, 1999).
Information Security: NRC’s Computer Intrusion Detection Capabilities (GAO/AIMD-99-273R, Aug. 27, 1999).
Electricity Supply: Efforts Underway to Improve Federal Electrical Disruption Preparedness (GAO/RCED-92-125, Apr. 20, 1992)
Public Health
Anthrax Vaccine: Changes to the Manufacturing Process (GAO-02-181T, Oct. 23, 2001).
Bioterrorism: Public Health and Medical Preparedness, (GAO-02-141T, Oct. 9, 2001).
Bioterrorism: Coordination and Preparedness, (GAO-02-129T, Oct. 5, 2001).
Bioterrorism: Federal Research and Preparedness Activities (GAO-01- 915, Sept. 28, 2001).
West Nile Virus Outbreak: Lessons for Public Health Preparedness (GAO/HEHS-00-180, Sept. 11, 2000).
Food Safety: Agencies Should Further Test Plans for Responding to Deliberate Contamination (GAO/RCED-00-3, Oct. 27, 1999).
Emerging Infectious Diseases: Consensus on Needed Laboratory Capacity Could Strengthen Surveillance (GAO/HEHS-99-26, Feb. 5, 1999).
International Crime Control
International Crime Controls: Sustained Executive Level Coordination of Federal Response Needed (GAO-01-629, Sept. 20, 2001).
Alien Smuggling: Management and Operational Improvements Needed to Address Growing Problem (GAO/GGD-00-103, May 1, 2000).
Criminal Aliens: INS Efforts to Identify and Remove Imprisoned Aliens Continue to Need Improvement (GAO/T-GGD-99-47, Feb. 25, 1999).
Criminal Aliens: INS Efforts to Remove Imprisoned Aliens Continue to Need Improvement (GAO/GGD-99-3, Oct. 16, 1998).
Immigration and Naturalization
Immigration and Naturalization Service: Overview of Management and Program Challenges (GAO/T-GGD-99-148, July 29, 1999).
Illegal Immigration: Status of Southwest Border Strategy Implementation (GAO/GGD-99-44, May 19, 1999).
Illegal Immigration: Southwest Border Strategy Results Inconclusive; More Evaluation Needed (GAO/GGD-98-21, Dec. 11, 1997). | What GAO Found
The 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. |
crs_R44227 | crs_R44227_0 | 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:
" 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? "
What Is the Internet of Things (IoT)?
When 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.
While 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.
In 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.
The 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.
How Does the IoT Work?
The 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—streetlights, 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"—such as smart meters and smart cars.
Internet 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.
To 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.
What 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.
Smart 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"—that is, almost instantaneously.
Smart 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.
Smart 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.
IoT 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.
What Impacts Will the IoT Have?
The 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.
Economic Growth
Several 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.
Economic Sectors
Agriculture
The 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.
Energy
Within 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.
Smart-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.
Health Care
The 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—which can be wearable or nonwearable, or even implantable, injectable, or ingestible —can 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.
Manufacturing
Integration 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.
Transportation
Transportation 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.
Additionally, IoT technologies can allow vehicles within and across modes—including cars, buses, trains, airplanes, and unmanned aerial vehicles (drones)—to "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.
Infrastructure and Smart Cities
The capabilities of the smart grid, smart buildings, and ITS combined with IoT components in other public utilities—such as roadways, sewage and water transport and treatment, public transportation, and waste removal—can 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.
This 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.
As 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
social media (such as Facebook and Twitter), mobile computing (such as smartphones and wearable devices), data analytics (big data—the processing and use of very large data sets; and open data—databases 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).
Together, these are sometimes called SMAC.
Social and Cultural Impacts
The 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."
Some 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.
What Is the Current Federal Role?
There 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.
Various 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.
The 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.
In addition to the activities described above, several agencies are engaged in research and development (R&D) related to the IoT.
Like 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.
What Issues Might Affect the Development and Implementation of the IoT?
The 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 .
Technical Issues
Prominent 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.
Internet Addresses
A 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.
Some 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.
Version 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—more than a trillion trillion per person .
It 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 .
Efforts 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.
High-Speed Internet
Use 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.
Wireless Communications
Many 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 .
Standards
Current 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.
Other Technical Issues
Several 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.
Energy 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.
Cybersecurity
The 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—in 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.
Cybersecurity 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.
The 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.
Access 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.
IoT 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.
Safety
Given 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.
However, 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.
Privacy
Cyberattacks 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.
In 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.
With 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.
Other Policy Issues
Federal Role
As 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.
Given 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? ").
Some 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.
Spectrum Access
Radio 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.
Net Neutrality
The 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.
It 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.
What Actions Has Congress Taken?
Legislation
Bills
No 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.
Resolutions
Two 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
a 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.
The 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.
Hearings
Both 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.
Caucuses
There 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.
Where Can I Find Additional Resources on This Topic?
For 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 ). | "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.
In 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.
Two features make objects part of the IoT—a 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.
Those 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.
The 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.
There 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.
Security 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.
Several other issues might affect the continued development and implementation of the IoT. Among them are
the 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."
No 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. |
gao_GAO-08-560T | gao_GAO-08-560T_0 | Interior’s Oversight Does Not Provide Adequate Assurance That the Government Is Being Fully Compensated for Oil and Gas Production on Federal Lands and Waters
Interior 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’s 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—one used by the company and another reported to MMS.
Moreover, 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’s 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.
With regard to MMS’s assurance that royalty data are being accurately reported by companies, MMS’s 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’s 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.
In 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’s property has been selected for an audit or compliance review.
Furthermore, MMS’s 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’s 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’ 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.
Finally, MMS’s 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’s 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’s 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.
MMS’s Compliance Efforts Do Not Consistently Use Third-Party Data to Check Self-Reported Royalty-in-Value Payment Data
MMS’s 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—either full audits or compliance reviews—on 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’s 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— oil, gas, and retrograde, a liquid product that condenses out of gas under certain conditions—the 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.
To achieve its annual performance goals, MMS began using the compliance reviews along with audits. One of MMS’s performance goals is to complete compliance activities—either audits or compliance reviews— 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.
In 2006, Interior’s Inspector General (IG) reviewed MMS’s 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’s 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.
Finally, 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’s 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.
The MMS Royalty-in- Kind Program Is at Risk of Inaccurate Collection of Natural Gas Royalties because of Inconsistent Oversight
Because MMS’s 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.
For oil, MMS obtains pipeline meter data from OMM’s 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’ 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.
For gas, MMS relies on information contained in two operator-provided documents—monthly imbalance statements and production reports. Imbalance statements include the operator’s 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’s 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.
MMS’s 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—that is, production volumes submitted to MMS by operators are at times either under- or overreported.
Data 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’s 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.
Significant Questions and Uncertainties Exist Regarding the Reported Financial Benefits of the Royalty-in-Kind Program
The 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’s 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’s 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’s 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’s conclusions.
Sales Revenue
MMS 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—a 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.
Moreover, MMS’s 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.
According 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’s 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’s 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.
Interest
Revenues 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.
Administrative Cost Savings
MMS 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—that 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.
MMS’s 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.
MMS 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’s 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—some of which may have been incurred for either the royalty-in-kind or the cash royalty program—were 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’s administrative cost analysis.
Conclusions
Ultimately 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’s 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’s production and royalty data. We plan to make recommendations to address the weaknesses we identified in our final reports on these issues.
We 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.
GAO Contact and Staff Acknowledgments
For 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.
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Why GAO Did This Study
Companies 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.
What GAO Found
Interior 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. |
gao_GAO-07-781 | gao_GAO-07-781_0 | Background
The 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’s 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.
The 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’s 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’ and agencies’ 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.
All-Hazards Emergency Management Policies Provide the Overarching Context for the Strategy and Plan
The 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 “how” 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 “what” 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.
States 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.
The 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’s 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.
The 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—some 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.
Of 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 “unified command” 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.
ESF-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.
FEMA 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.
The 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.
The 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.
The Executive Branch Has Taken Other Steps to Prepare for a Pandemic
The 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.
Planning 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.
In 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.
Federal Government Leadership Roles and Responsibilities Need Clarification and Testing
While 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.
The Strategy and Plan Do Not Clarify Leadership Roles and Responsibilities
The 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—an 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— 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.
The 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.
Specifically, 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.
Also 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’ 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’s infrastructure, domestic security, and entry and exit screening for influenza at the borders.
Other 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’s 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.
Officials 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.
Additional Key Leadership Roles and Responsibilities Are Evolving and Untested
The 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.
DHS 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 “seams 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.” 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.
U.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.
The 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.
It 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—both 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’s 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.
Recent Congressional Actions Addressed Leadership Roles and Responsibilities
In 2006, Congress passed two acts addressing leadership roles and responsibilities for emergency management—the Pandemic and All- Hazards Preparedness Act and the Post-Katrina Emergency Management Reform Act of 2006—which were enacted into law on December 19, 2006 and October 4, 2006, respectively.
Pandemic and All-Hazards Preparedness Act and Its Implementation
The 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.
The 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.
The act seeks to further strengthen HHS’s 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’s office.
HHS 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.
Post-Katrina Reform Act and Its Implementation
In 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.
The 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’s National Preparedness Directorate contains functions related to preparedness doctrine, policy, and contingency planning and includes DHS’s 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.
Rigorous and Robust Exercises Are Important for Testing Federal Leadership for a Pandemic
Disaster 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— particularly for the type and magnitude of emergency incidents such as a severe influenza pandemic for which there is little actual experience—are 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.
While 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.
The National Strategy and Its Implementation Plan Do Not Address All the Characteristics of an Effective Strategy, Thus Limiting Their Usefulness as Planning Tools
The Strategy and Plan represent important efforts to guide the nation’s 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.
As 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.
The Strategy and Plan Partially Address Purpose, Scope, and Methodology
A 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.
In 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.
As 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’s guiding principles include recognition of the private sector’s integral role and leveraging global partnerships. The Plan’s 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).
Another 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’s and nonfederal entities’ 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.
Both 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’s 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’s security, it is important to recognize and reflect an understanding of how these national strategies relate to one another.
The 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’ 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.
Strategy and Plan Address Problem Definition and Risk Assessment
National 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.
In 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.
The 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.
The 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’s 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.
In 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’s 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.
The Strategy and Plan Partially Address Goals, Objectives, Activities, and Performance Measures
A 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.
The 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’s framework by including 324 action items.
The Plan uses the Strategy’s 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’s performance measure is policy recommendations for response protocols, screening, or both.
While 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’s chapters on the six functional areas (i.e., the chapters that contain action items).
Some 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 “all 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.” Similarly, another action item states that “all 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.” Yet the plan does not make clear who will be responsible for making sure that these actions are completed.
While 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—6 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.
Additionally, 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’s report included a statement that a determination of “complete” 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’ international efforts to forestall a pandemic influenza also reported that eight of the Plan’s international-related action items included in the HSC’s report either did not directly address the associated performance measure or did not indicate that the completion deadline had been met.
Most of the Plan’s 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’s 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.
The Strategy and Plan Do Not Address Resources, Investments, and Risk Management
A 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.
While neither document addresses the overall cost to implement the Plan, the Plan refers to the administration’s 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.
Developing 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.
Despite 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.
The 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.
The Strategy and Plan Partially Address Organizational Roles, Responsibilities, and Coordination
A 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.
The 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.
The Plan states that the primary mechanism for coordinating the federal government’s 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.
The 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.
Related to this issue, we recently reported that some of DOD’s 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’ ability to plan to provide support to lead federal agencies domestically and abroad during a pandemic.
The 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’ 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.
The Strategy and Plan Partially Address Integration and Implementation
A 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.
Since 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.
Whereas the Plan states that it supports Homeland Security Presidential Directive 8, which required the development of a domestic all-hazards preparedness goal—the National Preparedness Goal (Goal)—it 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’s pandemic influenza scenario is geared to a less severe pandemic—such as those that occurred in 1957 and 1968—while the Plan is based on the more severe 1918-level mortality and morbidity rates.
Further, 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’s 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.
The 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.
The 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.
Conclusions
Although 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.
A 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.
The Strategy and Plan are important because they broadly describe the federal government’s 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.
While 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’s level of preparedness.
DHS 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.
Recommendations for Executive Action
To 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.
We 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.
Agency Comments and Our Evaluation
We 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.
HHS informed us that it had no comments and concurred with the draft report. The HSC did not comment on the draft report.
As 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.
If 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.
Appendix I: Scope and Methodology
Our 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.
To 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’s 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’s 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’s 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.
To 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.
We 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.
National 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’s strategies relating to terrorism, rebuilding of Iraq, and financial literacy.
To 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 “addresses,” “partially addresses,” or “does not address.” According to our methodology, a strategy “addresses” a characteristic when it explicitly cites all, or nearly all, elements of the characteristic and has sufficient specificity and detail. A strategy “partially addresses” 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 “partially addresses” 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.
A strategy “does not address” 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.
We 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.
We conducted our review from May 2006 through June 2007 in accordance with generally accepted government auditing standards.
Appendix II: Comments from the Department of Homeland Security
Appendix III: GAO Contact and Staff Acknowledgments
GAO Contact
Acknowledgments
In addition to the contact named above, Susan Ragland, Assistant Director; Allen Lomax; David Dornisch; Donna Miller; Catherine Myrick; and members of GAO’s Pandemic Working Group made key contributions to this report.
Related GAO Products
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Emergency Management Assistance Compact: Enhancing EMAC’s Collaborative and Administrative Capacity Should Improve National Disaster Response. GAO-07-854. Washington, D.C.: June 29, 2007.
Influenza Pandemic: DOD Combatant Commands’ Preparedness Efforts Could Benefit from More Clearly Defined Roles, Resources, and Risk Mitigation. GAO-07-696. Washington, D.C.: June 20, 2007.
Influenza Pandemic: Efforts to Forestall Onset Are Under Way; Identifying Countries at Greatest Risk Entails Challenges. GAO-07-604. Washington, D.C.: June 20, 2007.
Avian 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.
The Federal Workforce: Additional Steps Needed to Take Advantage of Federal Executive Boards’ Ability to Contribute to Emergency Operations. GAO-07-515. Washington, D.C.: May 4, 2007.
Financial Market Preparedness: Significant Progress Has Been Made, but Pandemic Planning and Other Challenges Remain. GAO-07-399. Washington, D.C.: March 29, 2007.
Public Health and Hospital Emergency Preparedness Programs: Evolution of Performance Measurement Systems to Measure Progress. GAO-07-485R. Washington, D.C.: March 23, 2007.
Homeland Security: Preparing for and Responding to Disasters. GAO-07- 395T. Washington, D.C.: March 9, 2007.
Influenza 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.
Hurricane Katrina: Better Plans and Exercises Needed to Guide the Military’s Response to Catastrophic Natural Disasters. GAO-06-643. Washington, D.C.: May 15, 2006.
Continuity of Operations: Agencies Could Improve Planning for Telework during Disruptions. GAO-06-740T. Washington, D.C.: May 11, 2006.
Hurricane Katrina: GAO’s Preliminary Observations Regarding Preparedness, Response, and Recovery. GAO-06-442T. Washington, D.C.: March 8, 2006.
Emergency Preparedness and Response: Some Issues and Challenges Associated with Major Emergency Incidents. GAO-06-467T. Washington, D.C.: February 23, 2006.
Statement by Comptroller General David M. Walker on GAO’s Preliminary Observations Regarding Preparedness and Response to Hurricanes Katrina and Rita. GAO-06-365R. Washington, D.C.: February 1, 2006.
Influenza Pandemic: Applying Lessons Learned from the 2004-05 Influenza Vaccine Shortage. GAO-06-221T. Washington, D.C.: November 4, 2005.
Influenza Vaccine: Shortages in 2004-05 Season Underscore Need for Better Preparation. GAO-05-984. Washington, D.C.: September 30, 2005.
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Emerging Infectious Diseases: Review of State and Federal Disease Surveillance Efforts. GAO-04-877. Washington, D.C.: September 30, 2004.
Infectious Disease Preparedness: Federal Challenges in Responding to Influenza Outbreaks. GAO-04-1100T. Washington, D.C.: September 28, 2004.
Emerging Infectious Diseases: Asian SARS Outbreak Challenged International and National Responses. GAO-04-564. Washington, D.C.: April 28, 2004.
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Global Health: Framework for Infectious Disease Surveillance. GAO/NSIAD-00-205R. Washington, D.C.: July 20, 2000. | Why GAO Did This Study
An 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.
What GAO Found
The 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. |
gao_GAO-16-310 | gao_GAO-16-310_0 | Background
The 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’s 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.
Within 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—such as prescription drugs and listed chemicals—for legitimate uses while preventing their diversion. Given this overall mission, OD is responsible for preventing, detecting, and investigating the diversion of controlled substances.
The 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— manufacturers, distributors, physicians, pharmacies, researchers, and others—must 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.
DEA maintains the list of registrants in the controlled substances database (i.e., CSA2), which includes registrants’ 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’s 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.
States 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’ knowledge of the other prescriptions (i.e., “doctor shopping”) 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.
Each state determines which health-care occupations may prescribe or dispense controlled substances, as well as an occupation’s 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.
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 issuance of the registration would be “inconsistent with the public interest.” 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’s 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.
Figure 1 below provides an overview of how state and DEA processes interconnect for controlled substance registration.
Further, 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’s 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.
The Department of Justice (DOJ) Office of the Inspector General (OIG) reviewed the timeliness of DEA’s 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.
Selected States and DEA Have Established Controls to Ensure the Eligibility of Individuals to Handle Controlled Substances, Including Checks on Licenses and Legal Violations
State Controls Include Verifying Identity and Licensure Information, and Some States Conduct Criminal-Background Checks
Each 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.
As 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.
Officials in the five states we examined had established controls to renew and monitor physicians’ 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.
Although 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—in Connecticut and Vermont—accept the self- attestations and investigate only affirmative responses by applicants; in contrast, three state authorities—in Arizona, New Mexico, and Texas—conduct both state and federal criminal-background checks, regardless of the applicant’s attestation; and additionally, four of the five states—Arizona, Connecticut, Texas, and Vermont—review medical malpractice judgements for all medical license applicants, while one state—New Mexico—reviews medical malpractice judgements only for medical license applicants that have self-reported on their application.
Additionally, 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’s 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’s licensed physicians’ interactions with law-enforcement agencies nationwide using the FBI’s 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.
There 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’s 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’s 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’s PDMP.
DEA Controls Include Verifying Current Licensures for Initial Practitioner Applications and Renewals, and Monitoring the Public Death Master File
Through 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’s 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’s 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.
DEA 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:
Comparing 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’s 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.
Confirming that an applicant’s 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.
For states with a controlled substance registration, confirming applicant’s status. DEA’s 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’s website to determine whether the applicant’s 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.
Checking for any drug-related offenses or suspect associations.
Registration specialists are to check the names of anyone listed on each initial application against DEA’s 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’s 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.
Reviewing 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.
Practitioners 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’s record (such as changes to the registrant’s 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’s 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.
DEA OD officials told us that they perform one systematic form of monitoring of registrants’ 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’ database against SSA’s public DMF every week to find possible matches, which can indicate that an individual registrant has died. Names and SSNs from the registrants’ 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.
DEA 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.
Limitations Exist in DEA’s Controls to Collect and Validate Identifying Information and Verify Continued Eligibility of Its Controlled Substance Registrants
DEA has established controls to aid in determining registrant eligibility. However, we found limitations in DEA’s processes to collect and validate registrants’ identifying information and verify continued registrants’ 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.
Missing, Potentially Invalid, and Duplicative SSNs in DEA’s Registrants Data Reduce the Effectiveness of Key Controls
DEA’s 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’s 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’s 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’s registration specialists are to compare the applicant’s name and state licensure information to the information maintained by the appropriate state licensing board.
Our examination of DEA’s CSA2 data revealed gaps and other issues pertaining to registrants’ SSNs, as described below.
Individuals 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’s relationship with DEA, pursuant to the Debt Collection Improvement Act of 1996. Instructions on DEA’s application form state that SSNs are required for individual registrations, and tax identification numbers (such as an EIN) are required for business registrations.
Our analysis of DEA’s 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., “Limited to Official Federal Duties Only”), 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’s 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’s 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’s ability to identify other registrations for the same individual, particularly those with past adverse history.
Potentially 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’s EVS. Specifically, we compared DEA registrants’ names, dates of birth, and SSNs to SSA’s 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’s intended use.
Multiple 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., “Sally Simpson” and “Sally Simpsen”), name cognates (e.g., “Jonathan Smith” and “Jon Smith”), name inversions (e.g., “Jon Smith” and “Smith Jon”), or additional first or last names (e.g., “Mary Lynn Smith” and “Mary Smith,” or “Jane Smith Johnson” and “Jane Johnson”). 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.
We 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.
According to the Standards for Internal Control in the Federal Government, agencies should design processes that use the agency’s 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.
As 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’ 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’s 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’s 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’s ability to conduct any other potential data matching, which could improve the integrity of its registrants’ data and reduce the risk of potential misrepresentation or fraud.
Some 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
Of the approximately 1.4 million individual registrations in DEA’s 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’s 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’ 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.
According 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’s 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.
Removing deceased registrants from its database and retiring their registration can reduce the risk of someone obtaining and misusing the deceased registrant’s authority to handle, dispense, or prescribe controlled substances, thus limiting opportunities for the diversion of these substances. While DEA’s 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’s CSA2 data of about 1.4 million individual registrations with SSA’s 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.
Under current law, DEA is not eligible to access SSA’s 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.
By not identifying deceased registrants and not subsequently deactivating their registrations, DEA’s registry may be vulnerable to potential fraud leading to diversion of controlled substances. To better ensure that DEA’s 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.
Limitations Exist in Monitoring State Licensure Information
As 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’s 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.
We 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’ information to information contained in the FSMB data, we were able to review an individual’s 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.
Our 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’ controlled substance authority. These actions occurred between June 2011 and February 2014. For example:
We identified a physician whose Ohio medical license was revoked in October 2011 for prescription drug–related 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 2-½ years after the state authority was revoked.
We 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.
We 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’ 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.
As described earlier, DEA verifies an applicant’s 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’ 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.
As 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’s 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.
By 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’ 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’s 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’ state authority. Regardless of the approach used, without taking steps to verify registrants’ continued eligibility, DEA may not have complete or timely information about the continued eligibility of its registrants, thereby weakening the integrity of its registry.
Limitations Exist in Monitoring Criminal Backgrounds
In 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 “a critical first step in diversion prevention,” “vital to fairly assess the likelihood of an employee committing a drug security breach,” and “essential to overall controlled substances security.” 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, “Within 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?” Given DEA’s 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’s internal controls help ensure individual registrants do not present similar issues that may increase the risk of illicit diversion of controlled substances.
Our analysis of DOJ’s BOP SENTRY data, USMS’s warrant data, and the FBI’s 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.
Incarcerated 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’s 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.
In 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’s 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.
Furthermore, 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’s 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’ CSA2 records did not contain any notes indicating awareness of the crime. The registrations subsequently expired in December 2014 and June 2014, respectively.
Registrants 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’s license in 2014. According to DEA OD officials, the registrant’s 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.
Registered Sex Offenders. We identified 62 individuals associated with 63 DEA registrations who were also registered with the FBI’s 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’s medical license in November 2012, and the license was subsequently revoked in January 2014. According to DEA OD officials, the registrant’s CSA2 record did not contain any notes indicating awareness of the crime. The physician’s 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’s CSA2 record did not contain any notes indicating awareness of the crime. The DEA registration expired in May 2015.
DEA 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’s 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.
We 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’ 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’s CSA2 record contained any notes indicating knowledge of the crime. In 43 of the 95 cases, CSA2 did not contain information on these individuals’ 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.
DEA 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.
By 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.
Although 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’s 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.
Conclusions
As 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.
DEA 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’ 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’s 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’s 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.
Furthermore, while DEA has taken steps to identify and retire deceased registrants in its database by using SSA’s public Death Master File (DMF), obtaining legal authority to access that agency’s 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.
Similarly, 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’s 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’ criminal backgrounds would help ensure that these registrants do not present similar issues that may increase the risk of illicit diversion of controlled substances.
Recommendations for Executive Action
To 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’ SSNs against EVS; develop a legislative proposal to request access to SSA’s 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’ criminal backgrounds, such as conducting matches against federal law-enforcement databases, and document decisions about the approach chosen.
Agency Comments, Third-Party Views, and Our Evaluation
We provided a draft of this report to DOJ for its review, and DEA’s 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— Arizona, Connecticut, New Mexico, Texas, and Vermont—to obtain their views and verify the accuracy of the information provided.
In 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.
Regarding 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’s 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’s 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’s 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.
Regarding 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’ 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.
Regarding our third recommendation to develop a legislative proposal to request access to SSA’s 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’s 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’s 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.
With 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’ databases. However, our recommendation does not specifically require the use of state medical licensing boards’ 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’s 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’s services can be beneficial for validating the types of practitioners included in FSMB’s 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’s 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.
Lastly, in response to our fifth recommendation that DEA assess the cost and feasibility of developing procedures for monitoring registrants’ criminal backgrounds, DEA stated that it has started discussions with BOP about effective ways of comparing DEA’s registrant data to BOP’s 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’ 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.
DOJ, 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.
As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the 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.
If you or your staff have any questions about this report, please contact me at (202) 512-6722 or bagdoyans@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III.
Appendix I: Objectives, Scope, and Methodology
This 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’s 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.
To 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—Arizona, 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.
Prior 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’ views about DEA’s controlled substances screening, registration, and enforcement processes for individuals and entities.
Because each state determines which health-care occupations may prescribe or dispense controlled substances, as well as an occupation’s 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.
To 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’s requirements and processes for registration, renewal, and monitoring of individual handlers of controlled substances, we reviewed applicable statutes, regulations and federal guidance, DEA’s annual budget submissions, DEA’s 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’s processes for registrants’ initial registration, renewal, and monitoring.
To assess the extent to which DEA’s 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’s Fraud Risk Management Framework, federal statutes, and DEA policies to evaluate these functions. To identify vulnerabilities for potential fraud in DEA’s internal controls, we analyzed registrants’ 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’s (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’ (BOP)
SENTRY data, as of March 2014; (4) U.S. Marshals Service (USMS) warrant data, as of February 2014; and (5) the Federal Bureau of Investigation’s (FBI) National Sex Offender Registry (NSOR), as of February 2014. We also compared DEA registrants’ identity information to the identity information from SSA’s 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’s 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.
To identify individuals with missing, duplicative, or potentially inaccurate or invalid Social Security numbers (SSN), we analyzed registrants’ identifying information contained in CSA2 and compared this information to SSA’s 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., “Limited to Official Federal Duties Only”) and, therefore, not required to provide either an EIN or SSN. We then reviewed a nongeneralizable sample of 20 records, matching the registrant’s name and address to the registrant’s website to confirm that the individual’s registration appeared to be associated with a private employer and not a government entity.
We 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., “Sally Simpson” and “Sally Simpsen”), name cognates (e.g., “Jonathan Smith” and “Jon Smith”), name inversions (e.g., “Jon Smith” and “Smith Jon”), or additional first or last names (e.g., “Mary Lynn Smith” and “Mary Smith,” or “Jane Smith Johnson” and “Jane Johnson”). 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.
To identify whether any registrants had potentially inaccurate or invalid SSNs or dates of birth, we submitted this information for individuals for verification to SSA’s 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.
To identify whether any registrants were potentially ineligible or presented issues that may increase the risk of illicit diversion of controlled substances, we matched DEA’s 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’s full death file. To identify registrants who were reported deceased by SSA, we matched the CSA2 data to SSA’s full death file by SSN, name, and date of birth, as of February 28, 2014. The full death file contains all of SSA’s 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’s 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.
We 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’s SSN and name matched that of an individual (or an individual’s 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’s NSOR data, as of February 2014. We identified records for which the registrant’s 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.
Because we matched CSA2 data to these datasets using two or more identifiers—SSN, name, date of birth—we 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.
We assessed the reliability of DEA’s CSA2 data, SSA’s 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’s 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.
We 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.
Appendix II: Comments from the Department of Justice
Appendix III: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
DEA 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.
GAO 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.
What GAO Found
The 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.
GAO 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.
What GAO Recommends
GAO 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. |
gao_T-RCED-98-131 | gao_T-RCED-98-131_0 | Background
In 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’s 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.
In 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’s 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.
Despite 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 “Bermuda II,” 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—currently 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.
Competition 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’ 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.
Bermuda II’s 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’ 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.
European Reviews Considering a Range of Competitive Issues; U.S. Reviews Pending
The 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’s 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.
Both the European and the U.S. reviewers have access to extensive information—including confidential proprietary data—to 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.
European Commission’s Review Forthcoming
In July 1996, because of concerns about the anticompetitive effects of the alliances, the European Commission’s 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’s sales and marketing practices, such as frequent flier programs, travel agent commission overrides, corporate incentive agreements, and computer reservation system practices.
The European Commission’s 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’s Member States Advisory Committee for review. After the Advisory Committee’s 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’s College of Commissioners. Thus, the European Commission’s final decisions are not expected for several more months.
United Kingdom Awaiting European Commission’s Draft Remedies
The 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’s 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.
The 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’s decision on the proposed AA/BA alliance differs from the European Commission’s, 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’s treaties by the institutions of the Union or the member states.
U.S. Reviews Not Proceeding Until AA and BA Complete the Application Process
In 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’s and BA’s proposed code-sharing alliance with antitrust immunity unless the United States has reached an open skies agreement with the United Kingdom.
According to U.S. law, DOT is to give the Attorney General and Secretary of State “an opportunity to submit written comments about” 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.
Justice’s 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’s potential for harm.
DOT 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’s application for antitrust immunity in its code sharing with Lufthansa, TWA contended that Lufthansa’s 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’ 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.
DOT has considered, but not always completely agreed with, Justice’s 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—Chicago-Frankfurt and Washington D.C. (Dulles)-Frankfurt. DOT agreed, and “carved out” (i.e., withheld antitrust immunity from) specific airline operations in those two markets. In considering Delta’s 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.
In 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—including Justice—will have 30 business days to comment on the alliance. Interested parties and AA/BA will then have another opportunity for rebuttal comments.
According 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.
Although the AA/BA application is not complete, DOT has already proposed holding an oral hearing before a departmental “decisionmaker” 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.
We 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’s 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.
AA/BA Alliance Would Dominate, and Competition Would Decline Unless Substantial New Entry Occurred
The 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.
AA and BA currently compete with one another from six U.S. airports to Heathrow and from Dallas to London’s Gatwick airport. New York’s importance—Kennedy and Newark—is 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—Kennedy, Chicago, Boston, Miami, and Dallas—these 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.
Our 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—15 flights a day—provided 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.
In 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 “feed” traffic. As a result, DOT will need to carefully examine the unique circumstances associated with these markets.
At 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.
If 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.
In addition to increased nonstop competition, carriers could provide consumers with new one-stop options to compete with the alliance’s 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’s 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.
Air Carriers Vary on the Effort Needed to Overcome Combined AA/BA Strength
When 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.
The carriers’ 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.
Officials 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.
On 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.
Virgin 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 “very large” number of slots to make successful competition by another airline (besides American) a realistic possibility.
As 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’s 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.
If 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 “phase in” their alliance over time, in part to give other carriers the time needed to establish themselves. If this happened, new airlines’ operations should be phased in to coincide with the alliance.
Airline Sales and Marketing Practices May Further Enhance Market Dominance Over Smaller, Nonaligned, and New Entrant Carriers
According 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—which include frequent flier programs, travel agent commission overrides, multiple listings on computer reservation systems, and corporate incentive programs—may 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.
In 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’s 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:
Travel agent commission overrides encourage travel agencies to book travelers on one airline over another on the basis of factors other than price.
Frequent flier programs encourage travelers to chose one airline over another on the basis of factors other than price.
Corporate fare agreements make it more difficult for point-to-point carriers to compete for corporate business.
Bias 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.
In 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.
AA, 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’s 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’ tending to allow members to accumulate miles for activities other than flying (e.g., through car rentals or stays at hotels), while European carriers’ programs are more restrictive in scope.
Some airline officials we interviewed expressed concern that the scope of AA’s and BA’s 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’s 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.
However, United, Delta, and Northwest—each of which participates in its own global code-sharing alliance—generally 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.
Outside 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.
We 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’s practices, or BA’s evidence to the contrary.
In 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’ 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’s practices.
The 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’ 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.
In 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’s and BA’s 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.
How 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—DOT, Justice, the European Commission, and the U.K. Department of Trade and Industry—have 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.
Mr. 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.
Related GAO Products
International Aviation: Competition Issues in the U.S.-U.K. Market (GAO/T-RCED-97-103, June 4, 1997).
International Aviation: DOT’s Efforts to Promote U.S. Air Cargo Interests (GAO/RCED-97-13, Oct. 18, 1996).
Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18, 1996).
International Aviation: DOT’s Efforts to Increase U.S. Airlines’ Access to International Markets (GAO/T-RCED-96-32, Mar. 14, 1996).
International Aviation: Better Data on Code-Sharing Needed by DOT for Monitoring and Decisionmaking (GAO/T-RCED-95-170, May 24, 1995).
International Aviation: Airline Alliances Produce Benefits, but Effect on Competition Is Uncertain (GAO/RCED-95-99, Apr. 6, 1995).
International Aviation: DOT Needs More Information to Address U.S. Airlines’ Problems in Doing Business Abroad (GAO/RCED-95-24, Nov. 29, 1994).
International Aviation: New Competitive Conditions Require Changes in DOT Strategy (GAO/T-RCED-94-194, May 5, 1994).
International Aviation: Measures by European Community Could Limit U.S. Airlines’ Ability to Compete Abroad (GAO/RCED-93-64, Apr. 26, 1993).
Airline Competition: Impact of Changing Foreign Investment and Control Limits on U.S. Airlines (GAO/RCED-93-7, Dec. 9, 1992).
Airline Competition: Effects of Airline Market Concentration and Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991).
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Pursuant 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.
What GAO Found
GAO 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. |
gao_GAO-01-600T | gao_GAO-01-600T_0 | Background
Dramatic 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.
In 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—including the military’s 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.
Reports of attacks and disruptions abound. The March 2001 report of the “Computer Crime and Security Survey,” conducted by the Computer Security Institute and the Federal Bureau of Investigation’s 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’s Melissa virus, have illustrated the potential for damage that such attacks hold. A sampling of reports summarized in Daily Reports by the FBI’s National Infrastructure Protection Center during two recent weeks in March illustrates the problem further: A hacker group by the name of “PoizonB0x” 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’s 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.
Since 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—most recently in January 2001.
Weaknesses Remain Pervasive
Evaluations 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—the policies, procedures, and technical controls that apply to all or a large segment of an entity’s 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.
Weaknesses 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—much of it pertaining to individual taxpayers and beneficiaries—at risk of inappropriate disclosure.
The 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—an 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.
Most 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’s overall security posture because the audit objectives focused on the financial statements and did not include evaluations of systems supporting nonfinancial operations.
In 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.
Risks to Federal Operations, Assets, and Confidentiality Are Substantial
To 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.
The 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’s systems. The related investigation determined that the employee had made many unauthorized queries, including obtaining earnings information for members of the local business community.
Such risks, if inadequately addressed, may limit government’s 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’s (IRS) electronic filing system, noting that failure to maintain adequate security could erode public confidence in electronic filing, jeopardize the Service’s 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’s corrective actions.
I would now like to describe the risks associated with specific recent audit findings at agencies of particular interest to this subcommittee.
Information technology is essential to the Department of Energy’s (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’ ability to do scientific research for up to a full week on at least two occasions. In February 2001, the DOE’s 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.
In February, the Department of Health and Human Services’ 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’s 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’s Division of Financial Operations.
The 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’s 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’s 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’s mission-related and financial operations were riddled with security weaknesses.
In addition, EPA’s records showed that its vulnerabilities had been exploited by both external and internal sources, as illustrated by the following examples.
In 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’s computers. The problem report stated that vendor- supplied software updates were available to correct the vulnerability, but EPA had not installed them.
In July 1999, a chat room was set up on a network server at one of EPA’s regional financial management centers for hackers to post notes and, in effect, conduct on-line electronic conversations.
In February 1999, a sophisticated penetration affected three of EPA’s computers. EPA was unaware of this penetration until notified by the FBI.
In June 1999, an intruder penetrated an Internet web server at EPA’s 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—synonymous with a commonly used denial-of-service hacker technique—affected computers at one of EPA’s field offices. In one case, an Internet user significantly slowed EPA’s 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.
In September 1999, an individual gained access to an EPA computer and altered the computer’s 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’s process for applying changes in personnel status to computer accounts.
Of particular concern was that many of the most serious weaknesses we identified—those related to inadequate protection from intrusions through the Internet and poor security planning—had been previously reported to EPA management in 1997 by EPA’s inspector general. The negative effects of such weaknesses are illustrated by EPA’s 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’s computer systems and the operations that rely on them were highly vulnerable to tampering, disruption, and misuse from both internal and external sources.
EPA 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’ Financial Integrity Act of 1982.
The 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 ‘s inspector general reported significant computer security weaknesses in several of the department’s bureaus and, last month, reported multiple material information security weaknesses affecting the department’s 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.
While Nature of Risk Varies, Control Weaknesses Across Agencies Are Strikingly Similar
The 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’s ability to ensure the integrity, availability, and appropriate confidentiality of its computerized operations—and 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.
Security Program Management
Each 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.
Despite 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.
With 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.
Access Controls
Access 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—such as gates and guards—as 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.
For 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’s activities associated with specific systems or files and to keep records of individual users’ 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’ responsibilities and related access needs.
Significant 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’ accounts had not been deactivated.
Users were not required to periodically change their passwords.
Managers 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.
Use 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’ keying in passwords and then use those passwords to obtain “high level” system administration privileges.
Software 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.
To 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—with agency cooperation—to 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.
Application Software Development and Change Controls
Application 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.
Such 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.
Weaknesses 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.
Implementation 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 “locally developed” (unauthorized) software programs was prevented or detected.
Agencies’ policies and procedures frequently did not address the maintenance and protection of program libraries.
Segregation of Duties
Segregation 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.
Although 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’s policies or that included malicious code.
Controls 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.
Segregation 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.
Segregation 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.
Operating System Controls
Operating 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.
Controls 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.
The 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.
Weaknesses 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.
Further, pervasive vulnerabilities in network configuration exposed agency systems to attack. These vulnerabilities stemmed from agencies’ 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.
Service Continuity
Finally, 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.
Losing the capability to process, retrieve, and protect information maintained electronically can significantly affect an agency’s 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.
Service 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.
Service 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.
Disaster recovery plans were not fully tested to identify their weaknesses.
At 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.
Improved Security Program Management Is Essential
The 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’s 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.
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. 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.
In 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’s highly networked computing environments. This cycle of risk management activities is depicted below.
This 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.
While 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.
New Legal Requirements Provide Basis for Improved Management and Oversight
Due 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.
Improvement Efforts Are Underway, but Many Challenges Remain
During 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.
While 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’ abilities to implement effective information security.
First, 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.
Second, 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.
However, 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.
Third, 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. | Why GAO Did This Study
This testimony discusses GAO's analysis of security audits at federal agencies.
What GAO Found
The 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. |
gao_GAO-16-793 | gao_GAO-16-793_0 | Background
Federal Employees’ Compensation Act Program
The Federal Employees’ Compensation Act (FECA) and its implementing regulations provide compensation for federal civilian employees who suffer disabilities resulting from work-related injuries or diseases. DOL’s Office of Workers’ 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—including cash and medical benefits—up front and then charges agencies a “chargeback” for the compensation provided to their employees. Employing agencies subsequently reimburse DOL each “chargeback year” from their next annual appropriation. Table 1 provides an overview of the types of FECA benefits.
DOL 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’s 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’s 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.
Total-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.
There 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.
DOD and the Military Department Roles in the FECA Program
Although 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’ 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.
At DOD, the Defense Civilian Personnel Advisory Service is the central DOD entity responsible for civilian human resource management, including workers’ 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.
The military departments each oversee their FECA claimants. The Department of the Air Force, for example, has a workers’ 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—which includes the Marine Corps—oversees 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’s Civilian Personnel Advisory Center has an injury compensation specialist who reports to the Civilian Human Resources Agency.
In 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.
Information Systems to Process Claims
FECA claims are processed by DOL and employing agencies like DOD using automated systems, including the Employees’ 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.
The Defense Civilian Personnel Advisory Service and military departments also use the Defense Injury and Unemployment Compensation System—a DOD-wide data application used as the internal source for department-related FECA information. This system gives DOD injury compensation specialists—the DOD counterparts that coordinate with DOL claims examiners—the 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.
Returning Employees to Work under FECA
FECA, as with workers’ 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—not all of which involved a significant period of disability—remained 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.
While there is no universal agreement on the optimal level of workers’ 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’s 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.
An 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—whether 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.
In 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.
Our 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’ 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.
For 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.
DOD Represented 17 Percent of All Claimants Government-Wide in 2015, and Total- Disability DOD Beneficiaries Were Older Than Non-DOD Beneficiaries
DOD Accounted for about 17 Percent of All FECA Claimants, and DOD Beneficiaries Received Various Types and Levels of Benefits
In 2015, DOD’s 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’s 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—approximately 132,000.
FECA claimants were spread across DOD, and the military departments—which represent nearly 80 percent of DOD’s civilian workforce—had the vast majority of claimants. Specifically, the Navy and the Army each had about one-third of all of DOD’s FECA claimants in 2015 (see fig. 3), while the other, nonmilitary DOD entities—which include the Office of the Secretary of Defense and other DOD organizations—had the smallest total percentage of FECA claimants (11 percent).
DOD’s beneficiaries receive various types of benefits—such 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.
About 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.
In 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).
Total-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’s total-disability population and 48 percent of DOD’s partial-disability population.
Of DOD’s total-disability beneficiaries, the vast majority—approximately 85 percent—received 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.
The distribution of cash benefits for DOD’s 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.
DOD Total-Disability Beneficiaries Were Generally Injured Longer Ago and Constituted an Older Population Than Non-DOD Beneficiaries
A 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.
While 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.
In 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.
DOD Officials We Interviewed Reported Claims Data Are Generally Available to Process FECA Claims, but Said They Experience Challenges Regarding Process Timelines
DOD Officials Report Generally Sufficient Access to FECA Claims Data and Information Necessary to Carry Out Responsibilities
Most 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.
ECOMP is DOL’s 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’s 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’s 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’ 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.
Defense 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.
DOD Does Not Internally Monitor Processing Timelines
The 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.
Employing 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’s 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’s physician, and other medical referrals as necessary. Second opinions may be requested by DOL to obtain an additional medical evaluation to clarify the claimant’s 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’s 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.
Defense Civilian Personnel Advisory Service officials stated that they understand it takes time to make decisions about claims, especially given the claims examiners’ 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—between the DOD injury compensation specialist and the DOL claims examiner—so the reasons for the delay may not be elevated to higher levels, or monitored across the department, if they are ultimately resolved.
In 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’s control, such as the scheduling of appointments and submission of medical documentation, and because every claim has its own set of facts and circumstances.
DOL 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.
One of the ways DOD injury claims specialists seek information on suitability determinations and second-opinion requests, among other claims-related information, is through DOL’s 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’s consistency and timeliness in responding to agency requests using DOL’s 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’s 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—which allows adding additional notes to previous entries into the system—to 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.
All of the DOD officials we spoke with—12 injury compensation specialists and liaisons, as well as each of the military departments’ FECA program offices, and FECA management at the Defense Civilian Personnel Advisory Service—highlighted difficulties with the communication timelines between DOD and DOL. However, while the military departments’ 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.
DOL 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.
Standards 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—such as response times between DOD and DOL—are 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–level 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.
Based 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.
Conclusions
In 2015, DOD employees constituted nearly one-fifth of all FECA beneficiaries across the federal government—the 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’ 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’s FECA process. However, without monitoring the timelines associated with injury compensation specialists’ processing of FECA claims—particularly the significant claims-management actions over which DOL has approving authority—the 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.
Recommendation for Executive Action
To 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.
Agency Comments
We 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.
We 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.
If 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.
Appendix I: Age of Total-Disability Beneficiaries and Full Social Security Retirement Age
In 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.
Further, 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.
According 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—the period from July 1, 2014, through June 30, 2015—so no longer-term trends or conclusions may be drawn from these data. Further, DOL’s 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.
Appendix II: Comments from the Department of Defense
Appendix III: GAO Contacts and Staff Acknowledgments
GAO Contacts
Staff Acknowledgments
In addition to the above contacts, Vincent Balloon, Assistant Director; Nagla’a 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.
Related GAO Products
Disability Insurance: Actions Needed to Help Prevent Potential Overpayments to Individuals Receiving Concurrent Federal Workers’ Compensation. GAO-15-531. Washington, D.C.: July 8, 2015.
Federal Employees’ Compensation Act: Analysis of Benefits Associated with Proposed Program Changes. GAO-15-604T. Washington, D.C.: May 20, 2015.
Federal Employees’ Compensation Act: Effects of Proposed Changes on Partial Disability Beneficiaries Depend on Employment After Injury. GAO-13-143R. Washington, D.C.: December 7, 2012.
Federal Employees’ Compensation Act: Analysis of Proposed Changes on USPS Beneficiaries. GAO-13-142R. Washington, D.C.: November 26, 2012.
Federal Employees’ Compensation Act: Analysis of Proposed Program Changes. GAO-13-108. Washington, D.C.: November 26, 2012.
Federal Employees’ Compensation Act: Status of Previously Identified Management Challenges.GAO-12-508R. Washington, D.C.: April 27, 2012.
Federal Employees’ Compensation Act: Benefits for Retirement-Age Beneficiaries. GAO-12-309R. Washington, D.C.: February 6, 2012.
Federal Workers’ Compensation: Questions to Consider in Changing Benefits for Older Beneficiaries. GAO-11-854T. Washington, D.C.: July 26, 2011. | Why GAO Did This Study
DOD employs more than 720,000 civilians—approximately 35 percent of the federal civilian workforce—in 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.
Senate 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.
GAO 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—including a nongeneralizable sample of DOD program officials.
What GAO Found
The 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—including 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).
DOD 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.
What GAO Recommends
GAO 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. |
gao_GAO-10-80 | gao_GAO-10-80_0 | Background
Both NTIA’s BTOP and RUS’s 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.
To 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—long-distance, high-speed transmission paths for transporting massive quantities of data—and last-mile projects. NTIA is also funding public computer centers and sustainable adoption projects.
Both 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— 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 “community- oriented connectivity” basis to currently unserved rural areas for the purpose of fostering economic growth and delivering enhanced health care, education, and public safety services.
To 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.
NTIA and RUS Have Taken Steps to Address Challenges, Including Scheduling and Staffing, Associated With Evaluating Applications and Awarding Funds; However, Some Risks Remain
NTIA 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’s proposed service area. While these steps address some challenges, the agencies’ 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.
NTIA and RUS Face Scheduling, Staffing, and Data Challenges in the Evaluation of Applications and Awarding of Funds
Scheduling 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.
The 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’s 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’s Community Connect program’s average annual appropriation was $12 million and its Broadband Access Loan Program’s 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’s l average appropriation for NTIA’s Technology Opportunities Program. Technology Opportunities Program.
NTIA 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.
Staffing 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’s 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’s 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.
Data 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’s 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.
NTIA and RUS Have Taken Steps to Address Challenges in Evaluating Applications and Awarding Funds
Two-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—due 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.
Use 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—broadband infrastructure, public computer centers, and sustainable adoption—and 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.
Publish 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—either unserved or underserved—in 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’s 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.
The Agencies’ Remaining Schedule May Pose Risks to the Review of Applications
During 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.
Because 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.
Based 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.
Depending 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 “lessons learned.” 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.
Compressed 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’s 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.
Continued 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.
NTIA and RUS Face Staffing Challenges in Overseeing Funded Projects, and Despite Steps Taken, Several Risks to Project Oversight Remain
NTIA 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.
A Large Number of Projects to Oversee Creates Staffing Challenges
NTIA 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—or 2,000 projects in total—before 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—or 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.
In 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’ prior grant programs. Based on NTIA’s estimated funding authority of $4.35 billion for BTOP grants and RUS’s 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’s 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.
Because 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’s 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.
NTIA and RUS Are Addressing Project Oversight Challenges by Procuring Contractor Services and Requiring Funding Recipient Reports and Audits
Contractor 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’ 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’s 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.
In 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’s 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’s 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’s business and community development loan programs, and this workforce could be used for project monitoring activities if there was an acute need.
Recipient 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.
BTOP-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’s 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.
BIP-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’s measure for “substantially complete.” 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.
NTIA 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’s risk assessment and monitoring processes—and 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’s implementing guidance in OMB Circular No. A-133. OMB’s 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’s existing broadband grant and loan programs. However, RUS’s 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.
Several Risks to Project Oversight Remain
Lack 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.
As 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 “without 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.” 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’s 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.
Lack 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’s 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.
NTIA 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.
RUS 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’s 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’s 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.
Undefined 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.
Conclusions
The 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.
The 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.
In 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.
Due 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.
Finally, 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’s 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’s oversight of its Recovery Act funding. For example, NTIA would lack independent auditors’ assurances that its funding recipients have important internal controls in place to fully track expenditures and guard against fraud, waste, and abuse.
Recommendations for Executive Action
We 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.
We 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.
Agency Comments and Our Evaluation
We 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’s 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’s 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.
In 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’s 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’s 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’s full comments appear in appendix II.
We 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.
If 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.
Appendix I: Stakeholder Organizations or Individuals Interviewed
Appendix II: Comments from the Department of Agriculture
Appendix III: Comments from the Department of Commerce
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
Access 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.
What GAO Found
NTIA 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. |
crs_R40577 | crs_R40577_0 | 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.
USDA'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.
Food 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.
USDA Statutory Authorities Related to Farms and Farm Activities
Authority to Protect Animal and Plant Health
The 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.
The 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.
Animal Health Protection Act
Congress 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.
Most 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.
The 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.
Plant Protection Act
The 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.
The 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.
In 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."
Authority to Enforce Marketing Orders and Implement Marketing Programs
Although 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.
Agricultural Marketing Agreement Act of 1937
The 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.
Commodities 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."
USDA 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.
Agricultural Marketing Act of 1946
The 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.
USDA 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.
USDA Regulation of On-Farm Activity
USDA'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.
Although 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.
The 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."
One 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.
The 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. | 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—on 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.
The 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. |
gao_GAO-04-795 | gao_GAO-04-795_0 | Background
Our nation’s 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’s 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’s 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’s Immigration and Customs Enforcement assumes responsibility for enforcing our immigration laws, including ensuring that foreign nationals are eligible to remain in the United States.
According to State officials, most visa revocations on terrorism grounds begin with information from the TIPOFF database, the U.S. government’s 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’s 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.
State 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’s 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’ visas. It also sends Consular Affairs an information package containing a summary of the derogatory information that led TSC to the recommendation to revoke.
After 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’s 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’ 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.
Upon 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.
FBI’s Role in Border Security
While FBI investigators do not play a formal role in the visa revocation process, they play a key role in the U.S. government’s 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’s 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.
Initial Actions Taken to Address Weaknesses Were Inadequate
Following 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’s 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’s and CBP’s initial actions, weaknesses persisted in the visa revocation process.
State Developed Initial Procedures in 2003, but DHS Did Not
After 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’s 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.
DHS did not develop an intra-agency policy regarding responsibilities for handling visa revocation cases. However, following our June 2003 report, DHS’s 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’s Immigration and Customs Enforcement for investigation.
Review of Revocation Process Identified Several Weaknesses
Our review of visas revoked based on terrorism concerns from October through December 2003 indicated that, despite State’s and CBP’s 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.)
We also found instances of delays in State’s notification to DHS. In addition, conflicting records of how many individuals’ 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.
Our 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.
Our 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.
State’s Lookouts Were Not Always Timely
Based 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’ visas have been revoked and should not be admitted to the United States. State’s 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.
Delays Occurred in Revoking Visas
Our review of 35 visas revoked based on terrorism concerns also showed that delays occurred in Consular Affairs’ 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’ 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’s visa. According to this official, Consular Affairs was deliberating whether the individual’s 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.
State’s Notifications to DHS Were Not Always Timely
We 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.
Agencies Reported Conflicting Information on Visa Revocations
State, 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.
Instances 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’ 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.
In our June 2003 report, we noted that State’s 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.
CBP and ICE Disagreed on Which Individuals May Have Been in the Country
Our 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—one 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.
In 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’s notification, it performed its own search of immigration records based on State’s 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.
These disagreements are due in part to the lack of clearly defined responsibilities for each of the DHS components. Because of DHS’s lack of an agencywide written policy regarding visa revocations, its component units’ procedures are sometimes duplicative. For example, CBP’s 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.
An 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’s primary responsibility is to post lookouts to prevent individuals from entering the country. ICE’s 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’s efforts to determine if individuals may be in the country.
ICE May Not Have Been Informed of Aliens with Revoked Visas Who May Be in the Country
Once 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’s 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.
ICE Officials Are Generally Unaware of Basis for Individual Revocations
While 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.
As 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’s 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.
ICE Initiated Field Investigations More Than 2 Months after Receiving Notification of Visa Revocation
Our 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.
ICE 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 “code orange” (high) during the period of our review. On December 21, 2003, DHS raised the terror threat level from “code yellow” (elevated) to “code orange” for 19 days. In June, ICE officials told us they were considering revising their policies to ensure that all future investigations are initiated promptly.
DHS Investigated Individuals with Visas Revoked on Terrorism Grounds
Separate 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.
Existing Law Does Not Expressly Provide for the Removal of Aliens Based Solely on Visa Revocations
Revocation of a visa is not explicitly a stated grounds for removal under the Immigration and Nationality Act. State’s 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’s 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’s 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’s 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.
Recent Actions Taken to Address Identified Weaknesses in the Visa Revocation Process
Since 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.
State Revised Its Procedures and Formalized Its System for Tracking Cases
In 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’s 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.
CBP Reviewed Past Revocations to Provide Additional Information to ICE
Officials 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.
In 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’ visas were revoked based on terrorism concerns from October through December 2003.
ICE Assigned Staff to CBP and Developed Written Standard Operating Procedures
In 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’s 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.
State and DHS Took Steps to Address Legal and Policy Issues
In 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’s 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.
TSC’s Efforts to Improve the Visa Revocation Process
Since 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’ 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.
TSC 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’s 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.
In 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.
Additional Actions Are Needed to Improve the Visa Revocation Process
Despite 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’s 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’s 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’ policies and procedures expect of them. Because agency officials do not always recognize what other agencies’ 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.
State’s and DHS’s written procedures also lack specific time frames for completing individual steps in the process. For instance, State’s procedures dated May 20, 2004 lack guidance on how quickly Consular Affairs officials should act on recommendations from TSC to revoke individuals’ 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’s 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.
State’s and DHS’s 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’s 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.
Conclusions
Our 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’s 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.
Recommendations for Executive Action
To 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.
Agency Comments and Our Evaluation
We provided a draft of this report to the Departments of Homeland Security, State, and Justice for their comments.
The 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.
The 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.
DHS and State also provided technical comments, which we have incorporated where appropriate.
We 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.
Appendix I: Scope and Methodology
The 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’s (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).
To assess the process for revoking visas on terrorism grounds, we examined data and records provided by State’s 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’s 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.
We used the Visa Office’s 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’s Consular Consolidated Database, which provided us with the individuals’ 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).
We met with officials from TSC and State’s 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.
To 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.
To 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’s 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.
We 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’s Visa Revocation Case Tracking Spreadsheet.
To determine which individuals with revoked visas might be in the country, we examined CBP’s 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’s 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.
We 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.
To 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’s certificate of revocation and DHS’s 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.
We were briefed by FBI officials regarding their efforts to investigate suspected terrorists in the TIPOFF database. However, we did not review these efforts.
We conducted our work from January through June 2004 in accordance with generally accepted government auditing standards.
Appendix II: Comments from the Department of Homeland Security
The following are GAO’s comments on the Department of Homeland Security’s letter dated June 17, 2004.
GAO Comments
1. 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’s 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.
Appendix III: Comments from the Department of State
The following are GAO’s comments on the Department of State’s letter dated June 23, 2004.
GAO Comments
1. 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’s 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’s Office of Visa Services, including delays in State’s decisions to revoke three individuals’ 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’s 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’ 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’ 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.
Given 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’s and DHS’s 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’s and DHS’s 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. | Why GAO Did This Study
The 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.
What GAO Found
GAO'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. |
gao_GAO-12-473T | gao_GAO-12-473T_0 | Background
DOE 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—nearly 40 percent of DOE’s total budget—NNSA 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.
Under DOE’s 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’s nuclear defense. DOE’s relationship with these entities has been formalized over the years through its M&O contracts—agreements that give DOE’s contractors unique responsibility to carry out major portions of DOE’s missions and apply their scientific, technical, and management expertise.
Currently, 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’s NNSA sites have operated under DOE’s 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’s sites, conduct day-to-day oversight of the M&O contractors, and evaluate the contractors’ performance in carrying out the sites’ missions.
NNSA Does Not Have Reliable Enterprise- Wide Management Information on Program Budgets and Costs
As we have reported since 1999, NNSA has not had reliable enterprise- wide budget and cost data, which potentially increases risk to NNSA’s 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—Title 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’s 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.
In June 2010, we reported that NNSA could not identify the total costs to operate and maintain essential weapons activities’ 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.
We 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.
We 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.
NNSA, 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—quantitative tools that couple data from each site with the functions of the enterprise—to 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’s development of an Enterprise Program Analysis Tool that should give NNSA greater insight into its sites’ 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.
NNSA Needs to Make Further Improvements to Its Management of Major Projects and Contracts
A 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’s 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’s construction did not plan for the technically complex assembly and installation of the facility’s 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—from $1.6 billion to over $2 billion—and 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.
We have issued several reports on the technical issues, cost increases, and schedule delays associated with NNSA’s 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— the manufacture of a key material known as Fogbank, which NNSA did not have the knowledge, expertise, or facilities to manufacture.
In October 2009, we reported on shortcomings in NNSA’s 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’s 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.
We reported in March 2010 that NNSA’s 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’s 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.
GAO, Nuclear Weapons: National Nuclear Security Administration’s Plans for Its Uranium Processing Facility Should Better Reflect Funding Estimates and Technology Readiness, GAO-11-103 (Washington, D.C.: Nov. 19, 2010).
Senate Committee on Appropriations. We plan to issue our report next month.
As 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—that is, the people and other resources—to 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.
NNSA’s Oversight of Safety and Security in the Nuclear Security Enterprise Has Been Questioned
Another underlying reason for the creation of NNSA was a series of security issues at the national laboratories. Work carried out at NNSA’s 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’s 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.
In numerous reports, we have expressed concerns about NNSA’s 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’s 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.
We reported in January 2008 on a number of long-standing nuclear and worker safety concerns at Los Alamos.included, among other things, the laboratory’s 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.
In October 2008, we reported that DOE’s Office of Health, Safety, and Security—which, among other things, develops, oversees, and helps enforce nuclear safety policies at DOE and NNSA sites—fell 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.
With 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.
In March 2009, we reported about numerous and wide-ranging security deficiencies at Livermore, particularly in the ability of Livermore’s protective force to assure the protection of special nuclear material and the laboratory’s protection and control of classified matter. Livermore’s 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’s contractor self-assessment program and the NNSA Livermore Site Office’s oversight of the contractor contributed to these security deficiencies at the laboratory. According to one DOE official, both programs were “broken” and missed even the “low-hanging fruit.” 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.
We 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’ contingency and disaster recovery planning and testing were comprehensive and effective. In particular, NNSA’s component organizations, including the Office of the Chief Information Officer, were unclear about their roles and responsibilities for providing oversight in the laboratories’ implementation of contingency and disaster recovery planning.
In March 2010, the Deputy Secretary of Energy announced a new effort— the 2010 Safety and Security Reform effort—to revise DOE’s safety and security directives and reform its oversight approach to “provide contractors with the flexibility to tailor and implement safety and security programs without excessive federal oversight or overly prescriptive departmental requirements.” We are currently reviewing the reform of DOE’s 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.
Concluding Observations
NNSA 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’s 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.
With regard to the concerns that DOE’s and NNSA’s oversight of the laboratories’ activities have been excessive and that safety and security requirements are overly prescriptive and burdensome, we agree that excessive oversight and micromanagement of contractors’ 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—often involving extremely hazardous materials, such as plutonium and highly enriched uranium, that must be stored under high security to protect them from theft—careful 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—ensuring 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.
Chairman 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.
GAO Contact and Staff Acknowledgments
If 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.
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Why GAO Did This Study
The National Nuclear Security Administration (NNSA), a separately organized agency within the Department of Energy (DOE), is responsible for managing its contractors nuclear weapon- and nonproliferation-related national security activities in laboratories and other facilities, collectively known as the nuclear security enterprise. GAO designated DOEs 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 cost and schedule overruns to inadequate oversight of safety and security at NNSAs sites. Laboratory and other officials have raised concerns that federal oversight of the laboratories 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.
This testimony addresses (1) NNSAs ability to produce budget and cost data necessary to make informed management decisions, (2) improving NNSAs project and contract management, and (3) DOEs and NNSAs safety and security oversight. It is based on prior GAO reports issued from August 2000 to January 2012.
DOE 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 DOEs and NNSAs implementation of these recommendations.
What GAO Found
NNSA 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 NNSAs 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.
For 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 NNSAs 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. NNSAs construction projects have also experienced cost overruns. For example, GAO reported that the cost to construct a modern Uranium Processing Facility at NNSAs 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 NNSAs record of weak management of major projects, GAO believes careful federal oversight of NNSAs modernization of the nuclear security enterprise will be critical to ensure that resources are spent in as an effective and efficient manner as possible.
NNSAs oversight of safety and security in the nuclear security enterprise has also been questioned. As work carried out at NNSAs 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 NNSAs 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 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 activities are not an efficient use of scarce federal resources, but that NNSAs problems are not caused by excessive oversight but instead result from ineffective departmental oversight. |
crs_RL34031 | crs_RL34031_0 | Most Recent Developments
The 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.
From 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.
Prior 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.
H.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.
Introduction to the Legislative Branch Appropriations Bill
Since 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.
Title 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.
On 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."
Changes in Structure of Legislative Branch Appropriations Effective in FY2003
Prior 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.
Title 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.
Activities and Programs Related to the Legislative Branch but Not Funded in the Legislative Branch Appropriations Bill
In 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.
Permanent 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.
For 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.
Reestablishment of House Subcommittee on Legislative Branch for the 110th Congress
Prior 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.
Status of FY2008 Appropriations
Action on the FY2008 Legislative Branch Appropriations Bill
Submission of FY2008 Budget Request on February 5, 2007
The 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.
Congressional Caps on FY2008 Legislative Branch Discretionary Funds
As 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.
Senate and House Hearings on FY2008 Budget
The 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.
The 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.
House Appropriations Committee Markup and Report (FY2008)
The 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.
House Passage of the FY2008 Bill (H.R. 2771)
On 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
an 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.
During 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.
The 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.
The House voted against the third amendment in a roll call vote of 177-231.
Senate Markup and Report of FY2008 Bill (S. 1686)
The 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.
Both 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.
No 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 ).
Action on FY2007 Supplemental Appropriations
While 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.
The 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.
A 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—205. 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.
FY2008 Legislative Branch Funding Issues
Capitol Complex Security—U.S. Capitol Police
Funding Issues
The 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.
Appropriations for the police are contained in two accounts—a 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.
The 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.
The 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.
Administrative Issues
Both 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.
Architect of the Capitol
The 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.
Overall Funding Levels
Operations 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.
The 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.
Capitol Visitor Center (CVC)24
The 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.
Capitol Power Plant Utility Tunnels
The 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.
Steps 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.
Following 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.
Administrative Provisions
The 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.
The 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. 1679) 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.
House of Representatives
Overall Funding
The 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.
House Committee Funding
Funding for House committees—for which $162.4 million was provided in the Consolidated Appropriations Act—is 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. 2771.
The 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.
The 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.
Members' Representational Allowance
The 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.
Senate
Overall Funding
The 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%.
Senate Committee Funding
Appropriations for Senate committees are contained in two accounts:
the 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%).
Senators' Official Personnel and Office Expense Account
The 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%).
Support Agency Funding
Congressional Budget Office (CBO)
CBO 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.
The 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.
Highlights of House and Senate Hearings on FY2008 Budget of the CBO
CBO 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."
Library of Congress (LOC)
The 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.
The 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.
The 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.
FY2008 new budget authorities for the Library's accounts are
salaries and expenses—The 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—The 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—The 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—The 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.
The 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.
An 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.
Highlights of the House and Senate Hearings on FY2008 Budget of the LOC
The 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.
Congressional Research Service (CRS)
CRS works exclusively for Members and committees of Congress to support their legislative and oversight functions by providing nonpartisan and confidential research and policy analysis.
The 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.
Government Accountability Office (GAO)
GAO 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.
The 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."
Highlights of House and Senate Hearings on FY2008 Budget of the GAO
The 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.
Government Printing Office (GPO)
The 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.
GPO'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
congressional printing and binding—The 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)—The 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—The 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.
The 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.
The 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.
GPO 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.
Additional Provisions
The 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.
Highlights of House and Senate Hearings on FY2008 Budget of the GPO
Acting Public Printer William H. Turri, in his written testimony, discussed recent efforts to transform GPO's operations for the digital age.
Other Funding
Office of Compliance
The 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.
The 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.
The 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.
The 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.
The 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.
Open World Leadership Center
The 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.
Established 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.
Following 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.
The Senate-reported bill had provided $13.5 million in new budget authority for Open World.
The 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.
Open 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.
John B. Stennis Center for Public Service Training and Development
The 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.
For Additional Reading
CRS Report
CRS Report RL33379, Legislative Branch: FY2007 Appropriations , by [author name scrubbed] and [author name scrubbed].
CRS Report RL32819, Legislative Branch: FY2006 Appropriations , by [author name scrubbed].
Selected Websites
These sites contain information on the FY2007 and FY2008 legislative branch appropriations requests and legislation, and the appropriations process.
House Committee on Appropriations http://appropriations.house.gov/
Senate Committee on Appropriations http://appropriations.senate.gov/
CRS Appropriations Products Guide http://www.crs.gov/products/appropriations/apppage.shtml
Congressional Budget Office http://www.cbo.gov
Government Accountability Office http://www.gao.gov
Office of Management & Budget http://www.whitehouse.gov/omb/ | 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.
Legislative 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.
The 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.
By 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.
Among issues that were considered during discussions on the FY2008 budget are the following:
completion 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.
This report will be updated to reflect major congressional action. |
crs_RS21473 | crs_RS21473_0 | The Taepo Dong Program
The 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.
The 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.
Potential Configurations and Ranges
In order to strike targets from North Korea, a North Korean missile would need to achieve the following ranges:
Within 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.
Until 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.
In 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.
In 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.
North Korea's Military Spending25
Some 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."
North 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.
Medium or Intermediate Range Missiles
Various 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.
The 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.
In 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.
Land-Based Version 36
The 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—2.4m longer than the R-27—and, 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.
The 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.
Sea-Based Version
The 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.
In 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.
North 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.
Security Implications
DPRK 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. | 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]. |
crs_RS21127 | crs_RS21127_0 | Introduction
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. 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.
Overview of Federal Statutes Related to Insider Trading
Securities Act of 1933
The 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.
Certain 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.
Securities Exchange Act of 1934
The 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—information 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.
Failure 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.
One 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.
To 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.
Section 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:
It 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 . . .
(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. . . .
Rule 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:
It 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,
(a) To employ any device, scheme, or artifice to defraud,
(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
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
Insider Trading Sanctions Act of 1984
According to the House report on the bill, the Insider Trading Sanctions Act of 1984 was enacted because:
Insider 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.
"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.
The 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.
Insider Trading and Securities Fraud Enforcement Act of 1988
After 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.
Stop Trading on Congressional Knowledge (STOCK) Act of 2012
The 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.
The STOCK Act also has provisions concerning financial disclosure reporting requirements for legislative and executive branch officials.
Examples of Penalties for Insider Trading
There 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.
Selected Regulations
As 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.
Rule 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:
[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.
Various 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.
Rule 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.
Regulation 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.
Selected Decisions Illustrating the Use of Section 10(b) and Rule 10b-5 to Prosecute Insider Trading Violations
There 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.
Strong v. Repide
Although 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."
In the Matter of Cady Roberts & Co.
In 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.
The 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:
Analytically, 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.
The 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:
[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.
Thus, 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.
Securities and Exchange Commission v. Texas Gulf Sulphur
Securities 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:
[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.
Chiarella v. United States
The 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.
The 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.
Dirks v. Securities and Exchange Commission
Dirks 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.
On 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.
Carpenter v. United States
Seven 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.
The 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.
The 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.
In 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.
United States v. O'Hagan
Ten 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.
The 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.
In 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:
[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.
United States v. Newman
A 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.
Salman v. United States
As 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.
On 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.
In 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—and thus a breach of the tipper's duty—where the tipper receives something of value in exchange for the tip or 'makes a gift of confidential information to a trading relative or friend.'"
According 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.
Congressional Interest in Insider Trading
No 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.
Two 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.
H.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.
H.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.
S. 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.
The 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. | 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—directors, 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.
There 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.
No 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. |
gao_GAO-04-363 | gao_GAO-04-363_0 | Background
Medicare 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.
Many low-income Medicare beneficiaries who cannot afford to pay Medicare’s cost-sharing requirements receive assistance from Medicaid. For Medicare beneficiaries qualifying for full Medicaid benefits, state Medicaid programs pay for Medicare’s 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’s 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.
To assist low-income Medicare beneficiaries with their premium and cost- sharing obligations, Congress established several Medicare savings programs—the QMB, SLMB, QI, and QDWI programs. Under these programs, state Medicaid programs pay enrolled beneficiaries’ 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.
In 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 “application model,” 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 “peer assistance model,” 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—ranging from an additional 7 enrollees per 1,000 letters to 26 enrollees per 1,000 letters—with the application model recording the highest enrollment rate and peer assistance recording the lowest.
In 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.
In addition to SSA’s 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’s 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.
In 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.
SSA Is Conducting an Annual Outreach Effort Targeted to Low-Income Medicare Beneficiaries
In 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’s or supplement SSA’s outreach efforts.
For 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’s income eligibility ceiling.
The 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.
Medicare beneficiaries who had sources of income other than Social Security—such as income from employment and public and private pensions—and whose incomes were above the programs’ eligibility thresholds were selected nonetheless to be sent the SSA outreach letter because SSA’s data systems do not collect information on these income sources. In addition, SSA’s records do not contain information about beneficiaries’ private assets, making it impossible for SSA to identify whether letter recipients had assets within their states’ Medicare savings programs’ eligibility limits—typically $4,000 for an individual and $6,000 for couples.
In 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.
In 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’s name, and the basis for Medicare entitlement of each letter recipient. SSA is required to provide updated data to the states each year.
For 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.
In 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.
Medicare Savings Program Enrollment Increased by More than 74,000 Beneficiaries Following the 2002 SSA Mailing
We estimate that SSA’s 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’s 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.
More than 74,000 Additional Beneficiaries Enrolled in Medicare Savings Programs Following SSA’s 2002 Mailing
On the basis of our analysis of SSA’s 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—a 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’s enrollment in Medicare savings programs was affected following SSA’s mailing.
As shown in figure 1, by August 2002—3 months after the initial letters were sent in May 2002—the 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.
As 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.
Nationwide, CMS data showed that Medicare savings programs experienced an overall net increase in enrollment of 5.9 percent (341,069 individuals) from May 2002—the start of SSA’s mailing—to 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’s nationwide mailings. (See table 4.) These data suggest that SSA’s mailing helped to increase enrollment at a greater annual rate than in earlier years.
Certain States and Demographic Groups Had Higher Enrollment Rates Following SSA’s Outreach
Across the United States, letter recipients residing in the southern states had a 0.6 percent additional increase in enrollment following SSA’s 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.
Certain 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’s outreach. Also, minority beneficiaries, which based on SSA’s 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.
Enrollment Increases Varied among Selected States We Reviewed, with Several Reporting Increased Calls and Applications Concurrent with SSA Mailing
The percentage of additional letter recipients newly enrolling in Medicare savings programs following SSA’s 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.
SSA Outreach Efforts Had Varying Effects on Enrollment in Selected States
Among the states we reviewed, SSA’s 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’s 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.)
The 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’s ability to handle increased phone calls and applications, and a state’s 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’s phone number was discontinued and calls were redirected to CMS’s nationwide 1-800- Medicare number. California’s lower enrollment could also result from its eligibility requirements for SSI. For example, in a prior demonstration, SSA’s 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.
States Reported Increased Interest in Medicare Savings Programs Concurrent with SSA and States’ Outreach Efforts
States 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’ 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.
Concurrent with SSA’s 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 “How To Protect Your Health and Money,” which included information about the Medicare savings programs, and conducted a “Senior Day” 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.
Of 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’s own data system to assess the number of applications authorized, rejected, or denied as a result of the SSA mailing.
Agency and State Comments
We 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’s 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.
While we did not examine the effects of SSA’s 2003 mailing, Louisiana Medicaid officials indicated that, in comparison to the 2002 SSA mailing, there was little increase in call volume following SSA’s 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’s 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’s 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.
We 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’s Web site at http://www.gao.gov.
Please 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.
Appendix I: Methodology
To 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.
To determine how enrollment changed following SSA’s outreach, we analyzed records from SSA’s Master Beneficiary Record (MBR)—a database that contains the administrative records of Social Security beneficiaries, including payments for Medicare premiums—and CMS’s 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’ 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’s 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.
In 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—this 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’s 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.
To determine how additional enrollment in the programs changed in selected states following SSA’s outreach and what outreach efforts these states undertook, we interviewed Medicaid officials in six states— 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’s third party master file to identify how many beneficiaries in each state were enrolled in Medicare savings programs, and analyzed records from SSA’s 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’s 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.
We 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’s state of residence, which is less likely to change as SSA reported that, even if a beneficiary’s 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.
Appendix II: SSA 2002 Outreach Letter
SSA 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’s preference. Figure 2 provides a sample of the outreach letter sent to a beneficiary in Texas between May and November 2002.
Appendix III: Medicare Savings Program Enrollment following 2002 SSA Mailing by State
Figure 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.
Appendix IV: Medicare Savings Program Enrollment following 2002 SSA Mailing by Demographic Group
On the basis of our analysis of SSA’s 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.
Figure 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.
Appendix V: Comments from the Social Security Administration
Related GAO Products
Medicare and Medicaid: Implementing State Demonstrations for Dual Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.: August 18, 2000.
Low-Income Medicare Beneficiaries: Further Outreach and Administrative Simplification Could Increase Enrollment. GAO/HEHS- 99-61. Washington, D.C.: April 9, 1999.
Medicare and Medicaid: Meeting Needs of Dual Eligibles Raises Difficult Cost and Care Issues. GAO/T-HEHS-97-119. Washington, D.C.: April 29, 1997.
Medicare and Medicaid: Many Eligible People Not Enrolled in Qualified Medicare Beneficiary Program. GAO/HEHS-94-52. Washington, D.C.: January 20, 1994. | Why GAO Did This Study
To 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).
What GAO Found
In 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. |
crs_RL32420 | crs_RL32420_0 | Introduction
Congressional 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.
Numerous legislative proposals in the 109 th Congress aim to reduce levels of mercury in the environmentâin 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.
Analysis 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 environmentâan 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).
Sources of Mercury in the Environment
Mercury 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).
Natural 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.
During 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.
In 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.
People 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.
Three 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.
Since 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.
Fate of Mercury Released to the Environment
Transport, Deposition, Re-emission, and Transformation
Chemical 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.
However, 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.
Mercury 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.
Summer 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.
Mercury 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.
Mercury 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.
Mercury 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.
Mercury 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.
Layered 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.
Atmospheric 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.
The 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.
Only 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.
Scientists 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.
Methylmercury Formation and Accumulation
The 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.
Generally, 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:
that 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.
In 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).
The 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 originatedâin industrial emissions deposited to the oceans or in the natural reservoir of the ocean depthsânor where it was transformed into methylmercury.
Some 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.
Other 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.
At 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.
A 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.
Another 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.
Risks of Methylmercury Poisoning
Toxicity of Methylmercury
Methylmercury 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.
In 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.
Methylmercury 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.
There 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 basisâfor example, by an increase in the proportion of an exposed population that falls below a level of function defined as impaired.
In 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."
A 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.
Human 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.)
A 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.
Environmental Methylmercury Exposure
People 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.
Although 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.
The 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.
In 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.
The 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.
Recommended Exposure Limits
A 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.
EPA Reference Dose for Methylmercury
The 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.
In 1985, EPA established its first RfD for people who eat methylmercury-contaminated fish at 0.3 micrograms of methylmercury (μg) per kilogram of body weight (kg bw ) per day. This is equivalent to about 126 μg 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.
Two 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 μg/kg bw /day (42 μg 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.
To 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).
EPA used the benchmark dose to conclude that consumption of 1.1 μg/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 μg methylmercury per liter of blood. (However, individual ratios of hair to blood concentrations varied widely.) EPA divided that daily dose (1.1 μg/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 μg/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.
According 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.
Soon 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 μg/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.
Based on the NRC report, EPA revised the RfD for methylmercury. The value of the RfD did not change from 0.1 μg/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.
Agency for Toxic Substances and Disease Registry Minimum Risk Level
The 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 μg/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.
Food and Drug Administration Action Level
The 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 μg/kg bw /day, slightly higher than 0.3 μg/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 μg 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.
The 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.
Table 4 consolidates the quantitative information provided above to facilitate comparisons among agencies.
U.S. Fish Consumption, Methylmercury Exposure, and Health Risk
By 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.
Average 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 μg 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.
Consumption 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:
85% 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.
Data 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.
Data 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 μg 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.
In 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.
Wildlife Exposure and Health Effects
Fish 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.
Fish-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.
In 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.
Mink 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.
Conclusion
Current 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.
Scientific 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.
Local 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.
As 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. | 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].
Mercury 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.
People 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. |
crs_RL31495 | crs_RL31495_0 | Introduction1
July 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—allegations 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.
The 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—promotion of the rule of law—and does not intend to take any action to undermine the ICC.
While 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.
On 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.
This 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).
U.S. Objections to the Rome Statute
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, 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.
Below, 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.
Issue #1: Jurisdiction over Nationals of Non-Parties
Only 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.
Some 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.
ICC 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.
Issue #2: Politicized Prosecution
The 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 U.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 as "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.
A 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 Prosecutor noted that the allegations about U.S. nationals' behavior during the Iraq occupation were "of a different order than the number of victims found in other situations under investigation," and concluded that the allegations were of insufficient gravity to warrant an investigation.
Issue #3: The Unaccountable Prosecutor
The 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.
Issue #4: Usurpation of the Role of the U.N. Security Council
The 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.
Issue #5: Lack of Due Process Guarantees
The 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.
Congressional Action
Congress 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 (§ 572).
American Servicemembers' Protection Act of 2002
Both 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.
Legislative History
Originally 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.
Prohibitions and Requirements
The 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 to prevent the direct or indirect transfer of certain classified national security information to the ICC.
Restrictions on Participation in Peacekeeping Missions
Unless 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.
The 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.
Restriction on Provision of Military Assistance
Effective 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.
The 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 agree 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 interests.
One 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.
Authority to Free Persons from ICC
Section 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.
Waivers and Exceptions
The 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.
If 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.
Section 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).
Inasmuch 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 2004 and 2006 infringe upon his constitutional authority in certain cases, he might assert that 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, regardless of whether the President believes that sections 2004 and 2006 impinge his constitutional authority.
The 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.
Section 2015 provides clarification with respect to assistance to international efforts. It states:
Nothing 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.
This 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. § 7423) as they apply to permanent resident aliens.
Reporting Requirements
In 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.
The Nethercutt Amendment
Section 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).
The 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 (§ 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.
National Defense Authorization Act for FY2007
The 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 (§ 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.
Prospective Legislation
Some 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.
Some 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.
Implications of the ICC for the United States as a Non-member
As 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 3–10, 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.
The 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.
Observer Role
The 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.
As 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.
The 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.
Foreign Policy Implications
Perspectives 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.
Another 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.
The 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.
Others 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.
Strategy for Precluding ICC Prosecution of U.S. Troops and Officials
ASPA § 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.
Agreement with the U.N. Security Council
On 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:
Acting under Chapter VII of the Charter of the United Nations,
1. 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;
2. 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;
3. Decides that Member States shall take no action inconsistent with paragraph 1 and with their international obligations;
4. Decides to remain seized of the matter.
The 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:
No 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.
Although 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.
Other U.N. Missions
U.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
current 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.
Unlike 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 § 2005 (22 U.S.C. § 7424). Liberia had signed the Rome Statute in 1998 but did not ratify it until September of 2004.
The 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.
U.N. Action Regarding the Situation in Darfur
On 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—the United States, China, Algeria, and Brazil.
U.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.
The 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.
Article 98 Agreements
The 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.
The agreements are intended to make use of Article 98 of the Rome Statute, which states:
Cooperation with respect to waiver of immunity and consent to surrender
1. 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.
2. 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.
Paragraph 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.
Despite 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.
The 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.
Options
Though 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.
Finally, 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. | 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.
The 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.
This 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). |
crs_R42033 | crs_R42033_0 | Introduction
In 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."
The 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—and some enacted—as freestanding bills or parts of other legislation.
This report describes provisions in the American Jobs Act that fall into three major categories:
provisions 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.
The 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).
Overview of the American Jobs Act
The 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.)
Title I— Relief for Workers and Businesses —would 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.)
Title II— Putting Workers Back on the Job While Building and Modernizing America —includes 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.)
Title 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.)
Title III— Assistance for the Unemployed and Pathways Back to Work —includes 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.)
Title IV— Offsets —includes 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.)
Promoting Hiring and Preventing Layoffs
The 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.
Teacher Stabilization (Title II, Subtitle B)20
The 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.
Distribution of Funds to States
Of 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.
Application Process
Funds 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.
Distribution of Funds to the Local Level and Uses of Funds
Of 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.
Within 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.
LEAs 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).
Education Jobs Fund and Use of Funds
No 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.
According 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.
With 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.
Statutory 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."
Rainy-Day Funds and Debt Reduction30
Similar 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.
Fiscal Accountability Requirements
A 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.
Two 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—maintenance of effort—requires, 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.
The 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
1. 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.
For 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.
The 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.
Reporting Requirements
Each 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).
Current Status of the Education Jobs Fund
As 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.
First Responder Stabilization (Title II, Subtitle C)39
The 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).
Law Enforcement Officers
The 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.
The 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.
In 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.
Firefighters
As 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.
There 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.
The 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.
Work Opportunity Tax Credits52
The 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.
The 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:
3. 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.
Under current law there is no targeted group for long-term unemployed for the WOTC.
Veterans Targeted Group (Title II, Subtitle A)
The 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
for 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.
The 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.
The 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.
Long-Term Unemployed Targeted Group (Title III, Subtitle B)
The 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.
As 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.
The 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.
Prohibition of Discrimination on the Basis of Unemployed Status (Title III, Subtitle D)
The 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.
Coverage
Like 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.
The 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.
Likewise, 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.
Prohibited Acts
Under 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.
Likewise, 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.
The 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.
Enforcement and Remedies
Enforcement 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."
Individuals 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.
Finally, 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.
Compensation and Services for Unemployed Workers
The 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.
Unemployment Compensation (Title III, Subtitle A, Part I)
Extension of Temporary Provisions: EUC08, 100% EB Federal Financing, EB Three-Year Lookback Trigger Option, and Increased Railroad Unemployment Benefits
The 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].
In 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.
In 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—but not increasing—unemployment 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.
The 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.
It 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—and, thus, failing to be 10% higher than in any of the previous three years.
To 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%.
The 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.)
The proposed American Jobs Act would also extend the temporary increased railroad unemployment benefits—authorized under the American Recovery and Reinvestment Act (ARRA; P.L. 111-5 , as amended)—for 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 ).
Reemployment Services
The 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.
Self-Employment Assistance
The 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.
Under 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—from all tiers of EUC08 available in his or her state—may 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.
Reemployment NOW Program (Title III, Subtitle A, Part II)
The 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.
To 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.
Allowable program uses of Reemployment NOW funds would include the following:
The "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.
Short-Time Compensation Program (Title III, Subtitle A, Part III)
The 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.
Workforce Development for Low-Income Adults and Youth
Title 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.
Subsidized Employment for Unemployed, Low-Income Adults (Title III, Subtitle C, Section 364)
The first of the three Pathways Act programs would provide $2 billion for the purpose of subsidizing employment of unemployed, low-income adults.
Purpose
Funds provided under the subsidized employment initiative of the Pathways Act would be used by state and local entities for two main purposes.
First, 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.
Second, 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.
Eligibility and Administration
To be eligible to participate in activities supported by this initiative, individuals would have to be
at 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.
With 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.
States 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.
To 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.
Funding
Each 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.
Following these reservations, the remainder of funds would be allocated to states on the basis of the following factors:
one-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.
For 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.
After 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.
Performance Accountability
As 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—subsidized employment, youth employment, and work-based strategies—would require grantees to provide the following information:
number 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.
In addition to the common reporting requirements listed above, grantees under Section 364 would be required to report the following performance outcomes for participants:
entry into unsubsidized employment; retention in unsubsidized employment; and earnings in unsubsidized employment.
Summer Employment and Year-Round Employment Opportunities for Low-Income Youth (Title III, Subtitle C, Section 365)
The second of the three Pathways Act programs would provide $1.5 billion for the purpose of providing employment opportunities for low-income youth.
Purpose
Funds provided under the youth employment initiative of the Pathways Act would be used by state and local WIBs for two main purposes.
First, 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.
Second, 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.
Priority 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.
Eligibility and Administration
To be eligible to participate in activities supported by this initiative, individuals would have to
be 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.
With 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.
Funds provided under the youth employment section of the Pathways Act would be administered through state and local Workforce Investment Boards (WIBs).
To 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.
Funding
Each 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.
Following 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.
For 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.
After 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.
Performance Accountability
As 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—subsidized employment, youth employment, and work-based strategies—would require grantees to provide the following information:
number 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.
In addition to the common reporting requirements listed above, grantees under both the youth employment (§365) and work-based strategies initiatives (§366, described below) would be required to report the following performance outcomes for low-income youth participating in summer employment:
work readiness skill attainment; and placement in or return to secondary or postsecondary education or training, or entry into unsubsidized employment.
For youth participating in year-round employment, under activities authorized by Section 365 or Section 366, grantees would be required to report
placement 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.
Work-Based Employment Strategies of Demonstrated Effectiveness (Title III, Subtitle C, Section 366)
The 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.
Purpose
Funds 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
on-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.
Eligibility and Administration
Entities 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.
Funding
The $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.
Priority in awarding grants would be given to eligible entities applying from areas of high poverty and high unemployment.
Performance Accountability
As 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—subsidized employment, youth employment, and work-based strategies—would require grantees to provide the following information:
number 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.
In 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:
attainment of an industry-recognized credential; and entry into unsubsidized employment, retention in unsubsidized employment, and earnings in unsubsidized employment.
School Modernization
The 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.
Under 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.
The 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.
A Note About the Fix America's Schools Today (FAST) Act of 2011
Provisions 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:
The 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 apply to the funding provided for the Elementary and Secondary Schools Modernization program. The FAST Act would require additional reporting. Each 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 of the programs. The American Jobs Act would only require reports on the Community College Modernization program from the states and the Secretary.
The House version of the FAST Act ( H.R. 2948 ) includes two additional differences:
H.R. 2948 does not include the American Jobs Act provision that would prohibit Elementary and Secondary Schools Modernization funds from 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. Under the American Jobs Act, the eligible IHEs would not include four-year private not-for-profit IHEs that award a significant number of degrees and certificates below the baccalaureate level.
The sections below describe the School Modernization provisions, as included in the American Jobs Act.
Elementary and Secondary Schools Modernization (Title II, Subtitle D, Part I)
The 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.
Distribution of Funds to States and 100 Largest LEAs
The 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.
Distribution of Funds to the Local Level and Uses of Funds
Of 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.
States 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.
All 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.
Private School Participation89
The 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.
Eligible private schools would be able to use funds for
modifications 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.
When 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.
Potential Issue of Grant Size
The 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.
Community College Modernization (Title II, Subtitle D, Part II)
The 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.
Distribution of Funds to States
The 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
the 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).
The 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.
Where:
NP2E = Two-year public and two-year private not-for-profit IHE enrollment
Pub4E = Four-year public IHE enrollment
2YrDeg = Total of two-year and less-than-two-year degrees/certificates awarded at public four-year IHEs
AllDeg = Total of all degrees/certificates awarded at public four-year IHEs
APP = Program allocation after set-asides
∑ = Sum (for all approved states)
The 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.
States 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.
Distribution of Funds to the Local Level and Uses of Funds
Of 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—two-year public IHEs, two-year private not-for-profit IHEs, and four-year public IHEs.
IHEs 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.
Appendix. Related Tables | 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—and some provisions enacted—as freestanding bills or parts of other legislation.
This report describes provisions in the American Jobs Act that fall into three major categories:
provisions 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.
The 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.)
The 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.
The 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.
The 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.
Although not discussed in this report, tax reductions for employers ($70 billion) and employees ($175 billion)—largely through payroll tax cuts—would 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. |
crs_R44651 | crs_R44651_0 | Introduction
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 inhabited territory's local tax system has features that help determine the structure of its public finances.
Additionally, 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.
These 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.
Second, 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.
Third, 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.
These 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.
This 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 .
Territorial Tax Authority: Mirror vs. Non-Mirror Code Jurisdictions
U.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—Guam, CNMI, and the USVI—are 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).
In 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.
Regardless 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.
Guam and the Commonwealth of Northern Mariana Islands
Although 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.
U.S. Virgin Islands
USVI 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.
Puerto Rico and American Samoa
There 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.
Applicability of Federal Taxes in the Territories
In 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).
U.S. Individual Income Taxation
As 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.
The possession-source income exclusion currently applies to each of the territories through several sections of the IRC:
American Samoa (IRC Section 931) U.S. Virgin Islands (IRC Section 932) Puerto Rico (IRC Section 933) Guam and CNMI (former IRC Section 935)
The 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.
Bona 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
1. 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.
For 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.
Additionally, 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.
Corporate Income Taxation
U.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.
There 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.
U.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.
U.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.
Dividends 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%.
Payroll Taxes
For 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).
PR 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).
As with FICA taxes on employee wages, bona fide residents of a U.S. territory who have selfemployment income must generally pay selfemployment tax to the United States. Bona fide residents may be subject to U.S. selfemployment tax even if they have no income tax filing obligation with the United States.
Employers 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.
Excise Taxes
U.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.
In 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—not including PR or USVI—is 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.
Estate and Gift Taxation
A 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).
There 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.
U.S. Tax Incentives Targeted to the Territories
Federal 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.
There 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.
Policy Issues for Congress
This 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.
Tax-Based Assistance to Households in the Territories
As 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.
Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC)
The 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—namely 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.
The 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.
Generally, 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.
The 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.
In 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.
Given 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.
There 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.
Additionally, 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).
Expanding 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.
Payroll Tax Cut
Congress 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.
The 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.
Alternatively, 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).
Still, 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.
Economic Development of the Territories
Congress 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.
Options 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.
Most 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.
Officials 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."
Subsequent 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).
Tax Arbitrage and U.S. Tax Avoidance
Tax 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.
As 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.
For 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.
Additionally, 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).
These 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).
Second, 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.
Third, 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.
Appendix. Summary of Internal Revenue Code Tax Filing Requirements for U.S. Territories
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"—meaning 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.
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.
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).
For more background on tax law regarding the territories, the status of federal legislation to encourage development in the territories, see
CRS 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. | 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.
The 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.
Second, 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.
These 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.
Second, 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.
Third, 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.
This 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. |
gao_GAO-02-831 | gao_GAO-02-831_0 | Background
DI 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’s 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.
To obtain disability benefits, a claimant must file an application at any of SSA’s 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—generally a team comprised of disability examiners and medical consultants—review 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’s definition of disability. In 2001, the DDSs made 2.1 million initial disability determinations and over 514,000 reconsiderations.
If the claimant is not satisfied with the reconsideration, the claimant may request a hearing by an ALJ. Within SSA’s 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’s 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’s 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.
SSA 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.
SSA’s Study of Racial Disparities Was Extensive, but Methodological Weaknesses in Available Documentation Preclude Conclusions
Following 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’s 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.
SSA’s Effort to Study Racial Disparities Was Extensive, but Results Were Not Published
In 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—the Division of Disability Hearings Quality—to spearhead the collection of data needed to study racial disparities and to oversee ongoing quality assurance reviews of ALJ decisions.
Data 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—from 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.
In addition to obtaining files and tapes, the data collection effort included a systematic review of each case—the 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.
During 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’s consultants—a law professor and recognized expert in disability issues—reviewed SSA’s analytical approach and evaluated initial results. In his report to SSA, this consultant expressed overall approval of SSA’s data collection methods, but made several recommendations on how the analysis could be improved—some 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’s 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.
According to SSA officials, the agency’s 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’s sensitive nature, SSA officials told us the agency decided not to publish the conclusions of this study.
Available Documentation of Racial Disparities Study Indicated Some Methodological Weaknesses
From our review of SSA’s internal working papers pertaining to the study, and information provided verbally by SSA officials, we identified several weaknesses in SSA’s 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.
Although 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’s Appeals Council—about half of ALJ denials—were 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’s 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’s final sample.
With 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’s 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’s 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’s analysis of racial disparities, SSA’s 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.
Another 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’s 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’s decision, but evaluated the ALJ’s 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’s 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—such as one that indicates the reviewer believed that the original ALJ decision was unfair or not supported—then 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’s analyses.
Finally, in its internal working papers, SSA used a statistical technique— stepwise regression—that 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—variables 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’s 10 regions, which were used in SSA’s 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’s 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’s regional models included variables that were statistically significant but reflected the reviewer’s evaluation of the hearing proceedings—which an ALJ would not consider in a hearing—and therefore were not appropriate. As mentioned earlier, including these variables may have reduced the explanatory power of other variables— 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.
According 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— and ran the models with and without variables that reflected posthearing evaluations—and 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.
Future Studies of Racial Disparities Would Be Hampered by Data Limitations
Since 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—a 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’s ongoing quality assurance review of ALJ decisions still includes information on race, SSA no longer analyzes these data to identify patterns of racial disparities.
Even 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—a key performance indicator used in SSA’s 2000–03 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—files are either missing or not made available if the cases are in use for appeals or pending decisions. However, SSA’s 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’s 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.
Second, 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.
SSA Has Taken Limited Steps to Address Possible Racial Bias in Its Hearings Level Decision-Making Process
Concurrent with SSA’s study of racial disparities, SSA’s 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.
OHA Has Taken Some Steps to Address Possible Racial Bias
SSA’s OHA adopted a mandatory diversity sensitivity program in 1992. All of SSA’s 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.
OHA 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’s 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 “How to Become an Administrative Law Judge at OHA,” at each conference. Despite these efforts, there have not been significant changes in the racial/ethnic profile of SSA ALJs.
In 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’s 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’s 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’s 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.
Officials 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.
ALJ Complaint Process Lacks Mechanisms to Identify Patterns of Racial Bias
While 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’s public notice on the creation of this process, it was stated that SSA’s Special Counsel would “collect 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.” However, OHA’s 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’s Office of General Counsel’s complaint form specifically asks complainants to categorize their claim as being related to such factors as race or sex.
Similarly, 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.
Additionally, OHA staff do not record key information about complaints— such as the nature of the complaint—in an electronic database so that patterns of bias can be easily identified. OHA’s 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—a time-consuming process that it does not perform on a routine basis.
Finally, 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—aware only of their own circumstances and lacking a basis for comparison—may 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’s administrative data.
Conclusions
The steps SSA has taken over the last decade have not appreciably improved the agency’s understanding of whether or not, or to what extent, racial bias exists in its disability decision-making process. SSA’s attempt to study racial disparities was a step in the right direction, but methodological weaknesses evident in SSA’s 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’s 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’s ability to analyze racial differences in its decision making will diminish due to a lack of data on race and ethnicity. Finally, SSA’s complaint process for ALJs lacks mechanisms—such as summaries of key information on each complaint, an electronic filing system, and information on the race and ethnicity of complainants—that 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.
Recommendations
To address shortcomings in SSA’s ongoing quality assurance process for ALJs—which would improve SSA’s assessment of ALJ decision-making accuracy—we 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’s 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.
To more readily identify patterns of misconduct, including racial bias, in complaints against ALJs, we also recommend that SSA’s 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.
Agency Comments and Our Response
We 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’s title accurately reflected the report’s 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’s representativeness.
SSA also provided technical comments and clarifications, which we incorporated in the report, as appropriate. SSA’s general comments and our response are printed in appendix I.
We 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.
If 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.
Appendix I: Comments from the Social Security Administration
GAO Comments
1. Although we believe the draft report’s 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 “ethnicity” 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 “holdout samples and cross modeling” 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’s representativeness. Another approach that we do not cite in the report—but which SSA may wish to consider—is 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.
Appendix II: GAO Contacts and Staff Acknowledgments
GAO Contacts
Staff Acknowledgments
In 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. | What GAO Found
The 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. |
gao_GAO-15-292 | gao_GAO-15-292_0 | Background
DHS invests in major acquisition programs to develop capabilities intended to improve its ability to execute its mission. DHS policy defines acquisition programs as follows:
Level 1 major acquisition programs are expected to cost $1 billion or more over their life cycles.
Level 2 major acquisition programs are expected to cost at least $300 million over their life cycles.
Special 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’s strategic and performance plans is disproportionate to its size or it has high executive visibility.
Level 3 programs are those with a life-cycle cost estimate less than $300 million and are considered non-major.
DHS’s 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’s policies and processes for managing these acquisition programs. MD 102 establishes that DHS’s Chief Acquisition Officer—the Under Secretary for Management (USM)—is responsible for the management and oversight of the department’s acquisition policies and procedures. The Deputy Secretary, USM, and CAE are the acquisition decision authorities for DHS’s acquisition programs, depending on the level.
The acquisition decision authority is responsible for reviewing and approving the movement of DHS’s 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’s 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.
Figure 1 depicts the four phases of the acquisition life cycle and the associated acquisition decision events.
An 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’s critical baseline cost, schedule, and performance parameters.
We 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.
PARM 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’s 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’s 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.
The Fiscal Year 2012 DHS Appropriations Act required the USM to submit a Comprehensive Acquisition Status Report (CASR) with the President’s 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’s 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)—a 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.
DHS Has Taken Steps to Improve Oversight of Major Acquisition Programs, but Lacks Written Guidance and Cost Oversight Mechanism for Some Programs
Although 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.
DHS Lacks Written Guidance for a Consistent Approach to Ongoing Oversight
While 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’s 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.
Figure 2 illustrates PARM’s 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.
PARM 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’s 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’s executive director, which may be used in high visibility meetings with the USM.
PARM 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’s 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’s 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’s 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’ 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.
GAO, 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.
Further, while PARM is the lead office responsible for overseeing all major acquisition programs, we found confusion among component officials related to PARM’s 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’s 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.
GAO, 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.
DHS Issued Guidance to Clarify the Role of the CAE
In 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’ 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’s 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’s acquisition programs. Given the new requirements for CAE experience levels, PARM’s executive director anticipates that there may be changes in CAE assignments for at least one component.
The memo directs PARM to create and provide executive-level acquisition training to the CAEs. The memorandum further outlines the CAEs’ responsibilities for complementing PARM’s 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.
PARM Highlights Some Programs for Oversight through High Visibility Meetings, but DHS Lacks a Cost Oversight Mechanism for Programs In Sustainment
PARM 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’s acquisition programs on the MAOL, which is broken down into categories that describe each program’s 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.
PARM High Visibility Meetings Highlight Programs for Management Attention
PARM’s executive director established high visibility meetings in December 2013 to discuss any acquisition programs that require more immediate attention from DHS management. PARM’s executive director uses these meetings as a management tool. He identifies the programs to be discussed in consultation with component leads. PARM’s executive director told us that the purpose of these meetings is to make sure that senior leadership—including the USM, Chief Financial Officer, Chief Information Officer, Chief Readiness Support Officer, Chief Procurement Officer, and General Counsel—have a common understanding of the acquisition programs’ 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.
PARM 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.
PARM is Taking Steps to Improve the MAOL
DHS 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.
PARM 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—meaning 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.
DHS Lacks Cost Oversight Mechanism for Programs in Sustainment
DHS 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’s 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.
Further, 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’s 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’ 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.
The 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.
Program Data PARM Provided to DHS and Congressional Decision Makers Were Not Consistently Accurate and Up-to-Date
PARM’s 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’s official system of record for acquisition program reporting. However, data issues—including inconsistent participation among the programs responsible for entering data—have 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.
Data in DHS’s Acquisition Program Reporting System Were Not Consistently Accurate
For 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’s 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.
We 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.
When we compared programs’ entries of expenditure data over time, we found additional discrepancies. As an example, the U.S. Coast Guard’s Fast Response Cutter program’s 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’s 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’s 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’s Verification Modernization program’s 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.
Large 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—even though that was one intended purpose of the system—because 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’ 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.
Extensive Adjudication Process Did Not Correct Inaccuracies for Reported Life-Cycle Cost Estimates
To 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’s adjudication process did not rectify key inaccuracies in the fiscal year 2014 CASR, specifically regarding programs’ 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.
The 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’s 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.
Further, PARM may have incorrectly included or excluded certain programs in the CASR based on DHS’s 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’ 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.
We 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 “special interest” program in the MAOL, which did make it eligible for inclusion in the CASR, but PARM did not include this rationale in the CASR.
In 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’s Next Generation Network-Priority Service noted difficulties in accurately reporting data on their program’s 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’s costs.
DHS Did Not Provide Most Useful Information on Program Risks and Other Requirements for the CASR
Of 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’ top-five cost, schedule, and technical risks, instead of separate ratings for each. However, this reporting was inconsistent. Programs submitted these risks through DHS’s 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:
The Verification Modernization program had five risks, all of which were technical.
The 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.
The inconsistent risk reporting in this section prevents Congress from making cost, schedule, and performance comparisons across DHS programs.
In 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’s evaluation accurately reflected program risks.
Due to PARM’s inability to provide us with supporting data, we reviewed the Science and Technology Directorate’s National Bio and Agro-Defense Facility program’s 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’s acquisition documents. A program official stated, however, that the documents could not go forward for DHS approval due to the program’s lack of funding. The CASR did not contain any clarifying explanation for the documents not being approved. Further complicating the issue, the program’s 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’s reported document status according to nPRS as of September 2013 and the CASR issued in March 2014, and the source documents provided by PARM.
In another example, in PARM’s risk assessment of the Federal Emergency Management Agency’s Risk Mapping, Assessment and Planning program, the CASR stated that the program was covered by the USM’s 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.
A second CASR reporting requirement was a program’s 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.
A third requirement was the reason for any significant changes in a program’s 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’s 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’s guidance, the CASR would not include any cost, schedule, or performance changes for these programs. By defining programs’ 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.
Finally, 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.
Conclusions
Effective, on-going oversight of DHS’s 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.
DHS 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.
Likewise, as DHS acquisition programs move into the sustainment phase, their costs continue to require monitoring. The USM’s 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’ operations and maintenance costs. Without an identified oversight body, DHS lacks insight into those programs’ 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.
Finally, 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’s 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’s 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.
Recommendations for Executive Action
In order to help ensure consistent, effective oversight of DHS’s acquisition programs, we recommend the Secretary of DHS take the following five actions:
Direct PARM to develop written guidance that defines roles and responsibilities of its component leads.
Direct the USM to:
Develop written guidance to clarify roles and responsibilities of PARM and OCIO-EBMO for conducting oversight of major acquisition programs.
Produce operations and maintenance cost estimates for programs in sustainment and establish responsibility for tracking sustainment programs’ adherence to those estimates.
Determine 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.
To make the CASR more useful, starting with the report reflecting fiscal year 2015 program data, adjust the CASR to do the following:
Report an individual rating for each program’s cost, schedule,
Report a best estimate of procurement quantities or indicate why this is not applicable, as appropriate;
Report all programs’ 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;
Report major program events that are included in acquisition program baselines, such as scheduled acquisition decision events; and
Report the level at which the program’s life-cycle cost estimate was approved.
Agency Comments and Our Evaluation
We 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.
DHS also provided technical comments that we incorporated into the report as appropriate.
As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of DHS. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov.
If you or your staff have questions about this report, please contact me at (202) 512-4841 or 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.
Appendix I: Objectives, Scope, and Methodology
The objective of this review was to assess the Department of Homeland Security’s (DHS) oversight of its major acquisition programs. Specifically, this review focused on DHS’s 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.
To 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—DHS Instruction Manual 102-01- 001—and the guidebook’s 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’s April 2014 Unity of Effort memorandum; the Office of the Chief Procurement Officer’s 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–Enterprise Business Management Office (EBMO), Office of the Chief Procurement Officer, Office of Policy, and Office of the Chief Financial Officer–Office 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.
To address our first objective, we selected nine DHS components with responsibility for at least one Level 1 acquisition—a program with a reported life-cycle cost estimate exceeding $1 billion—and 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:
Federal Emergency Management Agency
National Protection and Programs Directorate
OCIO
Science and Technology Directorate
Transportation Security Administration
U.S. Citizenship and Immigration Services
U.S. Coast Guard
U. S. Customs and Border Protection
U.S. Immigration and Customs Enforcement To collect examples of PARM’s 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.
We 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 “concerns/issues” or as being “monitored closely” in PARM’s 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’s independent verification and validation section and are derived from PARM’s 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.
For the second objective, we collected and reviewed data from DHS’s 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’s MAOL are required to report in nPRS. PARM then uses the program data in nPRS to help generate its CASR.
In 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—the 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.
We 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.
We 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.
In 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’s 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’s 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’s congressional reporting requirements, DHS policies, and acquisition practices.
We 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.
Appendix II: Department of Homeland Security Acquisition Programs in Sustainment Exempt From Documentation Requirements
Table 7 below identifies 42 acquisition programs for which the Department of Homeland Security’s (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.
Table 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.
Appendix III: Comments from the Department of Homeland Security
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
In 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.
GAO 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.
GAO 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.
What GAO Found
The 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)—the lead body responsible for overseeing the acquisition process and assessing the status of acquisition programs—and 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.
The 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.
GAO Assessment of the DHS Comprehensive Acquisition Status Report Development Process
What GAO Recommends
GAO 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. |
gao_GAO-17-259 | gao_GAO-17-259_0 | Background
Credit 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.
Overview of Credit Union and Deposit Insurance Markets
The 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.
The 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.
American Share Insurance
ASI 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’s total insured deposits. In addition, ASI has the authority to charge special premium assessments under certain conditions with regulator approval, as it did in 2009–2013.
ASI 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’s board of directors meets to review and monitor the company’s 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’s 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.
Federal Law and Regulation I
Federal 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.
Regulation 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’s 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.
FAST Act and Federal Home Loan Bank System
The 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.
The 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.
Regulatory and Other Assessments Indicate ASI Has Had Adequate Reserves and Strong Claims- Paying Ability
Regulators Have Not Cited Concerns about ASI
The Ohio Department of Insurance’s most recent examination of ASI, which covered 2008–2012, did not identify any deficiencies in ASI’s financial condition and determined that ASI’s reserves for losses were consistent with Ohio’s 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’s 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’s 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.
Ohio Department of Insurance staff told us that as part of their full-scope examinations every 5 years, the examination team reviews ASI’s 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’s actuary performs an analysis of ASI’s information to derive the department’s own estimate for ASI’s loss reserves. The department compares its derived estimate to ASI’s held reserves, as well as to the range of estimates reported by ASI’s 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’s loss reserves. According to representatives from the National Association of Insurance Commissioners (NAIC), the procedures the department uses for assessing ASI’s capital, including its loss reserves estimates, are consistent with NAIC’s guidelines for conducting such assessments.
Ohio Department of Insurance staff also told us that on an annual basis they review the statement of actuarial opinion of ASI’s loss reserve estimates (as rendered by the third-party actuarial firm and discussed later in this report) and ASI’s audited financial statements, and also compute financial ratios. According to the staff, as part of this review, analysts review ASI’s capital position and monitor ASI’s 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’s capital was roughly $219 million. In addition, Ohio Department of Insurance staff said they consider any risks that could affect ASI’s 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’s 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’s 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’s quarterly financial statements and the credit unions for which ASI is considering providing deposit insurance coverage.
Ohio 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 2007–2009 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’s exposures and potential losses, but the department never determined there was a need to conduct an additional full-scope examination.
In addition to the Ohio Department of Insurance’s 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’s audited financial statements, statement of actuarial opinion, and reports from ASI’s 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.
As well as participating in the Ohio Department of Commerce’s annual examination of ASI, the eight other state credit union supervisors told us that they monitor ASI’s financial condition on an annual or quarterly basis. This process generally involves a review of ASI’s 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’s 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—whose funds provide protection for various property and casualty lines of insurance written by its member insurers––private 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’s funding, Ohio law allows ASI to charge a special assessment, with regulator approval, against the credit unions it insures.
Moreover, 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’s financial condition by reviewing ASI’s annual audited financial statements, statutory quarterly financial filings, and reports on ASI’s 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’s 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’s 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.
ASI 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’s 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 2–3 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’s liquidity needs.
Independent Actuarial Reviews Found That ASI Had a Strong Financial Ability to Pay Claims under Different Scenarios
ASI retains an independent actuarial firm to conduct analyses for the company. The actuarial firm conducts a study of the adequacy of ASI’s 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’s loss experience to help estimate loss reserves and render an annual statement of actuarial opinion on the adequacy of its loss reserves.
Capital Adequacy
The four most recent capital adequacy studies, which covered calendar years 2009–2015, indicated that ASI’s ability to pay claims was strong. The 2010 capital adequacy study—conducted near the end of the financial crisis—indicated ASI’s ability to pay claims was strong, but it also reported that ASI’s ability to pay claims had decreased. For the most recent capital adequacy study, the actuarial firm’s analysis found that ASI’s 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’s management is as important as the study’s findings because even with adequate capital, a company could fail based on mismanagement or fraud, which cannot be modeled.
According 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’s total assets).
Additionally, the actuarial firm analyzed the capital adequacy of ASI’s wholly owned subsidiary, Excess Share Insurance Corporation, which can affect ASI’s financial condition because ASI offers it various funding sources and a guarantee. The actuarial firm’s 2016 study showed the subsidiary’s 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’s financial condition. To transfer some of this risk, the subsidiary carries a reinsurance policy for its excess insurance line of business.
The 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 2007–2009 financial crisis, ASI (1) charged its insured credit unions a special premium assessment each year in 2009–2013; (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’ 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’s capital adequacy.
Loss Reserves
Each of the actuarial firm’s annual loss reserve studies conducted during 2011–2015 found that ASI’s 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’s loss reserve experience and reviews the assumptions ASI uses to determine its reserves for losses. The reserve studies identified some potential risks—for example, the possibility that some of ASI’s credit unions could cancel their deposit insurance coverage and withdraw their capital contributions, which would reduce ASI’s capital (but also reduce its exposure to potential losses).
In 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’s 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’s held reserves to its capital, and that ASI’s 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’s reserves.
Privately and Federally Insured Credit Unions Had Similar Regulatory Ratings, but Differed in Geographic and Deposit Concentration
ASI’s 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’s 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 2006–2015. 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.
For further review, we also selected one indicator in each of five categories––capital adequacy, asset quality, loss coverage, profitability, and liquidity––regulators 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 2011–2015.
The 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.
However, our analysis shows that privately insured credit unions have higher geographic and deposit concentration than federally insured credit unions, which can present risks. Specifically,
Privately 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).
The 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’s 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’s 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.
Credit Unions We Reviewed Largely Complied with Disclosure Requirements, but Some Disclosure Provisions Lack Specificity
Privately 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.
Disclosure signage at teller and drive-through windows. The 47 privately insured credit unions we visited were largely in compliance with CFPB’s 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’s 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 “station or window where deposits are normally received,” and thus require disclosure.
We 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 2-¼ 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’s policies.
CFPB 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 “clear and conspicuous and presented in a simple and easy-to-understand format, type size, and manner” 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’s 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’s website.
Disclosures on websites. We also reviewed 102 privately insured credit union websites and found that almost all of these websites complied with CFPB’s 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).
CFPB’s Regulation I states that the website disclosures, like all other required advertising and premises disclosures, should be “clear and conspicuous and presented in a simple and easy to understand format, type size, and manner,” but CFPB does not define these terms or specify font size requirements for websites. In comparison, NCUA’s 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.
Disclosures 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 “all advertisements” 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 “all advertisements.” In comparison, NCUA’s regulation for federally insured credit unions defines advertising, and also provides examples. In NCUA’s regulation, an advertisement is “a commercial message, in any medium, that is designed to attract public attention or patronage to a product or business.” Furthermore, NCUA’s regulation specifies that advertising includes print, electronic, or broadcast media, displays and signs, stationery, and other promotional material.
Disclosures 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.
Reviews 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.
CFPB has not had any findings, observations, or evaluations regarding privately insured credit unions’ 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’ 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.
The 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.
While 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 “advertising” 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.
Conclusions
Deposit 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.
Recommendations for Executive Action
We 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.
Agency Comments
We 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’ 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’s 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.
We 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.
If 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.
Appendix I: Objectives, Scope, and Methodology
This 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’s Surface Transportation Act (FAST Act) includes a provision for us to review private deposit insurers and privately insured credit unions’ 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––the Public Corporation for the Supervision and Insurance of Cooperatives––and these credit unions are not included in the scope of this report. In addition, this report does not compare ASI’s reserves and capital adequacy to those of the National Credit Union Administration’s (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.
To gather information about ASI, we identified the company’s 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’s 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’s financial condition, we reviewed documentation such as the most recent examination report covering calendar years 2008–2012 and financial analyses of ASI covering calendar years 2013– 2015. We also compared the department’s process with the guidelines recommended by the National Association of Insurance Commissioners (NAIC) and confirmed with NAIC staff that the department’s 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.
We reviewed ASI’s annual reports and audited financial statements for 2008–2015 and other documentation, such as the company’s 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’s 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’s analyses of ASI’s capital adequacy for 2009–2015 (conducted every 3 years), annual analyses of ASI’s unpaid loss and loss adjustment expense for 2011–2015, and annual statements of actuarial opinion for 2011–2015, as well as the firm’s analysis of capital adequacy for ASI’s wholly-owned subsidiary for 2015. We interviewed the actuarial firm’s 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’s 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’s internal peer review process and steps taken to ensure the completeness and accuracy of the models used to assess ASI’s capital adequacy and reserves for losses. We did not conduct our own independent assessment of ASI’s capital adequacy and reserves for losses and therefore cannot make our own actuarial determination or opinion.
To review information about the credit unions that ASI insures, we reviewed CAMEL ratings for privately and federally insured credit unions for 2006–2015. We also used financial data from SNL Financial (2011–2015) 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’s 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’ 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 2011–2015. 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.
To 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’s (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––two with many (Ohio and Illinois), one with a moderate number (California), and one with few (Maryland)––and 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.
We 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.
We conducted site visits at both main retail and branch locations. We selected locations to include both urban and nonurban areas. We roughly defined “urban” as a downtown area where consumers are more likely to walk to the credit union and “nonurban” 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.
To determine compliance with disclosure requirements for the credit unions’ 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’s 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.
To 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—for example, each state reviews a sample of new accounts as part of the routine examination each credit union receives.
Because CFPB is the federal entity responsible for issuing disclosure regulations, we interviewed CFPB staff about the agency’s oversight and findings related to compliance with these disclosure requirements. We compared CFPB’s 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.
To 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’s 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 2008–2009. 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.
We 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.
Appendix II: Reasons Credit Unions Chose Private or Federal Deposit Insurance
Credit 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’s 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—for 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 2012–2016, and five converted from private to federal deposit insurance in 2008–2009 (the most recent such conversions).
Representatives of some credit unions that converted from federal to private deposit insurance cited the following reasons:
Greater 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.
Reduced 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.
Cost savings. Credit union representatives said that private deposit insurance was less expensive than federal deposit insurance following the 2007-2009 financial crisis because ASI’s 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.
Comparable business models. A credit union representative noted that the credit union business model aligns well with ASI—both are not-for-profit organizations that exist to serve their members, and member credit unions sit on ASI’s board of directors.
Representatives of some credit unions that converted from private to federal deposit insurance cited the following reasons:
Full 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.
Concern 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 2007–2009 financial crisis.
Access 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.
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
The 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 (2006–2015) and selected financial data (2011–2015) 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.
What GAO Found
About 2 percent of credit unions (125) have private deposit insurance, which is provided by one company—American 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.
Privately 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.
What GAO Recommends
GAO 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. |
gao_GAO-08-481T | gao_GAO-08-481T_0 | Number and Rate of Incursions Show Upward Trend
Runway safety is a longstanding major aviation safety concern; prevention of runway incursions, which are precursors to aviation accidents, has been on NTSB’s 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).
Additionally, 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.
Moreover, the number and rate of serious incursions—where collisions were narrowly or barely avoided—increased 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.)
Most 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—about 9 per year—involved 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.
In 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’Hare International Airport had the greatest number of runway incursions from fiscal years 2001 through 2007, as shown in fig. 5.
The 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).
Challenges Remain Despite Numerous Efforts to Address Runway Safety
FAA, 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.
According 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.
In our November 2007 report, we found that FAA’s Office of Runway Safety had not carried out its leadership role to coordinate and monitor the agency’s 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.
The deployment of surface surveillance technology to airports is a major part of FAA’s 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’s 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.
However, 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’s 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.
FAA 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.
FAA 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’s busiest airports, were regularly working 6-day weeks. (See table 7 in the appendix for additional information.)
Experts 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.
Recommendations
In 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.
In closing, although FAA has taken many actions to improve runway safety, the number of serious incursions that are continuing to occur— many of which involved aircraft carrying hundreds of passengers— 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.
Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions from you or other members of the Subcommittee.
GAO Contact and Staff Acknowledgments
For 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. | Why GAO Did This Study
While 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.
What GAO Found
Recent 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. |
gao_NSIAD-98-57 | gao_NSIAD-98-57_0 | Background
In 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.
Interest 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’s primary office responsible for providing assistance to communities, regions, and states “adversely impacted by significant Defense program changes.”
The 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.
Expenditure 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’s 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.
Federal 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.
Federal Dollars Contribute to New Mexico Economy, but Economy Is Diversifying
DOE 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.
This 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’s 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—the headquarters location for German air force operations in North America—were factors in Germany’s 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.
Services and trade are distinct components of New Mexico’s 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.
New Mexico state officials have been focusing on “achieving economic diversification to protect against dramatic negative changes in the state’s economy,” 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’s second-largest private sector employer and contributing to the growth in New Mexico’s 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.
A comparison of the percent change in New Mexico’s 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’s gross state product and total defense-related federal expenditures reveals the same pattern, suggesting that efforts to diversify the state’s 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.
DOE Spends More on Procurement; DOD Spends More on Workforce and Retirement
Available 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).
Appendix II includes additional descriptions of federal spending and employment in New Mexico.
Defense-Related Expenditures
The 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.
Between 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’ salary and wages, and retirement payments accounted for by DOE and DOD, respectively.
Defense-Related Employment
Between 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.
The 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’s direct federal employment was higher than DOE’s in each year between 1990 and 1996.
Of 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.
A 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).
Federal Expenditure and Employment Data Are Incomplete
Official 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.
To gain further insights into the reliability of the federal government’s data we focused on characteristics of existing DOD data. Although DOD’s 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.
DOD 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’s 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’ records. Differences between DOD and contractors’ 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.
Our 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’s 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.
Also, service contracts may more likely be under DOD’s $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’ records.
Finally, 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.
The 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.
To 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).
Conclusions
The 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.
On 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.
Agency Comments
In 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.
Scope and Methodology
In 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.
To 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.
To 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’s 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.
To 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’s conclusions.
Our work was conducted between November 1996 and October 1997 in accordance with generally accepted government standards.
As 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.
Please 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.
Offices We Contacted
Department of Defense, Washington, D.C.
Department of Energy, Washington, D.C.
Department of Commerce, Washington, D.C.
Congressional Agencies, Washington, D.C.
Federal Facilities, New Mexico
State Government Offices
Universities
Defense Contractors
Others
Professional 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.
Direct Federal Expenditures and Employment in New Mexico
This 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’s (DOE) and the Department of Defense’s (DOD) share of the defense-related expenditures and employment.
We 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.
Federal Expenditures in New Mexico
Federal 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).
Figure II.1: Federal Expenditures in New Mexico (1988-96)
This increase in federal expenditures for New Mexico is consistent with nationwide trends.
Total 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.
Figure II.2: New Mexico Federal Employment (1988-96)
Figure II.3 shows the specific expenditure trends in procurement, grants, salaries and wages for federal workers, and direct payments to individuals.
Figure II.3: Total Federal Spending on Procurement, Grants, Federal Employee Salaries and Wages, and Direct Payments in New Mexico (1988-96)
Procurement 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.
Defense-Related and Nondefense-Related Federal Expenditures in New Mexico
Defense-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.
Figure II.4: Defense-Related and Nondefense-Related Federal Procurement Expenditures in New Mexico (1993-96)
Nondefense-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.
Figure II.5: Defense-Related and Nondefense-Related Federal Grant Expenditures in New Mexico (1988-96)
Defense-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).
Figure II.6: Salaries and Wages to Defense-Related and Nondefense-Related Federal Workers in New Mexico (1988-96)
Between 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.
It 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.
Programs 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.
Figure II.7: Distribution of Federal Direct Payments in New Mexico, by Federal Program (1988-96)
Payments 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.
We 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—on average 68 percent—of 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.
Figure II.8: Total Annuities for Federal Workers Living in New Mexico and Retired From Defense-Related and Nondefense-Related Agencies (1988-96)
Defense-Related and Nondefense-Related Federal Employment in New Mexico
Federal 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.
Figure II.9: Defense-Related and Nondefense-Related Federal Employment in New Mexico (1988-96)
Defense-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.
Figure II.10: Federal Retired Workers From Defense and Nondefense-Related Agencies Living in New Mexico (1988-96)
The 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).
Between 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.
Figure II.11: DOD and DOE Procurement Expenditures in New Mexico (1993-96)
Figure 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.
Figure II.12: Annuities to Workers Retired From DOD and DOE and Living in New Mexico (1990-96)
Also, more former DOD than DOE federal employees were living in New Mexico between 1990 and 1996 (see fig. II.13).
Figure II.13: DOD and DOE Retired Federal Workers in New Mexico (1990-96)
The 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.
Figure II.14 shows that DOD also accounts for nearly all of the salary and wage expenditures for federal employees of defense-related agencies.
Figure II.14: DOD and DOE Federal Employee Salary and Wage Expenditures in New Mexico (1988-96)
On 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.
DOE 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.
DOD and DOE Share of Defense-Related Employment in New Mexico
Defense-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’s and DOE’s numbers and types of occupations.
On average, DOD accounted for 97 percent of the total defense-related federal employment in New Mexico between 1988 and 1996 (see fig. II.15).
Figure II.15: DOE and DOD Employment in New Mexico (1988-96)
DOE 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).
Figure II.16: DOD Active, Inactive, and Civilian Employment in New Mexico (1988-96)
Active 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).
Figure II.17: Salary and Wages for DOD Active and Inactive Duty Members and DOD Civilians in New Mexico (1988-96)
Between 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).
Figure II.18: Job Occupations of DOD Active Duty Military in New Mexico (1988-96)
The 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).
Figure II.19: Job Occupations of DOD Civilians in New Mexico (1988-96)
The majority of DOE federal jobs in New Mexico between 1988 and 1996 were professional and administrative (see fig. II.20).
Figure II.20: Job Occupations of DOE Federal Employees in New Mexico (1988-96)
Survey of Top Defense Contractors in New Mexico
The 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.
Survey Methods
For 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.
We obtained DOD’s 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.
Contractors 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.
Contractor Background
As 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.
During the period of time covered by our survey, Honeywell’s 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’s business establishment in Albuquerque.
DynCorp is a large professional and technical services firm. DynCorp’s 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’s survey data was completed by staff at the corporate headquarters in Reston, Virginia. DynCorp’s responses were based on financial data for DynCorp and its subsidiaries that also operate in New Mexico (e.g., Aerotherm).
EG&G’s 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’s survey data was completed by staff at the Albuquerque office and includes data only for EG&G Management Systems.
Kit Pack Company is located in Las Cruces, south of Holloman Air Force Base near White Sands Missile Range. Kit Pack’s 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.
We 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’s Washington operations office.
We could not use Lockheed Martin’s 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’s 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’s tax department.
We discovered several discrepancies in the company’s financial information. When we discussed these with company officials, they indicated that the data provided by the Washington operations office were “less reliable” 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.
Key Limitations
Our 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.
Among 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.
Honeywell 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.
Kit 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.
EG&G did not have records for FTEs and wages associated with subcontracted work.
DynCorp 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.
Survey Findings
We 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.
The 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).
Figure III.1: DOD Contracts Awarded to the Top Four New Mexico Defense Contractors (1988-96)
Between 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.
Figure III.2: Contract Dollars Received by the Top Four New Mexico Defense Contractors That Stayed In-State (1988-96)
Although 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’s 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).
Figure III.3: Differences in Percent of Prime Contract Dollars That Remained In-State (1988-96)
For 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.
Figure III.4: Subcontract Dollars That Stayed In-State (1988-96)
The 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).
Figure III.5: DOD Prime Contract and Subcontract Jobs That Stayed In-State (1988-96)
On 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.
Figure III.6: Wages for DOD Prime Contract and Subcontract Work That Stayed In-State (1988-96)
We compared our survey results to DOD’s 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’s records and the contractors’ would be different as was revealed in the survey. Therefore, we compare DOD’s 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).
The overall comparison between the contractors’ records and DOD’s 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’s economy. In 1994, the contractors’ records show that $93.6 million in DOD prime contract work was done in New Mexico. On the other hand, DOD’s 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’ records showed that $143.3 million in DOD prime contract work was done in the state, whereas DOD’s records show that the businesses received $117.2 million, representing a possible $26-million, or about an 18 percent understatement.
As expected, a comparison of the contractors’ 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’s records. | Why GAO Did This Study
Pursuant 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.
What GAO Found
GAO 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. |
crs_RL33341 | crs_RL33341_0 | History of the SPR
Establishment of the SPR
From 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.
The 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.
In 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.
The 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.
SPR 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.
The 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.
The 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.
Some 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.
The 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.
The 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.
The Drawdown Authorities
The 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."
Congress 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. § 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.
Under 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.
Proposals in the 111th Congress to Amend the Authorities
Legislation 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.
The 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.
Historically, use of the SPR is premised on a physical shortage of supply—which 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.
Behind 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.
If 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.
Arguments 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.
Arguments 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.
Acquisition of Crude Oil for the SPR
Resumption of Fill (2009)
As 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.
Royalty-in-Kind Acquisition
From 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—as well as a precipitous drop in crude oil prices into early 1999—generated 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.
As 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.
In 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.
Legislative 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.
In 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.
Through 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.
Opponents 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—that 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.
When Should the SPR Be Used?: The Debate Over the Years
The 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.
Authorizing 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"—either an observed price increase, or the likelihood of one.
A 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—and in committee in the 105 th —renewed 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.
The 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.
The 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.
Use of the SPR in the Persian Gulf War (1990)
This 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.
In 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.
Within 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.
The 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.
A 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.
Hurricanes and Changes in the Market Dynamics (2005-2008)
Prior 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.
However, 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.
The 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.
The Call for an SPR Drawdown: Summer 2008
Some 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.
By 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.
In 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).
The 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.
The 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.
It 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.
There 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.
The 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.
Establishment of a Regional Home Heating Oil Reserve
Although 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—from which both home heating oil and diesel fuels are produced—immediately 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.
There 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—for seven consecutive days—the 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.
During 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.
A 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.
S. 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. | 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.
The 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.
Beginning 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.
The 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. |
crs_R43361 | crs_R43361_0 | Introduction
The 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."
As 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.
In 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.
This 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"—that is, review and clear—foreign 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.
Legislative Background
Since 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—and continue to be—attached to legislation for an individual country or region.
A 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.
In 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.
In 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—such as equipment, support services, grants, loans and cash transfers, and exercises—that 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.
In 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.
In 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.
Depending 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.
As 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.
Comparison of Current Laws
The 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.
(See Table 1 , below, which summarizes these key differences.)
Leahy Vetting in Practice22
The 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.
For 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.
For 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.)
Under 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.
The Vetting Process
Leahy 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—both units and individuals—for training and the exchange of memoranda for other forms of assistance.
U.S. Embassy Procedures
U.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.
As 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).
The 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.
Headquarters Level
In 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.
Additional Review and Conclusion
If 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.
Vetting Results and Their Use
By 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.
In 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.
Vetting Personnel
The 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.
Vetting Funding
In 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.
In 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 Mérida 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.
Some 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.
Vetting System Improvement Initiatives
The 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.
DRL 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.
Issues for Congress
The 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.
Should the FAA and DOD Leahy Laws Be Made Consistent?
Over 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 —the 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.
Should the FAA and DOD Remediation Standards Be the Same?
The differing FAA and DOD language on remediation standards—the 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—leaves 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.
If 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.
In 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—to 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 ).
On 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—punishing all members of a unit for the transgressions of some members of a unit—is inequitable. Some critics view the remediation measures set forth by DOD—removing individuals who have committed abuses from units rather than making all in the unit guilty of their transgressions—as 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.
In 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.
Should Other Differences Be Aligned?
In 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.
What Level of Resources Are Adequate to Conduct Vetting?
The 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?
The 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.
Funding
Some 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.
Some 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.
Technology
Another 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.
Training and Oversight
Concern 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).
In 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.
Should Implementation Practices and Procedures Be Standardized?
Although 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.
In 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.
To 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—including 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—a certain degree of flexibility in the application of the laws may be desirable.
What Challenges May the Expanded DOD Scope Present?
The 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.
Nevertheless, the expansion of scope of the DOD prohibition presents the State Department and DOD with a number of challenges. These challenges include the following:
Defining 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.
Conclusion
More 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.
Given 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.
Evolving 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—with 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.
Some 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?
Congress 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. | 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.
First 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.
Implementation 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.
The 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. |
crs_RS20717 | crs_RS20717_0 | RS20717 -- Vietnam Trade Agreement: Approval and Implementing Procedure
Updated December 17, 2001
Background (1)
After 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.
Restoration 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.
Implementing Procedure
The 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)).
All 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.
Functionally, 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
(1) Enactment necessary.
The agreement can take effect only if approved by enactment of a joint resolution (Section 405(c)); 19U.S.C.2435(c)).
(2) Transmittal of the agreement by the President to Congress.
The 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)
(3) Mandatory introduction of approval resolution.
On 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)
(4) Language of approval resolution .
The 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:
"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)
(5) Committee referral .
The 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)).
(6) Amendments prohibited .
No 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)).
(7) Committee consideration in the House . (8)
If 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)).
(8) Floor consideration in the House.
(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)).
(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)).
(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)).
(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)).
(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)).
(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)).
(9) Committee consideration in the Senate (12)
An 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)).
(10) Floor consideration in the Senate.
(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)).
(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)).
(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)).
(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)).
(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)).
(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.
(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.
(11) President's implementing authority.
(a) After the joint resolution approving the trade agreement with Vietnam is passed
by 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)).
(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).
(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).
(12) Approval by Vietnam.
The agreement also must be approved by Vietnam. (18)
(13) Entry into force.
After 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)
(14) Maintenance in force .
According 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)
In 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) | 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. |
crs_RS20458 | crs_RS20458_0 | RS20458 -- Vieques, Puerto Rico Naval Training Range: Background and Issues for Congress
Updated August 20, 2004
Background information
The 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.
Until 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.
Puerto 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.
April 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.
Rush 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
should 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.
Clinton-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.
Removal 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.
Congressional 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.
Congress 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.
Congress 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.
Position 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.
Final 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.
Initial 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.
In 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."
New 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.
Supporters 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.
Governor 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.
On 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.
Legislation 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
directs 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)
Closures 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.
Potential Issues for Congress
Potential 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?
Legislative Activity
FY2004 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
this 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)
FY2004 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. | 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. |
crs_RL32623 | crs_RL32623_0 | 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.
There 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.
In 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.
As 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.
Consistent 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.
It 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.
Timing of Federal Elections
The 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.
The Constitution, while declaring in the "Times, Places and Manner" clause (art. I, §4, 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, §1, 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.
It 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.
The 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.
Federal Authority to Postpone
As 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.
Unlike 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:
That 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.
If 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 .
Furthermore, 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.
It 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. §8) and presidential elections (3 U.S.C. §2), which have traditionally left the details of such decisions up to the states.
State Authority Over Election Procedures and Administration of Federal Elections
State Authority Under United States Constitution
There 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.
The 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.
Finally, 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.
Although 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.
Under 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.
The 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:
Indiana 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, § 4.
It is true that a State's verification of the accuracy of election results pursuant to its Art. I, § 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.
As 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.
Authority Under State Law to Postpone or Reschedule an Election to Federal Office
There 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.
Conformance With Federal Law
Does 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?
Congressional Elections
The statutorily established date for elections for federal office—while it is clearly mandatory and not merely advisory—may 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:
2 U.S.C. § 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.
The 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.
Federal 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:
...[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.
This 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—to be elected—receive 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:
The court in Busbee acknowledged that 2 U.S.C. § 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—death, resignation, personal incapacity—2 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.
Elections for Presidential Electors
The 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:
3 U.S.C. § 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.
Does 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.
Certainly, 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.
However, if there is a disruption prior to an election, or anticipated at the time of election—such as in the case of a hurricane, for example—could 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.
It 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.
Furthermore, 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:
creates 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.
Clearly, 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.
It 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.
Finally, 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—particularly an election for presidential electors—based 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.
There 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—a contested congressional primary—on 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.
Problems 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—absent the most extreme disruption and immediate "exigent" circumstance—to 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.
Appendix: Constitutional and Federal Statutory Provisions
Constitutional Provisions: Congressional Elections
A 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 ....
Article 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.
Amendment Seventeen . The Senate of the United States shall be composed of two Senators from each State, elected by the people thereof, for six years ....
When 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.
Article 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.
Article I, Section 5, clause 1 . Each house shall be the Judge of the Elections, Returns and Qualifications of its own Members ....
Presidential Elections.
Article 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:
Article 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....
Article 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.
Amendment 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; – 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 ....
Dates of Federal Office Terms.
Amendment 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.
Current Federal Statutory Provisions.
2 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.
2 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.
2 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.
3 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.
3 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.
3 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. | 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.
The 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, §5, cl. 1), and an express authority in Congress over at least the timing of the selections of presidential electors in the states (article II, §1, 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.
In 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. §8, and 3 U.S.C. §2) 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.
With 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.
This report has been revised from an earlier version and will be updated as case law or events warrant. |
gao_GAO-07-794T | gao_GAO-07-794T_0 | Background
Titles 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 ‘87, 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’s compliance with federal standards, and introduced additional sanctions and decertification procedures for homes that fail to meet federal standards. Following OBRA ‘87, 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.
Survey Process
Every 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.
The 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’ 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’ 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—generally consisting of registered nurses, social workers, dieticians, and other specialists—to use in conducting surveys. These procedural instructions are intended to make the on-site surveys thorough and consistent across states.
The life safety component of a survey focuses on a home’s 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’s office.
Complaint 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’s 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’s property. The inclusion of such a finding constitutes a ban on nursing home employment.
Effective 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’s OSCAR database.
Enforcement
In an effort to better ensure that nursing homes achieve and maintain compliance with the new survey standards, OBRA ‘87 expanded the range of enforcement sanctions. Prior to OBRA ‘87, the only sanctions available were terminations from Medicare or Medicaid or, under certain circumstances, DPNAs. OBRA ‘87 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 ‘87, 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’s recommendation for sanctions but can modify it.
Effective 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’s 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.
Unlike 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—whether received directly from the home or withheld from the home’s Medicare and Medicaid payments—is 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’s closure, termination is used infrequently.
Oversight
CMS is responsible for overseeing each state survey agency’s 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 ‘87, 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’s 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’s 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.
Quality of Care Remains a Problem for a Small but Significant Proportion of Nursing Homes Nationwide
A small but significant proportion of nursing homes nationwide continue to experience quality-of-care problems—as evidenced by the almost 1 in 5 nursing homes nationwide that were cited for serious deficiencies in 2006—despite the reforms of OBRA ‘87 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.
CMS 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).
Despite 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.
The 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’s nursing home initiatives has increased state survey agencies’ 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.
In 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.
In December 2005, we reported on understatement of serious deficiencies in five states—California, Florida, New York, Ohio, and Texas—from 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.
Federal 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.
CMS Has Strengthened Its Enforcement Capabilities, although Key Initiatives Still Need Refinement
CMS has strengthened its enforcement capabilities since OBRA ‘87 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 “immediate sanctions” is misleading because the policy requires only that homes be notified immediately of CMS’s 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’s 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’s components are not integrated and the national reporting capabilities are incomplete, hampering the agency’s ability to track and monitor enforcement.
Despite Changes in Federal Enforcement Policy, Immediate Sanctions Do Not Always Deter Noncompliance and Often Are Not Immediate
Despite CMS’s 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’s 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.
In 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.
We also recently reported that the term “immediate sanctions” is misleading because the policy is silent on how quickly sanctions should be implemented and there is a lag time between the state’s 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’s intent to implement a sanction—15 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’s 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.
Although 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’s 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’ (HHS) Office of Inspector General that found that the collection of CMPs in appealed cases takes an average of 420 days—a 110 percent increase in time over nonappealed cases—and “consequently, nursing homes are insulated from the repercussions of enforcement by well over a year.”
CMS has taken additional steps intended to improve enforcement of nursing home quality requirements; however, the extent to which—or when—these 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’s scope and severity, the care areas where the deficiency was cited, and a home’s 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.
While CMS Collects Valuable Enforcement Data, Its Enforcement Monitoring Data Systems Need Improvement
In 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—ASPEN Enforcement Manager (AEM)—and, 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’s 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—and other data systems related to enforcement such as the financial management system for tracking CMP collections—are 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.
Furthermore, 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’s 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.
CMS 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—along with other data the agency collects—efficient 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.
CMS Has Strengthened Oversight, although Competing Priorities Impede Certain Key Initiatives
CMS 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 ‘87 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’ 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—the 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—was delayed because they compete for priority with other CMS projects.
Intensity of Federal Efforts Has Increased Significantly
CMS 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.
Complaint Investigations
To ensure that complaints and allegations of abuse are investigated and addressed in accordance with OBRA ‘87, 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.
CMS 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’s 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’s and states’ ability to adequately track the status of complaint investigations and CMS’s 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’ 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’ 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.
Federal Comparative Surveys
CMS 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.
Fire Safety Standards
In 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.
Upgrades to Data Systems
CMS 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’ 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.
Since 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.
In 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 ‘87 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’s 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.
Competing Priorities Impede Certain Key CMS Initiatives
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. 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—the 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—were delayed because they compete for priority with other CMS projects.
The 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.
Since 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.
Although 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.
Concluding Observations
About 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 ‘87. 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 ‘87 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.
Mr. 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.
GAO Contact and Acknowledgments
For 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.
Appendix I: Prior GAO Recommendations, Related CMS Initiatives, and Implementation Status
Table 2 summarizes our recommendations from 11 reports on nursing home quality and safety, issued from July 1998 through March 2007; CMS’s actions to address weaknesses we identified; and the implementation status of CMS’s initiatives as of April 2007. The recommendations are grouped into four categories—surveys, 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.
Appendix II: Percentage of Nursing Homes Cited for Actual Harm or Immediate Jeopardy during Standard Surveys
In order to identify trends in the percentage of nursing homes cited with actual harm or immediate jeopardy deficiencies, we analyzed data from CMS’s 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’ most recent survey from each period.
Related GAO Products
Nursing Homes: Efforts to Strengthen Federal Enforcement Have Not Deterred Some Homes from Repeatedly Harming Residents. GAO-07-241. Washington, D.C.: March 26, 2007.
Nursing Homes: Despite Increased Oversight, Challenges Remain in Ensuring High-Quality Care and Resident Safety. GAO-06-117. Washington, D.C.: December 28, 2005.
Nursing 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.
Nursing Home Fire Safety: Recent Fires Highlight Weaknesses in Federal Standards and Oversight. GAO-04-660. Washington D.C.: July 16, 2004.
Nursing Home Quality: Prevalence of Serious Problems, While Declining, Reinforces Importance of Enhanced Oversight. GAO-03-561. Washington, D.C.: July 15, 2003.
Nursing Homes: Public Reporting of Quality Indicators Has Merit, but National Implementation Is Premature. GAO-03-187. Washington, D.C.: October 31, 2002.
Nursing Homes: Quality of Care More Related to Staffing than Spending. GAO-02-431R. Washington, D.C.: June 13, 2002.
Nursing Homes: More Can Be Done to Protect Residents from Abuse. GAO-02-312. Washington, D.C.: March 1, 2002.
Nursing Homes: Federal Efforts to Monitor Resident Assessment Data Should Complement State Activities. GAO-02-279. Washington, D.C.: February 15, 2002.
Nursing Homes: Sustained Efforts Are Essential to Realize Potential of the Quality Initiatives. GAO/HEHS-00-197. Washington, D.C.: September 28, 2000.
Nursing Home Care: Enhanced HCFA Oversight of State Programs Would Better Ensure Quality. GAO/HEHS-00-6. Washington, D.C.: November 4, 1999.
Nursing Home Oversight: Industry Examples Do Not Demonstrate That Regulatory Actions Were Unreasonable. GAO/HEHS-99-154R. Washington, D.C.: August 13, 1999.
Nursing Homes: Proposal to Enhance Oversight of Poorly Performing Homes Has Merit. GAO/HEHS-99-157. Washington, D.C.: June 30, 1999.
Nursing Homes: Complaint Investigation Processes Often Inadequate to Protect Residents. GAO/HEHS-99-80. Washington, D.C.: March 22, 1999.
Nursing Homes: Additional Steps Needed to Strengthen Enforcement of Federal Quality Standards. GAO/HEHS-99-46. Washington, D.C.: March 18, 1999.
California Nursing Homes: Care Problems Persist Despite Federal and State Oversight. GAO/HEHS-98-202. Washington, D.C.: July 27, 1998.
This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Why GAO Did This Study
With 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.
What GAO Found
The 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. |
crs_RL32922 | crs_RL32922_0 | Background on the Programs
The 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.
Several 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.
Recently, 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.
These 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?
Statutory Authorities
Federal Meat Inspection Act of 1906
This 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.
Poultry Products Inspection Act of 1957
This 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).
Agricultural Marketing Act of 1946
Under 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.
Egg Products Inspection Act
This 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.
System Basics
Coverage
FSIS'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.
Plant Sanitation
No 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.
HACCP
Plants 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.
Slaughter Inspection
FSIS 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—meaning 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.
Processing Inspection
The 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.
Pathogen Testing
The 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.
Enforcement
FSIS 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.
Other 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.
Funding
Federal 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.
Staffing
FSIS 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.
State Inspection
Twenty-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.
Approximately 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.
Import Inspection
FSIS 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.
Microbiological Contamination and HACCP
The U.S. Centers for Disease Control and Prevention (CDC) observed in April 2009:
Despite 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.
Not 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).
Nonetheless, 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.
Development of HACCP
In 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.
In 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.
Pathogen Performance Standards and Salmonella
The 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.
In 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.
Nonetheless, 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.
FSIS 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.
FSIS 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—beginning with young chicken slaughter establishments—that 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.
The 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:
Category 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%);
Category 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%);
Category 3 establishments have results from their most recent completed sample set that exceed the standard (i.e., above 20%).
Twenty-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.
The 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.
Another 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.
Concerns 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).
(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—chicken, turkey and beef.)
In 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.
E. coli O157:H7
Illness 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.
CDC 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."
The 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.
The 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—from 0.24% in 2007 to 0.47% in 2008—but said it was unknown whether this was related to focused sampling of higher-risk facilities, improved laboratory detection, or an actually higher microbial load.
During 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 ").
In 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.
For 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.
FSIS 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—the 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.
In 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.
By 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.
Additional 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."
The 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.
FSIS 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.
Listeria monocytogenes
In 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.
The 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.
Interest 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.
In 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.
On 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.
USDA 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.
Recalls 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.
Risk-Based Inspection System
Congress 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."
More 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.
Public 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.
Several 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.
The 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.
The 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—which it now calls a "Public Health Risk-Based Inspection System" (PHRBIS)—to 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.
The 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.
In Congress
Provisions 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 ).
Several 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.
In 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—whether by contract or other means—another 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.
Other Selected Issues
Safety of Meats in School Meals Programs
As 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.
Although schools use cash to purchase directly most of the foods used in these programs, a significant amount—by law, at least 12% of the combined value of cash and commodity assistance—is 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.
USA 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—and 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.
A 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.
The 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.
The 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.
The 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."
Recall and Enforcement Proposals
Currently, 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.
At 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—and more rapid—action 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.
Meat 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.
In 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.
Reviewing 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."
In Congress
Provisions 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.
Several 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 ).
Mandatory 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.
Meat Traceability and Animal Identification
Recalls 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.
Supporters 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.
Regardless, 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.
On 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.
In Congress
Animal 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.
The 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.
The 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.
With 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.
Traceability 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.
Funding and User Fees
From 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.
To 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.
For 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).
In Congress
As 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.
Chinese Poultry Rule
The 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.
The 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).
The 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.
Furthermore, 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.
Many food safety advocates were supportive of the House appropriations language banning the poultry rule, arguing that China—the third leading foreign supplier of food and agricultural imports into the United States—lacks 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.
State-Inspected Products
As 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.
Those 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.
In Congress
In 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—except 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.
The 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.
The 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.
BSE
North American Cases
Twenty-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.
In 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.
Animal 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.
BSE Safeguards
FSIS 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:
Downer (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.
The 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" ").
Additional 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).
In Congress
For 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.
On 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].)
A 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.
Humane Slaughter and the Hallmark/Westland Recall
On 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—but before they were actually slaughtered—for food. FSIS regulations explicitly prohibit most nonambulatory cattle which are presented for ante-mortem inspection, because of their higher risk of BSE.
FSIS 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."
FSIS 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—that is, diverted from the human food supply—and properly disposed of.
In Congress
The 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.
In 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]. | 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.
Several 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—notably 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.
Is 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)—essentially plant-specific contamination prevention plans—on 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.
Should 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.
Does 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. |
gao_GAO-03-685 | gao_GAO-03-685_0 | Background
In 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’ 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.
Inspectors 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 “without regard to political affiliation and solely on the basis of integrity and demonstrated ability.” To help maintain their independence and fulfill their mission—which often involves being publicly critical of their own departments—inspectors general must familiarize their departmental colleagues with their special role.
Because 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 “be free, both in fact and appearance from personal, external, and organizational impairments to independence.” These standards also require that auditors “avoid 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 . . ..” 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.
About 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’s regional offices.
Consistent 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’s 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’s 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.
The 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’s 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’s information technology needs, and working with the media. It is also responsible for the OIG’s human resource management activities, but obtains significant personnel support from the department’s centralized Program Support Center. OCIG and OMP each represent about 5 percent of the OIG’s budget.
The 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—the federal government’s primary civil remedy for false or fraudulent claims—and refer such matters to DOJ. The act imposes substantial penalties on those who knowingly submit false claims to Medicare and other federal programs.
If 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 “kickbacks” in connection with patient referrals. The OIG also can assess CMPs against hospitals for “patient dumping,” that is, failing to provide appropriate treatment to patients presenting a medical emergency. The amount of the CMP imposed is related to each provider’s 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—including health care fraud or patient abuse and neglect—or had their license suspended or revoked. OCIG may also opt to negotiate corporate integrity agreements with health care providers.
Although 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’s 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.
Examination of the Inspector General’s Actions Regarding Independence and Judgment
We examined the independence that was reflected in the Inspector General’s 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.
The Inspector General’s Independence
Current and former OIG headquarters employees frequently expressed concerns about the Inspector General’s independence. These concerns centered on several incidents—some 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.
Florida Pension Audit
In 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.
The OIG’s 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’s contributions to the Florida retirement system could be excessive and that a report on these contributions might affect the outcome of the Florida governor’s race that November.
When 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.
We 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’s 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’s 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.
York Hospital
In February 2000, the OIG alleged that York Hospital—located in York, Pennsylvania—had 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’s potential liability was $726,000.
Soon 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, “I hate this case; get rid of it.” Feeling as though they had to move fast, OIG attorneys lost the benefit of time—which they explained is a key factor in resolving a case in the government’s favor—and 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.
The 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.
Although 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’s financial interest.
Lithotripsy Claims
Two 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.
A 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’s 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.
The 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.
Despite the OIG’s 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’s attorney. If the Inspector General wanted OCIG’s expertise to be offered to CMS, it would have made sense for OCIG to contact CMS’s attorney before proceeding. CMS’s attorney responsible for handling this matter told us that she would have been troubled if the OIG had commenced discussions without her agency’s participation. Given the Inspector General’s personal relationship with the medical societies’ attorney and the OIG’s 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.
Adjusted Community Rating Audit
On 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’s findings in written comments on April 16, 2002.
Some employees alleged that the delay in issuing this report reflected a lack of independence on the Inspector General’s part. They suggested that the Inspector General should have taken a more active role in expediting the report’s issuance. They pointed out that the CMS Administrator initially disagreed with the draft report’s findings and hired a consultant to validate the OIG’s results. According to these employees, it took CMS more than a year to replicate the OIG’s work and determine that it agreed with the report’s 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’s 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.
The 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’s issuance. Although she recalled that the CMS Administrator initially disagreed with the report’s conclusions, she told us that she did not remember the specific time frames associated with it.
Our evidence shows that the Inspector General’s staff tried to enlist her assistance in expediting CMS’s comments to no avail. By permitting CMS to delay the report’s 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’s attention.
The Inspector General’s Personnel Changes
During the Inspector General’s 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’s representative characterized these changes as voluntary and beneficial to the overall mission of the office.
The 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’s 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.
We 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.
These 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’s 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’s 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—all of which were initiated by the Inspector General—were involuntary.
The other four individuals whose departures were particularly troubling were GS-15 level managers from OMP, OCIG, OI, and the Inspector General’s Immediate Office. One manager resigned after being reassigned twice within 9 months. According to several OIG employees, the purpose of this manager’s second reassignment was to accommodate the Inspector General’s 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’s Immediate Office to another component. Some staff members perceived that the reassignment of this individual resulted, in part, from her requesting—without the Inspector General’s knowledge—a 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.
Some of the employees we interviewed were skeptical that these changes were necessary and asserted that they actually damaged the organization’s 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’s 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’ mistrust. Although some employees were supportive of the Inspector General’s organizational changes or felt unaffected by her actions, comments made during our interviews and in our employee survey highlighted the frustration many employees—especially at headquarters—felt due to the perception of unfairness associated with these personnel changes. We found that the magnitude and abruptness of the Inspector General’s actions raised fear and anxiety among her staff.
We 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’ privacy and that she was uncomfortable discussing the circumstances involving these managers with us.
Finally, we identified one matter giving rise to a legal concern. We obtained information suggesting that a member of the OIG’s 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’s 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’s outstanding performance as a GS-14 in the same office, the Inspector General had directed the employee’s supervisor to promote her to a GS-15 at the earliest opportunity. Shortly thereafter, an advisor to the Inspector General contacted the individual’s 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 “selective placement factor” 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’s actions were unlawful.
The Inspector General’s Judgment
We identified several matters that raised concerns about the adequacy of the Inspector General’s leadership. Some employees questioned the Inspector General’s 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’s actions as demonstrating a lack of interest in key office operations.
Report by the President’s Council on Integrity and Efficiency
In the fall of 2002, the Integrity Committee of the President’s 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.
The 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.
In 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.)
The 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’s 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’s acquisition of these items.
The Inspector General’s Travel
Another issue that persistently surfaced during our review was perceptions of the propriety of the Inspector General’s business travel. As the head of a large organization with offices nationwide, the Inspector General is entitled—and expected—to 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—like other government employees— 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—sometimes with two senior OIG managers.
To better understand the purpose of the Inspector General’s 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’s 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.
Three of the Inspector General’s 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—sometimes involving the participation of the two senior managers—were included. While we did not validate the managers’ 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.
In responding to our inquiries regarding the Inspector General’s 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.
The Inspector General’s Leadership in Resolving Budgetary Problems
During 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—regardless 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.
Some 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.
This 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’s 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.
Evaluation of OIG Productivity
The 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’s 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’s 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’s 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.
Savings, OAS Reports, and Convictions
We analyzed a wide variety of performance measures to evaluate the OIG’s 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’s investigative referrals has steadily increased over the last 6 years.
OI 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—March 31, 2003—the OIG reported 320 convictions.
Although it is difficult to measure the “sentinel” effect of some of the OIG’s 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.
Exclusions from Medicare
Like 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—the transition year—the number of such providers excluded by the OIG dropped to 166. Table 2 shows the OIG’s exclusions imposed since fiscal year 1997.
Settlements, Recoveries, CMPs, and CIAs
We 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’s 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.
OIG officials told us that its False Claims Act cases are strongly tied to DOJ’s 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.
Another 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.
In 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’s previous aggressiveness in pursuing patient dumping cases—which generally made up between 65 and 90 percent of all CMPs imposed each year—has 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.
CIAs, typically negotiated in conjunction with False Claims Act settlements, are also an indicator of the OIG’s productivity. CIAs consist of “integrity provisions” that are intended to ensure that a provider’s 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.
OCIG 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’s November 20, 2001, “Open Letter to Health Care Providers” regarding CIAs. CIAs had long been a concern of providers because of the costs associated with implementing the specified integrity provisions— 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’s policies and practices regarding CIAs were being modified in response to those concerns.
The 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’ 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 “certification agreements,” 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.
Outreach and Education Activities
We 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’s 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—especially among OCIG employees.
We 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.
OIG 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.
In 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’s 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.
OEI Reports
A 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’s 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.
We followed up on several projects that recently had been canceled to better understand management’s 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—despite interest from the provider community and relevant agency.
We 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.
In 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.
Measure of Employee Morale
Based 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.
Our 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 “All things considered, my component is a good place to work” (89 percent and 87 percent, respectively) and “I believe that my work is important to the success of the component” (94 percent and 93 percent, respectively). Similarly, our interviews revealed an overall high level of job satisfaction, typified by comments such as “I believe my work makes a difference.” 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.
We 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—10 percentage points—to the statement that “Everyone is treated with respect.” We also found a 14 percentage point difference in positive responses to the statement, “I have confidence and trust in my organization.” 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’s actions, most field employees told us that they felt insulated from, and largely unaffected by, the personnel and other changes that occurred in headquarters.
In addition, our survey indicated that senior management staff— specifically members of the Senior Executive Service and GS-15 employees—were 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, “As an organization, the OIG has clear goals,” only 67 percent of the senior management staff—those at the GS-15 level and members of the Senior Executive Service—responded 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’s goals, but others expressed confusion about the Inspector General’s 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’s actions.
Our survey revealed a substantial deterioration in OEI employees’ views of the organization, management, and their personal job satisfaction. For example, a statement focusing on whether “upper management clearly communicates the goals of my component,” 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 “fully informed about major issues affecting my job” (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).
The 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 “high- profile” products—those signed by the Inspector General, those issued as standard blue-cover reports, and those placed on the OIG’s Web site.
Our employee survey also identified a distinct decline in positive responses to survey items among OCIG employees—almost 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 “I am satisfied with my job” and a 12 percentage point drop in their opinion that “everyone is treated with respect,” compared with last year’s 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.
Finally, 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.
Agency Comments and Our Evaluation
We 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.
In reference to our discussion about the OIG’s 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’s nonmonetary achievements during her tenure. As we noted in our draft report, many of the OIG’s productivity measures have remained steady or improved, including those cited in the Inspector General’s 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.
In 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.
The 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—particularly where independence could be questioned. We continue to believe that the Inspector General’s decision to intervene at the request of senior officials in the Florida governor’s 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’s 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—particularly since the actual findings of the audit were reported by the media in March 2003, 6 months after the work commenced.
Regarding 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’s 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’s case was weak. However, the former Chief Counsel and other OCIG attorneys told us that when she instructed them to “get rid of” 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’s 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.
Concerning the OIG’s 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’s comments or publish the OIG’s 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’s 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—nor did we find any evidence to suggest—that she took more rigorous steps to obtain CMS’s 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’s report had nothing to do with her independence. However, the fact that CMS strenuously objected to the OIG’s 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.
Regarding 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’s 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 “over and over again.” 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— most of which are in the field where the consequences of the Inspector General’s 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 “at least equal to or better than” 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’s personnel decisions, nor is her practice of promoting other employees from within the organization.
In our draft report, we also discussed the OIG’s 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—who was in an acting deputy position—to develop strategies for resolving the OIG’s 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’s 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’s limited personal involvement, the OIG’s 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’s fiscal challenges.
Finally, the Inspector General’s 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.
We have reprinted the Inspector General’s letter in appendix III.
We 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’s Web site at http://www.gao.gov. We will also make copies available to others upon request.
If 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.
Appendix I: Scope and Methodology
To conduct our review, we focused on three key areas—the 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—including the Inspector General—and 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.
Our review included the examination of more than 8,000 pages of documents, including material related to the OIG’s 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—and were given access to—the 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’s Council on Integrity and Efficiency (PCIE), which recently issued a report on some of the Inspector General’s actions.
Interviews with Current and Former Employees
To obtain the views of OIG employees, we conducted a series of semistructured interviews. These interviews relied on open-ended questions regarding the Inspector General’s leadership, productivity, morale, and other OIG operations. We interviewed three categories of employees—those who were selected randomly, those who volunteered for interviews, and those we selected because of their knowledge or position within the OIG.
The randomly selected staff were chosen for interviews from five of the OIG’s 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.
At 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’s headquarters in Washington, D.C. and in nearby field offices, including those in Baltimore, Columbia, and Rockville, Maryland.
To 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.
In 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.
As 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.
Evaluation of the Inspector General’s Independence
To 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’s 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’s independence from interviews with current and former OIG officials as well as the Inspector General.
Review of Personnel Information
To 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’s 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.
Finally, 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.
We also interviewed OIG officials regarding this and other personnel decisions made during the Inspector General’s tenure.
Examination of the Inspector General’s Travel
To understand the purpose, frequency, and duration of the Inspector General’s 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’s 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.
Analysis of OIG Performance Measures
To 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—before the current Inspector General’s tenure.
To 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’s November 20, 2001, open letter to providers had been implemented.
In addition, we discussed the OIG’s productivity with some of its partners in the law enforcement community to determine whether there have been recent changes in the level of OI’s or OCIG’s support. Specifically, we spoke to officials from the Department of Justice and seven of its U.S. Attorneys’ 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.
Finally, we assessed the OIG’s 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.
Analysis of Web-Based Survey Results
To 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 “not deliverable” 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.
The 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: “Overall, the OIG is improving as a place to work and make a difference,” “I have confidence and trust in my organization,” and “In the last 15 months, morale in my work group has improved.” 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 “Completed,” which, if checked, indicated that the respondent gave us permission to include his or her responses in our analyses.
In 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 “Completed.” The unit of analysis was the comment—not the respondent. For example, if one respondent made several comments that fell into different categories, each comment was coded separately.
Appendix II: Insufficient Internal Controls Over the OIG’s Credentialing System
In response to allegations that certain employees, including the Inspector General, possessed improper credentials, we evaluated the security of the OIG’s 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’s credentialing system.
The 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’s backup tapes were located in an unlocked drawer in the credentialing system desk. In addition, we also found the stock paper containing the agency’s insignia, used in the production of all credentials, stored unlocked in a cabinet in the same room.
In addition, we found deficiencies in the system itself, making it even more vulnerable to misuse. For example, we found that neither the computer’s 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’s 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.
When we visited the credentialing room we found it empty, the computer on, and the screensaver active. By touching the computer’s 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.
Appendix III: Comments from the Inspector General
Appendix IV: GAO Contacts and Staff Acknowledgments
GAO Contacts
Acknowledgments
Major contributors to this report were Enchelle D. Bolden, Helen Desaulniers, Curtis Groves, Shirin Hormozi, Behn Kelly, Terry Richardson, Christi Turner, and Anne Welch. | Why GAO Did This Study
Janet 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.
What GAO Found
The 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. |
gao_AIMD-95-177 | gao_AIMD-95-177_0 | Background
In 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.
EPA 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.
EPA 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.
After 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.
The 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.
Site Cleanup Costs and Workload Are Substantial
EPA 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).
EPA’s 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.
Although Superfund was enacted 15 years ago, the bulk of EPA’s 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.
EPA’s 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.
EPA’s Automated Information Systems Are Vital to Effective Cost Recovery
After EPA has identified PRPs that are liable and able to pay, the success of EPA’s 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.
EPA 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’s official financial information system, which contains all of the agency’s 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.
According 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.
EPA 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.
Past Concerns With Management of Superfund Cost Recovery
EPA’s 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.
EPA 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.
In December 1992, and again in February 1995, we reported that EPA’s 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’ Financial Integrity Act Report to the President and Congress. Concerning IFMS, EPA’s Office of Inspector General (OIG) reported in 1991 and 1994 deficiencies with the agency’s 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’s (OMB) high-risk list since 1990.
Scope and Methodology
Our 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.
We 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’s 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.
Information System Limitations Make Cost Recovery Time-Consuming and Labor-Intensive
The 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’s 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.
Data in Financial Systems Must Be Augmented by Manual Efforts
Having sufficiently detailed financial information is essential for preparing and supporting cost recovery actions. The Chief Financial Officers Act of 1990 requires that an agency’s 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.
EPA 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.
Because 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.
Staff in EPA’s 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’s report on EPA’s fiscal year 1993 financial statements for the Superfund Trust Fund stated that the system limitation may adversely impact EPA’s 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.
Data Problems Impede the Efficiency of Cost Recovery
EPA 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.
Concerns 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’s financial information systems. Several of the examples cited by these staff are described below.
Staff 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.
One 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.
Five 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’s 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’s 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.
Two regions provided examples of missing or invalid data in the site/project identification field. This was corroborated by a report generated by EPA’s 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.
These 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.
EPA 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’s 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’ account code.
EPA 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’s 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’s 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.
The 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.
Until 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.
Cost Recovery Documentation Not Readily Accessible
To 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.
Despite 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’s 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.
Staff 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’s ten regional offices. The regional offices maintain these work-performed documents as hard copy in various locations—some 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’s offices, they must then try to obtain replacements from the contractors’ 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.
Although 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.
Financial System Does Not Efficiently Support Management of Superfund Cost Recovery Receivables
EPA 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.
OMB Circular A-127 requires that an agency’s 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.
IFMS 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.
EPA has recognized that it has a receivables problem. It has reported this problem as a material weakness in its fiscal year 1994 Federal Managers’ 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.
Because 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.
Planned Changes to Information Systems Could Be Enhanced
EPA 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’s 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.
Expansion of Account Code Structure Should Result in More Detailed Cost Data
To 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’s cost recovery efforts.
Statistical Testing and Improved Documentation of Application Controls Should Help to Improve Data Integrity
To assess financial data reliability, EPA’s 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’s 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.
Regarding 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.
Additional Use of Technology Could Enhance Records Management Systems Used for Cost Recovery
As 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’s difficulties in locating pre-1991 financial documents, or millions of work-performed documents that occupy growing amounts of space in EPA locations nationwide.
One 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’s regional office in San Francisco, California, using documents related to its largest Superfund site. This site accounts for about 25 percent of the region’s 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.
A 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.
Although 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’s Five-Year Plan. Agency officials explained that this has not been a high priority.
Evidence Lacking to Support EPA Assessment of Risks and Controls for Accounts Receivable System
Recognizing that IFMS’ 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’s 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’s 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.
Given 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.
Conclusions
EPA’s 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.
Aware 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’ application controls; (3) assessing how best to use records management systems to meet cost recovery users’ 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’s efforts to recover billions of Superfund dollars through cost recovery actions, make cost recovery more efficient, and lower the risks of losing recoverable dollars.
Recommendations
To improve EPA’s 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’ 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.
Agency Comments and Our Evaluation
EPA 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’s systems supporting cost recovery needed improvement. The agency provided additional information on the status of its improvement activities, which we have incorporated where appropriate.
As 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.
Please 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.
Scope and Methodology
To evaluate how well EPA’s 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’s 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’s 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.
We met with representatives and analyzed workpapers and documents from the three firms involved in the audit of EPA’s 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’s OIG and reviewed its past and current reports related to Superfund and cost recovery. We also met with officials in the Department of Justice’s 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.
To evaluate the extent to which EPA’s 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’s actions, including documentation on users’ requirements, feasibility, costs, benefits, and detailed specifications pertaining to the agency’s efforts to enhance and develop system capabilities to support cost recovery. We also reviewed EPA planning documents, including the agency’s Five-Year Plan, and Strategy and Master Work Plan for IFMS.
Our 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.
We 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’s 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.
Major Contributors to This Report
Accounting and Information Management Division, Washington, D.C.
Ronald 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.
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Address Correction Requested | Why GAO Did This Study
Pursuant 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.
What GAO Found
GAO 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. |
gao_T-RCED-98-122 | gao_T-RCED-98-122_0 | Concessions Operations in the Federal Government
Our 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—just 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.
While 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—in 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.)
Factors Affecting the Rate of Return
Our 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.
Our 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’ 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—especially 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.
Another 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.
A third factor that affects the rate of return to the government from concessioners is the agencies’ 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’ revenue than agencies that were not authorized to retain fees.
Need for Concession Reform
For 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—the 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.
Encouraging 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.
Our 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’ 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—including 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.
It is important to note that permitting the land management agencies to retain concession fees is a form of “backdoor” 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.
Costs and Benefits of Removing Possessory Interest
One issue that is frequently discussed as part of Park Service concession reform is possessory interest—the 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.
Bills 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.
Removing 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.
However, 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.
In 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’ 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.
Mr. 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.
This concludes my statement. I would be happy to answer any questions that you or other members of the Subcommittee may have.
Rate of Return on Concessions Agreements Either Initiated or Extended During FY 1994
Total (fees + special accounts)
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Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Why GAO Did This Study
GAO 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.
What GAO Found
GAO 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. |
gao_GAO-01-780 | gao_GAO-01-780_0 | Background
The 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’ clandestine efforts may involve a violation of U.S. criminal law, usually espionage or international terrorism, which falls within the federal law enforcement community’s mandate to investigate and prosecute. As a result, foreign counterintelligence investigations often overlap with law enforcement interests.
To 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’ 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’s 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.
Within 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.
The 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.
The FBI is DOJ’s 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’s 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.
Within 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.
Supreme 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’s appeals of Foreign Intelligence Surveillance Court denials of government-requested surveillance and search orders.
As 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.
The 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.
Scope and Methodology
To 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’s Internal Security and Terrorism and Violent Crime Sections, the Office of Inspector General, and the FBI’s 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’s July 1999 unclassified report on intelligence coordination problems related to DOJ’s campaign finance investigation. In addition, we reviewed the classified report of the Attorney General’s Review Team on the FBI’s handling of its investigation at the Los Alamos National Laboratory.
To 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.
To 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’s unclassified report on DOJ’s campaign finance investigation and the Attorney General’s Review Team’s classified report concerning the FBI’s 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’s documents. As such, our findings and conclusions relating to DOJ’s proposed actions and remaining impediments are based on testimonial evidence.
To 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’s Inspection Division.
We 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.
Concern Over Possible Adverse Consequences of Judicial Rulings Has Been a Key Factor Impeding Coordination
A 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’s and OIPR’s 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.
Concerns Inhibited FBI and OIPR Coordination
The 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’s 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.
Concerns Regarding Loss of FISA Investigative Tools
The FBI has long recognized that the investigative tools FISA authorized were often the FBI’s 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’s 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’s Review Team—the team established to review the FBI’s handling of the Los Alamos National Laboratory investigation—even 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.
According to an Associate Deputy Attorney General, resolving these concerns is complicated because DOJ’s 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.
Concerns Regarding Loss of Evidence in a Criminal Prosecution
Contacts 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’s enactment, no court using the primary purpose test has upheld a challenge to the government’s 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.
According to Criminal Division officials, the FBI’s and OIPR’s 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.
These 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’ 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.
Criminal 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’ 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’ 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.
Criminal Division Believes OIPR and FBI Concerns Are Overly Cautious
Criminal Division officials consider OIPR’s and FBI’s 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.
Moreover, 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’s 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’s and OIPR’s 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 “exclusive” purpose.
OIPR officials did not dispute this characterization of OIPR’s historical concerns relative to primary purpose. However, these officials said that OIPR’s current position regarding FBI and Criminal Division coordination was based on their understanding of the FISA Court’s 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.
Concerns Regarding Revelation of Intelligence Sources and Methods
According 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.
OIPR 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.
As 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’s 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.
Procedures Established to Ensure Proper Coordination Led to Problems
Stemming, 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’s criminal and counterintelligence functions were properly coordinated. However, according to Criminal Division officials and conclusions by the Attorney General’s Review Team, rather then ensuring proper coordination, problems arose soon after the Attorney General’s 1995 procedures were promulgated. As discussed, those problems stemmed from the FBI’s and OIPR’s concerns about the possible consequences that could damage an investigation or prosecution should a court make an adverse ruling on the primary purpose issue.
In 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’s Review Team during its review of the FBI’s 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.
The Attorney General’s 1995 Guidelines Were Promulgated to Try to Ensure Proper Coordination
According 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’s contacts with the Criminal Division in the Ames case, the Attorney General promulgated coordination procedures on July 19, 1995.
The purposes of the 1995 procedures were to establish a process to properly coordinate DOJ’s 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 “If in the course of an… investigation utilizing electronic surveillance or physical searches under the Foreign Intelligence Surveillance Act…facts 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.” Following the Criminal Division’s 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.
The 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’s 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.
Criminal 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.
FBI and OIPR Concerns Affected Implementation of the 1995 Procedures
“It is critical that the value of the FBI’s 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.”
According to information provided by FBI officials, after issuance of the procedures, agents received training on them. The FBI’s Office of General Counsel developed presentations, which according to FBI officials, were provided to both new agent trainees at the FBI’s 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.
According to the Attorney General’s Review Team’s report, almost immediately following the implementation of the Attorney General’s 1995 procedures, coordination problems arose. Rather than ensuring that DOJ’s 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’s 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.
An FBI official acknowledged that soon after the implementation of the Attorney General’s 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’s 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.
Subsequently, 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’s Review Team submitted interim recommendations to the Attorney General in October 1999.
DOJ Promulgated Additional Procedures to Address Some Coordination Problems
In January 2000, based on the Attorney General’s Review Team’s 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 “core group.” During these “core group critical-case briefings,” 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.
DOJ Has Taken Additional Action to Address Coordination, but Some Impediments Remain
Subsequent to its 1999 interim recommendations, the Attorney General’s 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’s 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—judicially acceptable contacts and information sharing between the FBI and the Criminal Division—that 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 “significant violations” that would trigger the Attorney General’s 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’s case summary memorandums.
Working Group Continued Efforts to Address Foreign Counterintelligence Coordination Issues
In May 2000, the Attorney General’s Review Team sent to the Attorney General its final report on and recommendations to address problems identified during its review of the FBI’s 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’s recommendations. In addition to the Review Team’s report, the coordination working group considered intelligence coordination issues raised in the DOJ Office of Inspector General’s report on DOJ’s 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 “significant federal crime” in the 1995 procedures be changed to “federal felony,” since they believed that the term “significant” was too ambiguous and that the term “felony” would be open to less interpretation as the particular elements comprising any particular felony violation are set out in statute.
The 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’s decisions to authorize a FISA surveillance or search. In contrast, a working group official said that the Criminal Division and Attorney General’s 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’s 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.
After 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.
In March 2001, the decision memorandum was sent to the Acting Deputy Attorney General for the Attorney General’s decision. On the basis of the Acting Deputy Attorney General’s 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.
Some Impediments to Coordination Remain
Despite 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.
Differing Opinions on the Requirements and Prohibitions of the Attorney General’s Coordination Procedures Persist
Despite 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’s recommendation to clarify language in the 1995 procedures that trigger the Criminal Division’s notification was not implemented and, therefore, that issue remains.
OIPR, 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’ 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.
In addition, the language indicating when the Criminal Division is to be notified remained an issue. Although the working group’s December 2000 memorandum recommended clarifying the language in the 1995 memorandum which triggered the Criminal Division’s notification by changing the term “significant federal crime” to “federal felony,” the significant federal crime language remains in effect without the Attorney General’s 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’s memorandum, this issue remains pending action by the Attorney General.
The Criminal Division Has Concerns About the Adequacy and Timeliness of the Case Summary Memorandums
According 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’s purposes and the timeliness of the memorandums.
Criminal 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’s 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.
Criminal 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.
No 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’s handling of the Los Alamos National Laboratory investigation, the Attorney General’s Review Team found that, by not coordinating with the Criminal Division at an earlier point, the FBI’s 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.
Regardless 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.
Mechanisms Created to Ensure Compliance With the Procedures Have Not Been Institutionalized
In 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’s 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’s 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.
Criminal Division’s Concerns Indicate That an Oversight Mechanism Was Lacking
Criminal 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’s ability to exercise its prosecutorial equities in those cases. These concerns indicate that an oversight mechanism to ensure compliance with the Attorney General’s coordination procedures was lacking.
DOJ Lacked Oversight Mechanisms to Ensure Compliance With Notification Requirement
Historically, 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’s directives. According to the former Principal Associate Deputy Attorney General, no mechanism existed to provide systematic oversight of compliance with the notification procedures.
Other 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’s 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.
Recently Created Mechanisms Should Help Better Ensure Notification
Since mid-2000, two new mechanisms have been created to help better ensure that FBI foreign counterintelligence investigations meeting the Attorney General’s 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.
OIPR’s Practice Identified FBI Investigations Meeting the Attorney General’s Notification Requirements
OIPR officials said that, based in part on the Attorney General’s Review Team’s 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’s 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’s 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.
OIPR 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’s International Terrorism Section noted instances where OIPR had contacted them to alert them to investigations that met the criteria established by the Attorney General’s 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’s requirements for notification.
Reconstituted Core Group to Provide Broader Oversight to Coordination Issues
In 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’s National Security and Counterterrorism Divisions. Whereas the previous core group’s role was to decide which of the FBI’s most critical cases met the requirements of the Attorney General’s coordination procedures and needed to be coordinated with the Criminal Division, the new core group’s 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’s attention any cases involving extraordinary situations where compliance with the guidelines requires the Attorney General’s consideration.
According to the Associate Deputy Attorney General, the FBI is to bring to the core group’s attention any investigation in which it is not clear that the Attorney General’s 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’s 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’s 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.
Mechanisms Have Not Been Institutionalized
While both mechanisms, if implemented properly, should help to ensure notification of the Criminal Division, neither mechanism has been written into policies or procedures. OIPR’s Counsel pointed out that while OIPR would try to ensure better coordination by employing this practice, it was not a part of OIPR’s mission. OIPR’s 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’s 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.
While 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’s coordination practices have varied over the years, the perpetuation of the current practice could depend on future Counsels’ views on the coordination issue and, more importantly, how restrictively they believe the FISA Court views coordination with the Criminal Division.
Likewise, 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.
Conclusions
Differing interpretations within DOJ of adverse consequences that might result from following the Attorney General’s 1995 coordination procedures for counterintelligence investigations involving FISA surveillance and searches have inhibited the achievement of one of the procedures’ intended purpose—to ensure that DOJ’s 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.
The 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’s 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’s 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.
Beyond 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’s 1995 procedures are institutionalized. Such actions could facilitate the coordination of DOJ's counterintelligence and prosecutorial functions.
Recommendations for Executive Action
To facilitate better coordination of FBI foreign counterintelligence investigations meeting the Attorney General’s coordination criteria, we recommend the Attorney General establish a policy and guidance clarifying his expectations regarding the FBI’s 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.
Further, 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’s 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’s coordination procedures.
Agency Comments and Our Evaluation
In 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’s 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’s 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’s 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 “Standards for Internal Control in the Federal Government.”
Concerning our recommendation regarding the FBI’s 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.
Concerning our recommendation that the Attorney General establish a policy and guidance clarifying his expectations regarding the FBI’s 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’s 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’s 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.
Concerning our two remaining recommendations—(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.
With respect to other points raised in Justice’s comments, we have incorporated in our report, where appropriate, the Department’s technical comments concerning our discussion of the primary purpose test and the courts’ views on it. Regarding the Department’s 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.
As 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.
If 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.
Appendix I: Chronology of Key Events Relating to FBI/DOJ Coordination
The following table shows key events relating to coordination of FBI foreign counterintelligence investigations with the Criminal Division.
Appendix II: Comments From the Department of Justice
The following are GAO’s comments on the Department of Justice’s letter dated June 21, 2001.
GAO Comments
1. See “Agency Comments and Our Evaluation” 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’s 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’ 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’s 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’s 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. | Why GAO Did This Study
This 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.
What GAO Found
GAO 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. |
crs_R44924 | crs_R44924_0 | T he National Park Service's (NPS's) backlog of deferred maintenance (DM)—maintenance that was not done as scheduled or as needed—is 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.
General Questions
What Is Deferred Maintenance?
The 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 .
As 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 —that 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.
How Big Is NPS's Maintenance Backlog?
NPS 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.
NPS 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.
Has the Maintenance Backlog Been Increasing or Decreasing?
NPS'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.
What Factors Contribute to Growth or Reduction of the Backlog?
Multiple 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—such as visitor centers, roads, utility systems, and other assets—were 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."
Another 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.
Another 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."
Some 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.
From 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:
The 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 … 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.
Still 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—such as buildings that NPS maintains but does not own—that 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.
How Does NPS's Backlog Compare with Those of Other Land Management Agencies?
Although all four major federal land management agencies—NPS, the Bureau of Land Management (BLM), the Fish and Wildlife Service (FWS), and the Forest Service (FS)—have 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 .
Which States Have the Largest NPS Maintenance Backlog?
NPS 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 .
The 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—the 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)—are all among the 20 states with the highest DM.
Which Park Units Have the Largest Maintenance Backlog?
Table 4 shows the 20 individual park units with the highest maintenance backlogs.
Various 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.
Funding Questions
How Much Has NPS Spent in Recent Years to Address the Maintenance Backlog?
It 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.
Although it is not possible to determine amounts allocated to NPS deferred maintenance, GAO estimated amounts allocated for all NPS 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.
What Are the Funding Sources for NPS to Address the Maintenance Backlog?
NPS 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."
The 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 million 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 .
Beyond NPS discretionary appropriations, a number of other, nondiscretionary agency revenue streams also are used partially or mainly to address DM.
NPS 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. §§6801-6814) 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. §§101911 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.
Have Additional Types of Funding Been Proposed to Address the Backlog?
Some 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—for example, by improving the agency's capital investment strategies, increasing the role of nonfederal partners in park management, or disposing of assets.
Management Questions
How Does NPS Prioritize Its Deferred Maintenance Needs?
NPS 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—a 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.
What Types of Challenges May Exist in Managing the Maintenance Backlog?
In 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—for 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.
An 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—such 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—create additional obstacles for NPS disposal of unneeded properties.
Role of Congress
How Has Congress Addressed NPS's Maintenance Backlog?
Congress 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.
How Did the National Parks Centennial Act of 2016 Address Deferred Maintenance?
The 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—the 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.
What Legislation Has Been Proposed in the 115th Congress to Address NPS Deferred Maintenance?
Bills in the 115 th Congress related to NPS deferred maintenance include the following.
H.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. | This report addresses frequently asked questions about the National Park Service's (NPS's) backlog of deferred maintenance—maintenance 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.
During 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.
Sources 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.
NPS 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.
Some 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—including H.R. 2584, H.R. 2863, S. 751, and S. 1460—would 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.
Other stakeholders have suggested that NPS deferred maintenance could be reduced without additional funding—for 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. |
gao_GAO-08-680 | gao_GAO-08-680_0 | Background
Definition: When ll people ll timeve oth phyicnd economic ccess to sufficient food to meet their dietry need for prodctive nd helthy life.
Food ilability—chieved 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.
Food insecurity—the lack of access of all people at all times to sufficient, nutritionally adequate, and safe food, without undue risk of losing such access—results 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—about 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.
Food ccess—ensured when household nd ll individua within them hve dequate rerce to oin pproprite food for tritious diet.
World 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’s 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.
To 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’s Committee on World Food Security (CFS) on the implementation of the Plan of Action to track progress on food security.
To 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.
Sub-Saharan Africa Has Made Little or No Progress in Achieving WFS and MDG Goals
As shown in figure 2, food insecurity in sub-Saharan Africa is severe and widespread. According to FAO’s 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.
Sub-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—but this change is due to population growth. According to FAO’s 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.
Multiple Development Partners Implement Programs to Advance Agriculture and Food Security in Sub-Saharan Africa
The 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’s 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.
Multilateral organizations: Several multilateral organizations and international financial institutions implement programs that contribute to agricultural development and food security—providing 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.
Bilateral 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.)
In the wake of the 1996 WFS, the United States adopted a number of development initiatives for Africa. These initiatives—including the Africa Food Security Initiative in 1998, the Africa Seeds of Hope Act in 1998, and the African Growth and Opportunity Act of 2000—reflect 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.)
In 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.
Food Insecurity Persists in Sub- Saharan Africa Due to Several Factors, Including Low Agricultural Productivity
Low 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.)
Low Agricultural Productivity
One 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’s 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.
Sub-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’s 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’s 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.
Low 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’s 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’s 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’s unique agro-ecosystem.
Limited Rural Development
Limited 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’ lack of access to microcredit as challenges.
Rural 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.
Farmers’ 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.
Government Policy Disincentives
Each 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’s 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’ 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—Côte d’Ivoire (49 percent), Ghana (60 percent), and Zambia (46 percent).
While 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’s policy of subsidizing smallholders’ maize production has had a number of long-term effects, including a loss of farmers’ 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.
Poor Health
Poor 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’ 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—363 cases per 100,000 people. Tuberculosis spreads particularly rapidly in areas with high concentrations of livestock.
Rising Global Commodity Prices
Global 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—through 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.
Experts 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—15 of which are in sub-Saharan Africa—depend on imported fuel, import grain, and report a prevalence of undernourishment exceeding 30 percent, according to FAO.
Higher agricultural prices hurt many of Africa’s 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.
Higher fuel and commodity prices increase delivery costs for emergency food aid programs to Africa’s 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’s 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.
Climate Change
Climate 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.)
Efforts of Host Governments and Donors, Including the United States, Toward Halving Hunger in Sub-Saharan Africa by 2015 Have Been Insufficient
Despite 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.
Limited Prioritization, Low Agricultural Spending, and Weak Capacity of Government Institutions Hamper Host Government Efforts
Host 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.
Achieving Food Security Has Not Been Prioritized by Some Host Governments
Despite 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.
Although 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’s 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.
Low Agriculture Spending Levels Remain a Significant Challenge
Although 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—with the exception of four countries: Ethiopia, Malawi, Mali, and Burkina Faso—had not reached this goal as of 2005. Of the four countries we reviewed—Kenya, Mozambique, Tanzania, and Zambia—none 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.
According 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’s 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.)
Weak Capacity of Host Government Institutions Hinders Long-term Sustainability of Interventions and Reporting on Progress
Some Food Security Interventions Are Unsustainable Due to a Lack of Host Government Capacity
Host governments’ 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’s 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’s 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’s 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.
Donors’ exit strategies vary depending on host governments’ capacity to continue their assistance activities. For some sub-Saharan African countries, the handover may be progressive—that is, a relevant government ministry gradually takes over the responsibilities of certain food security interventions in specific geographic regions as the government’s 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’s departure, recent postelection turmoil in the country has raised uncertainties about the project’s long-term sustainability.
Weak Reporting on Progress Toward Hunger Goals
All participating governments and international organizations agreed to submit a biannual national progress report to FAO’s 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’s Committee on World Food Security, according to FAO. Of these 79 member states and organizations, only 17 were from sub-Saharan Africa.
FAO 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’s 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.
According 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.
Declining Resources, Difficulties in Coordination, and Deficiencies in Undernourishment Estimates Limit Donor Efforts
Multilateral and Bilateral Aid to African Agriculture Has Declined
For some sub-Saharan Africa countries, a large portion of food security assistance comes from multilateral and bilateral donors through ODA provided to the country’s 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.
The 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’ top priorities for development assistance is the treatment, prevention, and care of HIV/AIDS through the President’s 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.)
Donor and NGO panels that we convened in the four countries we visited—Kenya, Mozambique, Tanzania, and Zambia—reported 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.
Coordination 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’ 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.
In 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’ 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—Tanzania and Mozambique—were among the eight countries worldwide to pilot the One UN initiative in 2007 and 2008. In addition, to accelerate progress toward MDGs— particularly MDG-1—WFP, 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’ 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.
FAO Estimates of Undernourishment Have Deficiencies
It is difficult to accurately assess progress toward the hunger goals because of deficiencies in FAO’s 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’s 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—a main staple food for sub-Saharan Africa—has 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.
Poor 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’s 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.
Furthermore, FAO’s 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’s methodology for estimating undernourishment to measure progress toward the 2015 hunger goals.
FAO 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 “International Scientific Symposium” 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.
Limited Agricultural Development Resources and a Fragmented Approach Impair U.S. Efforts to End Hunger in Sub-Saharan Africa
USAID’s Food Aid Funding for Emergencies Has Increased Substantially, While Its Food Aid Funding for Development Has Not Changed Significantly
In 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—the largest U.S. food aid program—has 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’S food aid funding fell below the 2003 level in 2006 and 2007.
While 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’s 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).
The U.S. Presidential Initiative to End Hunger in Africa (IEHA)—the principal U.S. strategy to meet its commitment toward halving hunger in sub-Saharan Africa—has 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’s 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.
Although both MCC and USDA are making efforts to address agriculture and food insecurity in sub-Saharan Africa, IEHA’s decision-making process does not take these efforts into consideration. In addition, IEHA does not leverage the full extent of the United States’ 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’ 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.
Conclusions
Most 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’s 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’ 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’s persistent food insecurity will require concerted efforts by host governments and donors, including the United States, in all of these areas.
Recommendations for Executive Action
To 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’s 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.
Agency Comments and Our Evaluation
USAID and the Departments of Agriculture and State provided written comments on a draft of our report. We have reprinted these agencies’ comments in appendixes VII, VIII, and IX, respectively, along with our responses to specific points. In addition to these agencies, several other entities—including MCC, Treasury, FAO, IFAD, IFPRI, UNDP, and WFP— provided technical comments on a draft of our report, which we have incorporated as appropriate.
USAID concurred with our first recommendation—noting 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—to the detriment of long-term agricultural development—does 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’s and other U.S. agencies’ 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 “shall include. . .an assessment of the progress toward achieving food security in each country receiving food assistance from the United States Government.” This report is intended to contain a discussion of food security efforts by U.S. agencies.
In 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.
State 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—such 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—work 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.
Treasury generally concurred with our findings and provided additional comments for consideration, which we have addressed as appropriate.
We 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.
If 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.
Appendix I: Objectives, Scope, and Methodology
Our 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.
To examine factors that have contributed to continued food insecurity in sub-Saharan Africa, we relied on the United Nations (UN) Food and Agriculture Organization’s (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’s 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’s (USDA) estimates on global hunger. We discussed the reliability of FAO’s 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’s 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.
We selected four countries for fieldwork—Kenya and Tanzania in East Africa, and Mozambique and Zambia in southern Africa—on 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.
In 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’s 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.
In 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’ 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.
To 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’s reporting and the conformity of reporting with DAC’s 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’s classification of agriculture may underreport funding to agriculture. OECD’s 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’ 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.
In 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’ 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—including representatives from academia, research organizations, multilateral organizations, NGOs, and others—to 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.
We 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.
Appendix II: U.S. Participation in the 1996 World Food Summit
As a major participant in the 1996 WFS, the United States supported the summit’s 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’s 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.
All 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.
Governments 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.
Governments 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.
Governments 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.
All countries should promote the critical role of sustainable development in agriculture, forestry, and fisheries sectors, and these policies must be environmentally sound.
Greater emphasis needs to be placed on agricultural research and extension services. Governments should emphasize investment in agricultural research and technical education.
During 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.
An 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.
Appendix III: Factors and Interventions Affecting Food Security
This 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.
Appendix IV: Summary Results of GAO’s Structured Panel Discussions with Donors and NGOs, with Examples of Interventions
On 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.
The 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.
Interventions to Improve Access to Markets
Our panelists noted that improving markets and farmers’ 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’s Famine Fund has been supporting a pastoral livelihood program.
Interventions to Strengthen Rural Communities and Economies
Weak 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’ 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’s 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.
The program trained 44 farmers, who produced an average of 800 kilograms of honey, generating $1,500 per farmer per year.
Interventions to Better Target or Manage Nonemergency Food Aid
The 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’s 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.
Interventions to Invest in and Improve Infrastructure
As 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—Tanzania 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.
Interventions to Improve Natural Resource Management Systems
Sustainable 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’s 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.
Interventions to Increase Access to Inputs
Increasing 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.
Participants in GAO’s Structured Panel Discussions and Roundtable
Appendix V: Additional Development Partners That Implement Food Security Interventions in Sub-Saharan Africa
In 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.
Nongovernmental 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’Lakes 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.
Private 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.
Appendix VI: New Food Security Challenges: Rising Demand for Biofuels and Climate Change
Rising 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.
Growing Biofuel Demand Projected to Increase African Food Insecurity
Driven 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’s 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’s transportation energy needs.
Growth 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.
African 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.
Rapid 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.
On 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.
Climate Change Predicted to Increase African Food Insecurity
Although 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.
Regarding 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.
Climate is an important factor affecting agricultural productivity and experts report that Africa’s 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.
Reduced 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.
Variable climates lead farmers to shift agricultural production sites, often onto marginal lands, exacerbating soil erosion. According to the World Bank’s 2008 World Development Report, soil erosion can result in agricultural productivity losses for the east African highlands of 2 to 3 percent a year.
Rising 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.
Climate 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.
To 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.)
Additional Source Information
Agoumi, Ali. Vulnerability of North African Countries to Climatic Changes: Adaptation and Implementation Strategies for Climate Change. International Institute for Sustainable Development, 2003.
Arnell, 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. “The 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.
Tubiello, Francesco N. and Günther Fischer. “Reducing Climate Change Impacts on Agriculture: Global and Regional Effects of Mitigation, 2000- 2080.” Technological Forecasting and Social Change, vol. 74, 2007.
United Nations Environment Programme. African Regional Implementation Review for the 14th Session of the Commission on Sustainable Development: Report on Climate Change. Nairobi, Kenya, 2006.
Warren, 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.
Appendix VII: Comments from the U.S. Agency for International Development
Following are GAO’s comments on the U.S. Agency for International Development letter dated May 16, 2008.
GAO Comments
1. 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’s 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’s and other agencies’ 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 “shall include…an assessment of the progress toward achieving food security in each country receiving food assistance from the United States Government.” 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.
Appendix VIII: Comments from the U.S. Department of Agriculture
Following is GAO’s comment on the U.S. Department of Agriculture letter dated May 14, 2008.
GAO Comment
1. 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.
Appendix IX: Comments from the Department of State
Following are GAO’s comments on the Department of State letter dated May 16, 2008.
GAO Comments
1. We maintain that U.S. agencies’ 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’s original estimates of undernourishment. We relied on FAO’s 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’s 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’s 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’s 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’s 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.
Appendix X: GAO Contact and Staff Acknowledgments
Staff Acknowledgments
In 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.
Related GAO Products
Somalia: Several Challenges Limit U.S. and International Stabilization, Humanitarian, and Development Efforts. GAO-08-351. Washington, D.C.: February 19, 2008.
The Democratic Republic of the Congo: Systematic Assessment Is Needed to Determine Agencies’ Progress Toward U.S. Policy Objectives. GAO-08-188. Washington, D.C.: December 14, 2007.
Foreign Assistance: Various Challenges Limit the Efficiency and Effectiveness of U.S. Food Aid. GAO-07-905T. Washington, D.C.: May 24, 2007.
Foreign Assistance: Various Challenges Impede the Efficiency and Effectiveness of U.S. Food Aid. GAO-07-560. Washington, D.C.: April 13, 2007.
Foreign Assistance: U.S. Agencies Face Challenges to Improving the Efficiency and Effectiveness of Food Aid. GAO-07-616T. Washington, D.C.: March 21, 2007.
Darfur Crisis: Progress in Aid and Peace Monitoring Threatened by Ongoing Violence and Operational Challenges. GAO-07-9. Washington, D.C.: November 9, 2006.
Foreign Assistance: Lack of Strategic Focus and Obstacles to Agricultural Recovery Threaten Afghanistan’s Stability. GAO-03-607. Washington, D.C.: June 30, 2003.
Foreign Assistance: Sustained Efforts Needed to Help Southern Africa Recover from Food Crisis. GAO-03-644. Washington, D.C.: June 25, 2003.
Food Aid: Experience of U.S. Programs Suggest Opportunities for Improvement. GAO-02-801T. Washington, D.C.: June 4, 2002.
Foreign Assistance: Global Food for Education Initiative Faces Challenges for Successful Implementation. GAO-02-328. Washington, D.C.: February 28, 2002.
Foreign Assistance: U.S. Bilateral Food Assistance to North Korea Had Mixed Results. GAO/NSIAD-00-175. Washington, D.C.: June 15, 2000.
Foreign Assistance: Donation of U.S. Planting Seed to Russia in 1999 Had Weaknesses. GAO/NSIAD-00-91. Washington, D.C.: March 9, 2000.
Food Security: Factors That Could Affect Progress toward Meeting World Food Summit Goals. GAO/NSIAD-99-15. Washington, D.C.: March 22, 1999.
Food Security: Preparations for the 1996 World Food Summit. GAO/NSIAD-97-44. Washington, D.C.: November 7, 1996.
International Relations: Food Security in Africa. GAO-T-NSIAD-96-217. Washington, D.C.: July 31, 1996. | Why GAO Did This Study
In 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.
What GAO Found
Chronic 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. |
gao_GAO-15-61 | gao_GAO-15-61_0 | Background
Nurse 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’ productivity and efficiency, while providing safe patient care by ensuring appropriate nurse staffing levels and skill mix.
VHA Nurse Workforce
VHA’s nurse workforce is primarily composed of RNs, licensed practical nurses (LPN), and nursing assistants (NA). These nurses provide care—ranging from primary care to complex specialty care—in 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—i.e., the share of each type of nurse (RNs, LPNs, or NAs) of the total—is 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.)
Although 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—RN, LPN, and NA. During the same time period, the annual nurse turnover rate at VAMCs—the percentage of nurses who left VHA through retirement, death, termination, or voluntary separation—increased 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.
See Department of Veterans Affairs, Veterans Health Administration, 2013 Workforce Succession Strategic Plan (Washington, D.C.: 2013).
VHA’s Nurse Staffing Methodology
To 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.)
To 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’s nurse staffing methodology.)
Each 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—members of senior management within each VAMC— are responsible for implementing the staffing methodology in their respective VAMCs.
Expert panels: advisory groups—at the unit and facility level—of 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’s facility expert panel.
Data-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’ 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.
After developing the staffing plan, each unit-based expert panel presents its plan, which includes staffing recommendations, to the VAMC’s 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—comprised of staff from across the VAMC—reviews each unit-based panel’s 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.
The staffing methodology is being implemented in three phases.
In Phase I, VAMCs were to implement the staffing methodology in all inpatient units no later than September 30, 2011.
In 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.
In 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.
In 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, “We re-emphasize the need for all facilities to fully implement the methodology and accurately address patient needs with safe and adequate staffing.”
Impact of Nurse Staffing on Patient Outcomes and Nurse Job Satisfaction
Adequate 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
A 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.
A 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.
A 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’ burnout, risk of turnover, and the likelihood of medical errors, while increasing patients’ satisfaction with their care.
Non-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.
VAMCs in Our Review Implemented VHA’s Nurse Staffing Methodology, Experienced Problems Developing and Executing Staffing Plans, and Some Reported Improvements in Nurse Staffing
All seven VAMCs in our review developed staffing plans using VHA’s 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.
VAMCs in Our Review Have Implemented VHA’s Nurse Staffing Methodology by Developing Staffing Plans and Taking Steps to Execute Them
The seven VAMCs in our review have implemented VHA’s 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’s directive—that is, used both expert panels and analysis of NHPPD—by September 30, 2011, the deadline specified in the directive. (See table 2.) Across all 151 VAMCs, according to ONS officials, VAMCs’ 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.
In 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’ 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.
VAMCs Experienced Problems Developing and Executing Staffing Plans, and Many of These Problems Persist
Officials 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.
Problems Developing Staffing Plans. Staff and officials from each of the seven VAMCs in our review reported facing problems developing staffing plans.
Lack 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’s 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—a VAMC official who assists with the administrative tasks associated with the implementation process— 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.
Difficulty 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’s 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.
Time 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’ 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.
Lack 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’s plan felt “frustrating.” In contrast, at another VAMC, officials told us that all unit staff—not just staff involved in the unit panel—received regular updates on the nurse staffing process at their monthly unit staff meetings.
Difficulty 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’ staffing plans. For example, a unit panel member said the VAMC’s staffing methodology coordinator calculated the unit’s NHPPD, developed the corresponding unit staffing plan, and presented the unit staffing plan to the respective facility expert panel almost entirely without her unit’s 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’s staffing and share this data with the facility expert panel—VAMC staff “beyond the typical chain of command.” Officials at this VAMC noted that unit panel members felt “empowered” to present their work to the facility expert panels.
Problems 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.
Hiring 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.
Budget 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’s 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.
Improvements in Nurse Staffing Were Reported When VAMCs Executed Staffing Plan Initiatives
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 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’ 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).
Some 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—as indicated by their VAMC’s staffing plan—they 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’ 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 “veterans deserve,” 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.
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. 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 “scramble” 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.
VHA’s Oversight to Ensure Its Nurse Staffing Methodology Is Implemented, Administered Appropriately, and Contributes to an Adequate and Qualified Nurse Workforce Is Limited
Our review of VHA’s oversight of its nurse staffing methodology found that some internal controls—those related to environmental assessment, a plan for monitoring compliance, evaluation, timeliness of communication, and organizational accountability—are 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’ health care needs.
Environmental 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.
VHA did not assess VAMCs’ 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—in particular an automated staffing system for information such as patient admission, transfer and discharge data, and human resources data—to 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—a national automated staffing system—would be forthcoming, and did not fully review whether VAMCs had alternative data capabilities to assist them in the interim.
When 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’ technical support and resources to determine if they were prepared to implement the methodology, VHA had no assurance that the VAMCs would be successful.
Plan 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.
ONS reported implementing two mechanisms for obtaining information from VAMCs—a 2013 questionnaire sent to all VAMCs and monthly methodology conference calls with VAMCs—but 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.
In 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’ ongoing evaluation of their staffing plans. The lack of a plan for monitoring VAMCs’ 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.
Evaluation. 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.
Evaluation of Phase I pilot (conducted in September 2009)—ONS identified VAMC challenges with implementing the methodology— 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.
Evaluations 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’ 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’s time to apply lessons learned from Phase I evaluations to the implementation of Phase II, portions of which are already nearly complete.
Phase II pilot training evaluation (began in early 2014 with results expected November 2014)—ONS 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.
VHA’s 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.
Timeliness 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—more than 7 years— 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.
Furthermore, ONS officials have not adequately communicated to VAMCs the status of Phase III of the methodology—development 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’s 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’s 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.
Organizational Accountability. VHA did not define areas of responsibility or establish the appropriate line of reporting within the framework of VA’s management structure for the ongoing administration and oversight of the methodology. Under federal internal control standards, an agency’s 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 “micro-manage” the local process of nurse staffing.
Furthermore, 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.
Staff 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.
ONS 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’s organizational structure, VHA’s 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.
Conclusions
As 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’s 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.
We also found that VHA’s oversight of the staffing methodology is limited and in many cases lacks sufficient internal controls, which could diminish VHA’s 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’ 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’s 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.
Recommendations for Executive Action
To 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’s 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’ ongoing compliance with the staffing methodology, including assessing VAMCs’ 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.
Agency Comments
We 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’s 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.
As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to 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.
If 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.
Appendix I: Comments from the Department of Veterans Affairs
Appendix II: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
GAO 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.
GAO 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.
What GAO Found
The 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—which outlines initiatives needed to ensure appropriate unit-level nurse staffing and skill mix—and taken steps to execute it. However, VAMCs experienced problems—such as lack of data resources and difficulties with training—in 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.
VHA'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:
Environmental 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.
Monitoring compliance. VHA does not have a plan for monitoring VAMCs to ensure compliance with the implementation and ongoing administration of the methodology.
Evaluation. VHA has conducted limited evaluations of the methodology, and at least one of these evaluations has been significantly delayed.
Timeliness 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.
Organizational 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.
Without 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.
What GAO Recommends
GAO 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. |
gao_GAO-16-125 | gao_GAO-16-125_0 | Background
Types of Dialysis
There 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— approximately 96 percent of—dialysis 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.
The processes for hemodialysis—performed either in a facility or at home—and peritoneal dialysis differ. (See fig. 1.) For in-center hemodialysis treatments, blood flows from the patient’s 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’s 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—draining and then refilling the abdomen with the dialysis solution—most 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.
The 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’ 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.
Factors Affecting Type of Dialysis
Patients’ 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—including learning to place needles in the vascular access site and how to respond to alarms from the dialysis machine— relative to peritoneal dialysis training could lead some patients to prefer one type of home dialysis over the other.
In addition to patients’ 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.
Medicare Payment for Dialysis Care
Medicare 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’ dialysis care and educating them about their condition.
Payments to Facilities
For dialysis treatments—including any training that occurs in the first 4 months of treatment—Medicare 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.
When training occurs after the first 4 months of the patient’s 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’ 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—called training treatments—varies 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.
Payments to Physicians
Medicare pays physicians (typically nephrologists) a monthly amount per patient to manage patients’ 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’s vascular access site. The monthly amount paid to the physician for managing in-center patients varies on the basis of the patient’s 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’s age and not the number of visits. Besides the monthly payment for patients’ 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’s supervision; this payment is separate from Medicare’s payments to facilities for training patients.
Medicare 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.
Percentage of Patients on Home Dialysis Generally Declined between 1988 and 2008 and then Slightly Increased; Stakeholder Estimates Suggest Potential for Future Growth
Historical trends in the overall percentage of all dialysis patients on home dialysis—including both Medicare and non-Medicare patients—show 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—the 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.
Literature 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.
Increased capacity to provide in-center hemodialysis. The growth in facilities’ 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.
Changes 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.
Medicare 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.
Medicare 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—including the payments for injectable drugs—could 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.
Concerns 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.
Estimates 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.
In 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.
Incentives for Facilities to Provide Home Dialysis May Have Limited Impact in Short Term
Medicare 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—that 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.
In addition to giving an incentive to provide dialysis in general, Medicare payments to facilities likely encourage the use of peritoneal dialysis—the predominant type of home dialysis—over 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’s goal of fostering patient independence through greater use of home dialysis among patients for whom it is appropriate.
Although 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’s 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—for 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.)
Our 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’ 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’s 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.
CMS 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.
We found that the cost report data on facilities’ costs for each type of dialysis, including costs for home dialysis training, were not sufficiently reliable. Although we determined that data on facilities’ 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’s 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.
We 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.
The adequacy of training payments could affect facilities’ incentives for providing home dialysis, but it is unclear whether these payments are adequate given CMS’s 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’s goal of encouraging the use of home dialysis when appropriate.
Medicare Payment Policies and Limited Nephrology Training May Constrain Physicians’ Prescribing of Home Dialysis
Medicare 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’s 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’ limited exposure to home dialysis during nephrology training programs is a third factor that may constrain the extent to which physicians prescribe home dialysis.
Medicare Physician Payments May Not Consistently Result in Incentives to Prescribe Home Dialysis
We found that the structure of Medicare’s monthly physician payments— one of several factors that could affect the use of home dialysis—may give physicians a disincentive for prescribing home dialysis, which could undermine CMS’s 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’ 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.
Physician 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’ care since 2004, although it has addressed some stakeholder concerns such as how it paid physicians when home patients were in the hospital.
In contrast to the monthly payments, Medicare physician payments related to patients’ training may provide physicians with financial incentives for prescribing home dialysis. For certain patients who start home training—those under 65 who are eligible for Medicare solely due to ESRD—the 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’s supervision. One stakeholder told us that this training payment may provide an incentive for physicians to prescribe home dialysis.
Payment Limitations on Categories of Providers and Patients for Kidney Disease Education Benefit May Constrain Its Use
Few 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—the first two years it was available—and use of the benefit has decreased since then.
When CMS implemented the KDE benefit, the agency identified specific categories of providers—physicians, physician’s assistants, nurse practitioners, and clinical nurse specialists—as 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’ financial interest.
Similarly, CMS identified a specific category of patients—those with Stage IV chronic kidney disease—as 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.
The 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.
Limited Exposure to Home Dialysis during Nephrology Training May Constrain Extent to Which Physicians Prescribe Home Dialysis
Literature 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.
Literature we reviewed and stakeholders identified two main factors that may limit physicians’ exposure to home dialysis while they undergo nephrology training:
The 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.
According 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—for example, a dialysis facility with a robust home dialysis program—if the hospital continues to pay the physicians’ 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.
The 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’s curriculum should include observation of and participation in a patient’s training to conduct home dialysis.
Conclusions
The 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’s goal of encouraging the use of home dialysis among patients for whom it is appropriate. One aspect of payment policy—training add-on payments to facilities—has a direct impact on facilities’ 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.
Recommendations
To 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.
The 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’s goal of encouraging the use of home dialysis among patients for whom it is appropriate.
To 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.
Agency and Third Party Comments and Our Evaluation
We 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.
Comments from HHS
In 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’ dialysis to ensure that these policies are consistent with CMS’s goal of encouraging home dialysis use when appropriate. HHS said that it would review these services through CMS’s 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.
HHS 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.
Comments from Groups Representing Patients and the Dialysis Industry
We 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.
Three 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—Fresenius—expressed 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’s 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’ data from our analysis suggests that the potential exists to improve the accuracy of these data. CMS’s 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.
One 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’ 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’s current method of paying physicians to manage patients’ dialysis care is one of several factors that could influence physicians’ 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’ dialysis care, we believe the intent of our recommendation—to ensure that these payments are consistent with CMS’s goal to encourage the use of home dialysis when appropriate—is clear.
Three 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’s 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’ treatment decisions.
The patient and industry groups also made several comments in addition to those described above.
DaVita, 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—such as managing home patients—that could be provided via telehealth under Medicare, and examining this process was beyond the scope of this report.
HDU, 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.
DaVita 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.
DaVita and HDU asserted that Medicare’s 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.
NRAA 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.
In addition to the comments described above, the patient and industry groups provided technical comments on the draft, which we incorporated as appropriate.
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If 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.
Appendix I: Data and Methods for Analysis of Facilities’ Medicare Margins
This 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.
Medicare Cost Report Data
We 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’ reported costs may be driven in part by hospitals’ 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.
We also took several steps to assess the reliability of facilities’ 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.
Calculating Average Medicare Margins
(𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑝𝑝𝑀𝑀𝑝𝑝𝑝𝑝𝑀𝑀𝑝𝑝𝑝𝑝𝑝𝑝− 𝐸𝐸𝑝𝑝𝑝𝑝𝑀𝑀𝑝𝑝𝑀𝑀𝑝𝑝𝑀𝑀𝑀𝑀 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑀𝑀𝑐𝑐𝑝𝑝𝑝𝑝𝑝𝑝)
We 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.
Estimating How Facilities’ Medicare Margins Are Associated with Home and In-center Hemodialysis
To 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’ 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’s 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.
As shown in table 5 and discussed further in the report, the results of our regression model show the effect on facilities’ Medicare margin from adding one patient year of a given type of dialysis.
Appendix II: Comments from the Department of Health and Human Services
Appendix III: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
In 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.
GAO 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.
What GAO Found
The 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—the 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—the most common type of home dialysis—reduced 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.
Medicare'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.
Medicare 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—the Kidney Disease Education (KDE) benefit—which 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.
What GAO Recommends
GAO 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. |
gao_GAO-11-617T | gao_GAO-11-617T_0 | Instituting a More Coordinated and Crosscutting Approach to Achieving Meaningful Results
The 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—every 4 years—long-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.
Also, 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’s 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’s 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’s efforts contribute to national outcomes.
The 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.
Our recent report on duplication, overlap, and fragmentation highlights a number of areas where a more crosscutting approach is needed—both 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.
Effective GPRAMA implementation could help inform reexamination or restructuring efforts related to these and other areas by identifying the various agencies and federal activities—including spending programs, regulations, and tax expenditures—that 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.
Examples 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’s 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.
Department 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.
Congress 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.
Military health system: The Department of Defense’s (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’s 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.
DOD 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’s military healthcare reform efforts.
Employment 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—HHS’s Temporary Assistance for Needy Families (TANF) and the Department of Labor’s Employment Service, and Workforce Investment Act of 1998 (WIA) Adult programs—and found they provide some of the same services to the same population through separate administrative structures.
Colocating 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.
To 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.
Focusing on Addressing Weaknesses in Major Management Functions
Although 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.
Moreover, 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’ 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.
In 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.
Although 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.
In 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’s goal was met, we are currently reviewing the agencies’ 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.
Undisbursed grant balances: Past audits of federal agencies by GAO and Inspectors General, as well as agencies’ 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’s Payment Management System—the 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.
Unneeded 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’ plans for property disposal.
OMB 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’s 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.
Ensuring Performance Information Is Both Useful and Used in Decision Making
Agencies need to consider the differing information needs of various users—such as agency top leadership and line managers, OMB, and Congress—to 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’ needs for completeness, accuracy, validity, timeliness, and ease of use. GPRAMA puts into place several requirements that could address these needs.
Completeness: 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—an 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—including the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), the National School Lunch Program, the School Breakfast Program, and SNAP—is associated with positive health and nutrition outcomes consistent with programs’ goals, such as raising the level of nutrition among low-income households, safeguarding the health and well-being of the nation’s 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.
Accuracy 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.
Timeliness 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.
In addition, to help ensure that performance information is used—not simply collected and reported as a compliance exercise—GPRAMA 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.
To 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—both in terms of staff trained to do the analysis and availability of research and evaluation resources—is 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.
Our 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’s Fiscal Year 2012 Budget, in the coming year OMB and the Performance Improvement Council intend to help agencies strengthen their employees’ skills in analyzing and using performance information to achieve greater results.
To 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.
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. 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 “staff out” responsibility for leading change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming organizations’ 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.
GPRAMA 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—chaired by the OMB Deputy Director for Management and composed of PIOs from various agencies—to assist the Director of OMB in carrying out the governmentwide planning and reporting requirements.
GPRAMA 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.
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. 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.
While 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.
Beyond 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.
Over 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—by 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.
GAO’s Role in Evaluating GPRAMA, High Risks, and Other Major Government Challenges
Realizing 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’s 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.
Similarly, 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’s planning and reporting requirements—at 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—and every 4 years thereafter—GAO is to evaluate the implementation of the federal government priority goals and performance plans, and related reporting required by the act.
Looking 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’ information security policies and practices and other requirements of the Federal Information Security Management Act of 2002.
Additionally, 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.
In 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’s promises are met.
Thank 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.
Contacts
For 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.
Appendix I: GPRA Modernization Act of 2010 Implementation
Agency 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.
OMB publishes interim federal government priority goals and prepares and submits a federal government performance plan consistent with the requirements of the act.
Agencies 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.
Agencies make performance reporting updates on their fiscal year 2011 performance consistent with the requirements of the act.
OMB begins federal government quarterly priority progress reviews.
OMB launches a single governmentwide performance website.
Full implementation of the act with a new strategic planning cycle.
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Why GAO Did This Study
The 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.
What GAO Found
GAO'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. |
gao_GAO-08-549T | gao_GAO-08-549T_0 | Background
The 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’s 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’ 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.
In 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’s 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’s 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.)
DCPS: 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’s 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.
Department of Education: The new D.C. Department of Education is headed by the Deputy Major for Education and oversees the state superintendent’s office, facilities office, and the ombudsman’s 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.
Office of the State Superintendent of Education: The state superintendent’s 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.
State Board of Education: While the Board of Education—renamed the State Board of Education—no longer has responsibility for day-to-day operations of the public schools, it is responsible for approving the District’s 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.
Office 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.
The 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.
Early Initiatives Are Focused on Broad Management Reforms and Establishing a Foundation for Long- Term Improvements
The 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’s 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.
Broad Management Reforms Include Office Restructuring and Human Capital Initiatives
As 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’s 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.
The 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’s office, this strategic planning effort will be completed in mid-summer 2008.The state superintendent’s office also plans to revise the District’s “highly qualified teacher” definition under NCLBA and is also considering revisions to how the District certifies teachers to align to the revised definition.
The 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 “reprogrammed” 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.
The District’s 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’s 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’ 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’s 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’s overall goals as outlined in the office performance plan.
The 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 “a dialogue between supervisors, managers, and employees throughout the year.” 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.
Other human capital initiatives included the Chancellor’s 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’ 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.
Other Activities, Such as Developing New Data Systems, a School Consolidation Plan, and Academic Priorities, Have Begun to Lay the Foundation for Long-Term Improvements
Both the state superintendent’s office and DCPS are working to improve their data systems to better track and monitor the performance of students, teachers, and schools. The superintendent’s 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’s 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’s office a 3-year grant totaling nearly $6 million to help fund this effort. The database is expected to be fully operational by 2012.
DCPS 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.
In 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.
In 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.
In 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’ 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.)
Facilities Has Begun to Address Back Log of Work Orders and Is Developing a New Process to Respond to Needed Repairs
The 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.
To 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 “stabilization” 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.
Furthermore, 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 “pre- qualified” by the facility office. Contracts for major repairs, such as replacing an entire roof, are put out for competitive bid.
Finally, 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’s 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.
D.C. Mayor Has Begun to Develop a Framework for Accountability
The 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’s 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.
Weekly meetings are a key component of the District’s 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’s meetings, known as CapStat meetings, are used to track progress and accomplishments across all D.C. government offices. Every 3 months, the City Administrator’s office develops a list of topics for possible discussion at CapStat meetings based, in part, on a review of each office’s 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.
At 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’s 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’ heating systems were not functioning. The Mayor’s 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’s 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.
The Chancellor and the State Superintendent adopted processes similar to CapStat—SchoolStat and EdStat, respectively—to hold managers accountable for their offices’ performance (see table 2 for information on the three “Stat” 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’s 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.
In addition to weekly meetings, the Mayor’s 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’ 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’s 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.
The D.C. Department of Education has taken some steps to coordinate and integrate the various efforts of the District’s 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’s long-term plan, such as the Chancellor’s 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.
Officials 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’ long-term plans are coordinated and executed.
While 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.
Conclusions
The 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’s 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—improving the reading and math skills of students and the instructional skills of teachers.
In 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’s effort to transform the organizational culture of the District’s public education system. However, the Mayor’s 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’s 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.
Recommendation to the Mayor of the District of Columbia
To help ensure the long-term success of the District’s 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’s education offices.
As you know Mr. Chairman, you have requested that we conduct a second, longer-term study of changes in D.C. schools’ management and operations, and results of these changes. We will begin that study this month.
Comments from the D.C. Mayor’s Office and District Education Offices
We 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’s 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’s 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’s 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, “put on a shelf,” and never used.
We agree that the Deputy Mayor is taking steps to coordinate the individual plans of these offices, and that the Mayor’s 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’s education leaders coordinate their efforts and goals, and provide future leaders the benefit of understanding what worked, what didn’t, 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’s development and implementation of an articulated documented strategy could provide a foundation that would help coordinate future efforts.
Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have.
GAO Contacts
For 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.
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Why GAO Did This Study
In 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.
What GAO Found
The 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. |
gao_GAO-12-538 | gao_GAO-12-538_0 | Background
FEMA’s Disaster Assistance Authority and Declaration Process
The Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988 (Stafford Act) generally defines the federal government’s 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 “strengthen the Homeland Security Enterprise” 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.
The 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’s 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.
FEMA’s Disaster Reserve Workforce and Organizational Structure
Under 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’s 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’s 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.
DAEs serve two-year appointments, are only FEMA’s organizational structure is decentralized and comprised of headquarters and ten regional offices. FEMA’s 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—provide emergency management within their respective geographical area. See appendix IV, FEMA’s organizational chart, and figure 1 for a map of FEMA’s regions.
Opportunities Exist to Strengthen Policies and Procedures That Govern the DAE Program
FEMA 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’ implementation of DAE policies and DAEs’ implementation of FEMA’s 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.
FEMA Has Not Yet Provided Guidance to Cadre Managers Related to DAE Management
FEMA 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’s 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’s 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.
According 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.
Of 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.
A 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’s 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’s 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.
FEMA Could Better Monitor Implementation of Policies and Procedures
FEMA’s 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.
In 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’s policies and procedures for disaster assistance and the regional offices are responsible for the implementation of these policies and procedures. We recognize that FEMA’s 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’s 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, “there 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”. 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.
Standards for Internal Controls in the Federal Government call for an organization’s 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’s Capstone Doctrine, reconciliations. which describes FEMA’s mission, purpose, and defines the agency’s 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.
Opportunities Exist to Communicate Cadre- Specific Information More Consistently with DAEs When Not Deployed
FEMA 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’s 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’s 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.
Thirteen 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.
According 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’s 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.
According to an official from FEMA’s 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’s internal website. Specifically, Hazard Mitigation’s disaster workforce resources are available on both FEMA’s 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’s 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’s 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.
Inconsistent access to information among non-deployed DAEs, in addition to inconsistent communication strategies with DAEs among regional cadre managers, may hinder FEMA’s 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’ access to information when they are not deployed. For example, part of FEMA’s 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’s 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’s 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’s Disaster Workforce Transformation and FQS. Unlike the Hazard Mitigation portal on HSIN, FEMA’s 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.
As part of FEMA’s 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’s 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’s 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.
FEMA Could Strengthen Human Capital Management Controls
FEMA 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’s 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.
FEMA Has Not Established Standardized Hiring and Salary Criteria for DAEs
FEMA has not established standardized hiring criteria for prospective DAEs, and FEMA headquarters provides limited guidance to regions on which to base DAE salary determinations.
According 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’s 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’s 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’s 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’s 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.
According to OCCHCO, the agency’s hiring criteria for DAEs is contained within FEMA Instruction 8600.1. This policy states that “consideration should be given to the specific job functions, the qualifications required to perform those jobs, and Equal Employment Opportunity requirements.” 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.
The 2007 preliminary report by Booz Allen Hamilton on FEMA’s 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’s 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.
Standards 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.
In 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 “Grant C. Peterson Memo” (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.
FEMA 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.
Peterson 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.
An 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 “learn about the organization,” 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’s 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’s 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 “town hall meeting” 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’s 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.
During 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’s 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.
Performance Appraisals for DAEs Do Not Adhere to Internal Control Standards
FEMA’s 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’s 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.
Performance 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’s 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’s 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.
For each element, a DAE may be given an “S” for Satisfactory, “U” for Unsatisfactory, or “N/A” if a supervisor had no opportunity to observe the DAE’s 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.
In 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’s 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’s 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’s Disaster Workforce Transformation effort. However, FEMA does not currently have specific plans to revamp the performance appraisal system.
We 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’s 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’ performance appraisals better reflect actual performance and provide managers with information to better inform performance management decisions.
FEMA’s DAE Training Is Not Consistent with Key Attributes of Effective Training and Development Programs
FEMA’s 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’s ability to plan for future training.
FEMA Does Not Have a Plan to Ensure DAEs Receive Required Training
FEMA 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’ 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’s 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.
Under 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.
According 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’s 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.
Systematically Tracking Training Cost Could Allow FEMA to Better Plan for Future Training Expenses
FEMA 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’s 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—such as travel expenses, per diem for the instructors, and copy materials—are all included in the administrative costs of the JFO. FEMA’s 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.
FEMA’s 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’s Deputy Administrator, DHS and the Office of Management and Budget before transmittal to Congress.
Prior 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’ 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.
FEMA Announced Impending Transformation of DAE Program, but It Is Too Soon to Evaluate the Effectiveness of the Agency’s Planned Actions
On 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 “grandfathered” 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’s 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.
Conclusions
FEMA 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’s 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’s decentralized structure allows for flexibility; however, establishing a mechanism to ensure ongoing monitoring of regional implementation of DAE policies and procedures and DAEs’ implementation of FEMA’s 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.
Further, FEMA’s 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.
Moreover, FEMA’s 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.
Recommendations for Executive Action
To 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’ implementation of DAE policies and procedures and DAEs’ implementation of FEMA’s 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.
Agency Comments and Our Evaluation
We 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’s implementation plans do not fully address one of the seven recommendations, as discussed below. Moreover, insufficient detail is provided related to FEMA’s plans for three of the recommendations; thus it is not clear to what extent these plans will fully address the three recommendations.
In 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’s 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’s 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.
In 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’s 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’s 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’ implementation of FEMA’s disaster policies. Thus, it is not clear to what extent these actions will fully address the recommendation.
In 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’s 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.
In 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.
In 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’s Incident Workforce Management Office will coordinate with FEMA’s 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.
In 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’s 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’s plans will fully address the intent of the recommendation.
In 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— intended to be the primary FQS tracking system—to 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.
DHS also provided technical comments that we incorporated, where appropriate.
As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the 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.
If 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.
Appendix I: Objectives, Scope, and Methodology
The 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’s human capital controls over the DAE workforce consistent with internal control standards; and (3) to what extent does FEMA’s DAE training incorporate key attributes of effective training and development programs. In addition, we describe FEMA’s initiative to transform the DAE program announced in April 2012 as it relates to the three questions above.
We 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’s human capital management controls over the DAE workforce are consistent with internal control standards, we analyzed relevant documents on FEMA’s 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’s human capital controls with criteria in Standards for Internal Control in the Federal Government.
The 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’s management of DAE training with key attributes of effective training and development programs to determine the extent to which they are aligned.
To 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’s disaster workforce.
We 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.
To 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’s 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.
We 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.
Appendix II: Categories of Disaster Workforce Employees
Appendix II: Categories of Disaster Workforce Employees Description Stafford Act federal employees who work on an on-call intermittent basis “forming the major workforce for FEMA in times of emergency or disaster.” 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.
Federal 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.
Temporary federal employees covered by Title 5 provisions. They do not have specified appointment periods. Federal Coordinating Officers (FCO) are included in this employment group.
Permanent federal employees hired in accordance with Title 5, United States Code.
Staff 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 “do not require FEMA-specific expertise, or when limited advance training or minimal on-the-job orientation or training is sufficient.” In certain instances local hires may convert to DAEs. .
OIG: FEMA’s Management of Disaster Assistance Employee Deployment and Payroll Processes, Appendix C Director’s Policy 1-99, March 1999.
Appendix III: Cadre List and Descriptions
There 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.
Appendix IV: FEMA Organizational Chart— Highlight of Response Directorate’s Incident Workforce Management Office
Appendix V: Disaster Assistance Employee Program Office Reorganization Timeline, April 2008 through May 2012
Appendix VI: Incident Workforce Management Office Organizational Structure and Proposed Roles
Appendix VII: FEMA Disaster Assistance Employee Pay Scale, Calendar Year 2011
Appendix VIII: Comments from the Department of Homeland Security
Appendix IX: GAO Contact and Staff Acknowledgments
GAO Contact
Acknowledgments
In 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. | Why GAO Did This Study
Since 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) FEMAs human capital controls over the DAE workforce are consistent with internal control standards; and (3) FEMAs DAE training incorporates key attributes of effective training and development programs. In addition, GAO describes FEMAs 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.
What GAO Found
The 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. FEMAs 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 DAEs implementation of disaster policies could help provide FEMA with reasonable assurance that disaster assistance is conducted in accordance with policy and implemented consistently.
FEMAs human capital controls could be strengthened. FEMAs 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, FEMAs 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 performance appraisals more accurately reflect performance and provide needed information to managers.
FEMAs 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.
In 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 FEMAs planned actions.
What GAO Recommends
GAO recommends, among other things, that FEMA establish a mechanism to monitor both its regions implementation of DAE policies and DAEs 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. |
crs_R42676 | crs_R42676_0 | Introduction
The United States is engaged in negotiations with Japan and 10 other countries to form a regional free trade agreement (FTA)—the 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).
Of 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—including representatives of major companies—and TPP opponents—including representatives of the very vocal and politically influential agricultural sector—engaged 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.
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 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.
Congress 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.
The 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.
The 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.
For 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.
Japan'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.
An Overview of the TPP
The TPP is an evolving regional free trade agreement (FTA). It was originally formed as the Trans-Pacific Strategic Economic Partnership—an 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.
On 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.
As 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).
The TPP participants also envision the TPP to go beyond typical FTAs by being:
a 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.
Summary of the April 2013 Announcement
Marantis'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.
To 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.
Furthermore, 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.)
The 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
U.S.-Japan Economic Ties
A 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.
U.S.-Japan Trade Trends
The 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.
The 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.
U.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 .)
Raw 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.
In 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.
However, 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.
Another 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.
Managing the Trade Relationship
Over 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.
In 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)—now the World Trade Organization (WTO)—the 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
domestic 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.
To 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
the 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.
The 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.
These 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.
Pending Challenges and the TPP
Many 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.
Market Access for U.S. Beef
In 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.
In 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.
In 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.
On 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.
Market Access for U.S.-Made Autos
Auto 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.–manufactured 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.
The 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—Chrysler, Ford, and General Motors—charge 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—6.7%.
Insurance, Express Delivery, and Japan Post
Japan 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.
On 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.
Among 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.
Japanese Economic Policies and the Yen
A 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%.
A 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 ¥120.46=$1 during the month, but after rapid appreciation, it reached as high as ¥76.65=$1 in October 2011. The yen has now been depreciating, having gone down to ¥96.3 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.
Overall U.S. Objectives
Japan'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:
Since 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...
The 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.
Market Access
Japan'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.
Rules-based Trade Framework and Impartial Dispute Settlement
One 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—including 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—became 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.
Enhanced TPP
Japan 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%.
Japan'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.
Foreign Policy Interests
In 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—often referred to as the "pivot" to the Pacific—announced 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—and richest economy on a per capita basis—in 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.
Japan's Objectives
Underlying 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:
A desire to promote Japanese growth and prevent the hollowing out of Japan— that is, the relocation of Japanese companies to other countries—by 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—what it calls Economic Partnership Agreements (EPAs)—it 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."
A 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.
Japanese Politics and the TPP
Until Abe's March 2013 announcement, the frequent turnover among Japanese prime ministers—Abe is the seventh premier in as many years—failed 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.
Japan'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 ¥1 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.
JA 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—rice, sugarcane/sugar products, wheat, dairy products, and beef—as "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.
The Views of U.S. Stakeholders
In 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.
In 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—Chrysler, Ford, and General Motors. In its statement, the AAPC said:
The 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.
The AFL-CIO also opposed Japan's participation in the TPP, having stated:
Given 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.
As 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.
[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.
In 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.
Some 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,
paramount 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.
These 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.
Possible Outcomes and Consequences
Japan'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—Japanese agricultural policy, problems in auto trade, government regulations and practices—have 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.
The 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.
The 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.
Furthermore, 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. | 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.
The 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."
Congress 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.
The 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.
The 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.
In 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. |
gao_GAO-04-437 | gao_GAO-04-437_0 | Background
Description of Biobased Products
Biobased 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.
The 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.
Importance of Biobased Products
Biomass 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’s 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.
According 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—making 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.
Regarding 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—such 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—biomass 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.
According 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 “green consumerism”—a segment of consumers who are willing to pay more for products that are less harmful to the environment. Currently, many of those “green” products are biobased, such as corn-based plastic ware, soy-based engine lubricants, and citrus-based household cleaners.
Perhaps 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’s 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’s 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.
Federal Efforts to Promote the Use of Biobased Products
In 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’s 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.
With 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—3 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.
USDA Delay in Issuing Biobased Purchasing Guidelines Has Slowed Other Agencies’ Efforts
While 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’s fulfillment of these requirements—particularly the designation of items for preferred procurement—they 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.
USDA’s Initial Efforts Have Only Partially Met the Farm Bill Requirements
USDA’s 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, “Lubricants and Functional Fluids” is one suggested category, hydraulic fluids is an item within that category subject to designation, and “ABC Hydraulic Fluid” 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.
Under 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.
In 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.
The process for designating items will be time consuming. For example, to designate the items discussed in the preamble to USDA’s 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’s 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.
USDA 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’s 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.
Considering the amount of work that remains to be done to fulfill the farm bill requirements, it seems likely that USDA’s fulfillment of these requirements will take years, particularly for the designation of items for preferred procurement that were discussed in the preamble of USDA’s 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’s enactment—by November 2002—it 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.
Federal Agencies Have Procured Small Quantities of Biobased Products
Without 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’s 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)—the supplier for DOD and several civilian agencies—has 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—assuming they meet necessary performance specifications—because 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’s 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.
The 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’s headquarters building in Washington, D.C. uses biobased plates and bowls, made primarily of potato starch and limestone. A pilot project undertaken with USDA’s 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.
In addition to its research activities to develop new uses of agricultural commodities for producing biobased products, USDA’s Agricultural Research Service is taking steps to use biobased products as well. For example, the agency’s Beltsville Agricultural Research Center in Maryland (the Center) spent about $8,500 in fiscal year 2003 for biobased products— 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’s 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.
USDA Could Accelerate Implementation of the Biobased Procurement Program by Developing a Comprehensive Management Plan and Assigning Adequate Resources
USDA 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’s other biobased requirements. Finally, USDA’s 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.
Need for Better Planning and Coordination
USDA 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.
When we asked New Uses officials in May 2003—a year after farm bill enactment and 6 months after the legislation deadline for USDA’s completion of the biobased procurement guidelines—for 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’s 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.
While 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 “this 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.” 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 “swimming in molasses.” A comprehensive plan would discuss possible sources of delay and how they might be mitigated.
Second, New Uses staff developed the timeline without consulting with the USDA office responsible for developing the model procurement program and the voluntary recognition program—the 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.
Third, 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— DOD, DOE, NASA, and GSA—-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’s 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.
Fourth, 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’s farm bill implementation team and that this team also reports to agency’s 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.
In contrast to the New Uses office’s 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.
We 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, “Implementing Section 9002 of the Farm Bill.” This document was attached to an e-mail dated June 2002 that referred to the attachment as an “early draft implementation plan for Section 9002.” 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, “Contractor performance would be evaluated on an annual basis against pre-agreed-upon achievement milestones, with an opportunity to re-direct resources if necessary.” Thus, although the New Uses office apparently planned to use a list of specific tasks and associated milestones to judge the contractor’s 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.
Furthermore, 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 “implementation plan,” 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’s 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’s requirements. Finally, New Uses officials stated that the notice of proposed rulemaking containing the proposed guidelines was developed far more quickly—by a measure of years—than 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.
In 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’s experience in developing the procurement program for recycled products that would benefit USDA’s efforts to develop a similar program for biobased products.
Careful 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’s completion of legislatively required actions.
Need for Additional Resources
USDA 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—in 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’s 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.
Regarding 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.
Regarding 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’s 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’s Oak Ridge National Laboratory and a consulting firm to, among other things, assist in developing the office’s comprehensive plan for implementing this portion of the work. Oak Ridge also will be involved in the plan’s implementation under the Procurement office’s 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.
Need for Assigning a Higher Priority
According 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.
In our earlier work, related to USDA’s 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’s issuance of federal procurement guidelines for biobased products, as well as USDA’s 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.
Stakeholders Generally Agree That Some Testing of Biobased Products Is Necessary, but They Question the Need For Life-Cycle Analysis
Most 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—as much as $8,000 for a single product—and they questioned whether they alone should bear this cost in order to make sales to the federal government.
The farm bill authorized USDA to use $1 million per year of the Commodity Credit Corporation’s 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.
In 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.
USDA’s 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’s performance against government or industry standards. Furthermore, manufacturers would have to use NIST’s 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.
Most Stakeholders Agree that Content and Performance Testing Are Necessary
According to officials we contacted from the top four purchasing agencies and the two testing organizations—Iowa State University and NIST— 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.
Ten 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.
Stakeholders Generally Question the Need for Life- Cycle Analysis
Officials 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’s 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’s decision to rely solely on one analytical tool—BEES—to 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.
Stakeholders 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’s 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.
Many 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.
Federal procurement officials indicated that life-cycle analysis is generally not an important factor in procurement decisions. A product’s 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’s 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.
Some 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 “recipe” (contents and structure) of a given product.
Conclusions
USDA 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’s 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’ procurement of biobased products largely hinges on USDA’s fulfillment of these farm bill requirements, USDA action is critical.
Recommendations
To ensure USDA’s 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.
Clearly identify and allocate the staff and financial resources to be made available for completing this work.
Clearly state the priority to be assigned to this work.
Agency Comments and Our Evaluation
We provided a draft of this report to USDA for review and comment. We received written comments from the agency’s 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.
USDA 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’s program for the purchase of recycled products. We believe the report provides a fair and accurate description of the farm bill requirements and USDA’s efforts to comply with these requirements to date. The scope of our work did not include a comparison of USDA’s efforts to implement these requirements to the efforts of other agencies to implement other procurement preference programs. However, we have previously reported on EPA’s 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.
Regarding 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’s progress with the Congress and others, including the department’s senior management.
Furthermore, 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’s 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.
Regarding 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’s 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.
We 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.
As 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’s Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at (202) 512- 3841. Key contributors to this report are listed in appendix VI.
Appendix I: Objectives, Scope, and Methodology
At the request of the Ranking Democratic Member of the Senate Committee on Agriculture, Nutrition, and Forestry, we reviewed issues related to the federal government’s 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.
To 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’s National Institute of Standards and Technology (NIST) who are developing testing standards for biobased products under agreements with USDA. Furthermore, we reviewed USDA’s 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’s 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.
To 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—the Department of Defense (DOD), the Department of Energy (DOE), the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA)—and analyzed the documents that they provided to us. These agencies account for the majority—about 85 percent—of the federal government’s 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’s (OMB) Office of Federal Procurement Policy (OFPP), and the White House’s 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.
To 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’s Office of the Federal Environmental Executive.
Testing organizations: Iowa State University and NIST.
Manufacturers: 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—at least one producer in each of the 11 biobased item categories proposed by USDA—and 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.
Environmental groups: Environmental and Energy Study Institute and Green Seal.
Consumer groups: Center for the New American Dream and Consumer’s Choice Council.
Advocacy group: New Uses Council.
Commodity associations: American Soybean Association, National Corn Growers Association, and the United Soybean Board.
Most of our contacts with these entities occurred prior to USDA’s 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.
In 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.
We conducted our review from May 2003 through February 2004 in accordance with generally accepted government auditing standards.
Appendix II: Sources for Information on Biobased Products
The following list provides the names, addresses, and Web sites for sources of information on biobased products used in our work.
Appendix III: Key Provisions of USDA’s Proposed Guidelines
This appendix summarizes key provisions of USDA’s 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.
Appendix IV: Chronology of Steps Completed or Planned by USDA to Comply with the Farm Bill Requirements
Appendix V: Comments from the U.S. Department of Agriculture
The following are GAO’s comments on the U.S. Department of Agriculture’s letter dated March 23, 2004.
GAO Comments
1. On page 29 of the draft report (now p. 28), we state USDA’s view that their progress compares favorably to EPA’s implementation of its program for the purchase of recycled products. We also state that a comparison of USDA’s 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’s program for the purchase of recycled products, was outside the scope of our work. However, we have previously reported on EPA’s efforts to implement this program. Specifically, in May 1993, we reported that EPA’s 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’s progress to the Congress and others, including the agency’s senior management. In addition, we reported that EPA’s efforts to fulfill the legislative provisions for the purchase of recycled products lacked priority and adequate staffing and resources, and because of the agency’s 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’s 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’s 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 “a particular style of plan.” 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 “adaptive plan composed of several parts” during our work—May 2003 through February 2004—nor 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— specifically the New Uses office—has 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 “formal definitive” 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—that 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’s 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’s publication of its proposed rule in December 2003. This was a function of our need to be responsive to our requester’s time frames for completing the work and delays in USDA’s issuance of the proposed rule. However, subsequent to the rule’s 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’s 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’s 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’s 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.
Appendix VI: GAO Contacts and Staff Acknowledgments
GAO Contacts
Acknowledgments
In 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.
Related GAO Products
Federal Procurement: Government Agencies Purchases of Recycled– Content Products. GAO-02-928T. Washington, D.C.: July 11, 2002.
Federal Procurement: Better Guidance and Monitoring Needed to Assess Purchases of Environmentally Friendly Products. GAO-01-430. Washington, D.C.: June 22, 2001.
Solid Waste: Federal Program to Buy Products With Recovered Materials Proceeds Slowly. GAO/RCED-93-58. Washington, D.C.: May 17, 1993.
Solid Waste: Progress in Implementing the Federal Program to Buy Products Containing Recovered Materials. GAO/T-RCED-92-42. Washington, D.C.: Apr. 3, 1992. | Why GAO Did This Study
The 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.
What GAO Found
USDA 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. |
gao_GAO-11-909 | gao_GAO-11-909_0 | Background
The 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’s 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’s 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’s 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.
CS Has a Global Network That Includes Domestic and Overseas Posts
CS 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. 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’s 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.) CS’s 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.)
In 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.) 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’s Advocacy Center, in Washington, D.C., with support from CS offices abroad, assists individual firms in various industry sectors competing for foreign government contracts.
Commercial Service’s Goals and Activities Support the National Export Initiative
CS Provides Services to U.S. Exporters, Particularly to SMEs
The 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’s 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 “export success” 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.
Trade 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.
CS’s fee-for-service activities include standardized services such as matchmaking, which CS generally refers to as a Gold Key—introducing U.S. businesses to qualified buyers overseas—and 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.
CS 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’s 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’s 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; eliminate or reduce a threat to U.S. business interests; and create market opportunities.
For 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—in this case requiring a European Union health certificate—is inconsistent with a bilateral trade agreement. If CS’s 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.
CS 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’s arbitrary customs valuations that would lead to excessive tariffs on the firm’s 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’s 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.
CS 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 “advocacy wins” was about $44 billion from fiscal year 2008 through fiscal year 2010.
While 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.
In addition to its export promotion and advocacy efforts, CS also supports other trade-related agencies’ efforts—for 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.
Important delegations of U.S. and foreign officials also visit sites within the United States, supported by CS’s 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—organizations 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.
CS Goals and Activities Align with NEI Priorities, but NEI Prompted New Areas of Emphasis
We found that CS activities align with six of the NEI’s 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.)
Supporting 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. 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. 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—an NEI priority country—received additional funds to support the International Buyer Program. 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. The NEI prompted CS to shift its focus from helping first-time exporters to encouraging firms already exporting, which supports NEI’s 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.
Through 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).
Commercial Service Is Modifying Performance Measures to Align More Closely with the NEI
In 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’s new revised set of performance measures for fiscal year 2012 addresses some past weaknesses; however, some weaknesses will remain—for 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.
CS Exceeded Past Performance for Effectiveness but Did Not Meet Most Targets in Fiscal Year 2010
CS tracked six performance measures to report on progress toward its goals in the Department of Commerce’s 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’s 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’s 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.
For 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—the 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’s performance measures for 2012.)
NEI’s overarching goal is to double the total value of U.S. exports in 5 years. The baseline against which the NEI’s 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’s 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.
Compared with its 2010 performance measures, CS’s 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’s 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’s 2012 performance measures with targets.)
In giving greater emphasis to the dollar value of export sales attributable to its assistance, CS’s new measures may motivate staff to prioritize activities that are more likely to produce significant dollar value of exports.
Two of CS’s 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’s emphasis on helping SMEs. Whereas three out of six of CS’s fiscal year 2010 measures focused primarily on helping SMEs, which is one piece of CS’s broad statutory mission, only one of CS’s 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.
The new emphasis in CS’s 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’s 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’s contribution toward the NEI’s goal of doubling the value of U.S. exports.
Performance Measures for Fiscal Year 2012 Partially Address Some Weaknesses
CS 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’s 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’s criteria for “success.” 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.
While CS’s performance management system exhibits important elements of a good system, we also found that CS’s 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’s modified performance measures for fiscal year 2012.
Three of its fiscal year 2010 measures tied CS’s 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’s fulfillment of its mission and its contribution to the U.S. government’s export promotion agenda. CS’s 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.
Four of CS’s 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’s 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.
CS 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’s fiscal year 2012 performance measures.
CS 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’s 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 “expects” 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’s 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’s export assistance through fee-based services may remain.
None of CS’s 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’s 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—10 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’ level of satisfaction with CS services. One of CS’s new measures for fiscal year 2012 includes a cost component—reporting 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.
Recently, 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.
Commercial Service’s Resource Allocation Process Does Not Make Full Use of Relevant Information to Guide Its Decisions
Systematic 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’s new performance goals. Furthermore, important available data related to some CS performance goals and activities are not systematically considered in the current process.
CS Has a Data-Driven Process to Inform Its Resource Allocation Decisions
In 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.
With 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’ 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. 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’s 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’s total imports, gross domestic product, and investment flows. Larger markets are generally ranked higher. In general, CS’s model is weighted 60 percent toward market structure and 40 percent toward market size. While most of the model’s 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.)
We analyzed the degree to which the overseas model’s 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—the European Union 15 and Japan, and free trade agreement (FTA) countries—still 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 “other” 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. Cost-benefit model. CS’s 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’s rankings to ascertain how posts compare in terms of relative expense and productivity.
We 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. 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.
CS 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. 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’s level of exporting activity, with greater weight given to industries with higher levels of exporting. Two other variables are also used in the model—the 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—including both manufacturing and services, as well as exporters and nonexporters—and applies export intensiveness factors to the industry groups within each MSA. The MSAs are then ranked by the resulting weighted SME count. 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.
CS Is Still Responding to Resource Management Challenges
Given 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’s budgets remained essentially flat while per capita personnel costs and administrative costs increased. CS’s workforce declined almost 14 percent through attrition, and, in response to the “crisis” situation, hiring, travel, training, and supplies were frozen, compromising CS’s 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.
As a result, CS’s 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’s 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’s 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.
CS'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 “other” 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—U.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.
CS’s 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’s 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.
We found that CS’s 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.
CS 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.
In addition, the large number of variables also creates complexity without obvious benefits, as we found a significant statistical correlation (covariance) among the overseas model’s 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’s 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’s 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.
We 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’s 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’s 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 “other” 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 “other” CS countries (see fig. 10). While countries in the “other” 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 “other” CS markets may increase.
In 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.
Five examples follow to illustrate how activity data could help inform resource management decisions. First, CS’s 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’ 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’s 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.
Second, 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’s 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.
Third, 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.)
Fourth, 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.
Finally, some posts have significant responsibilities for supporting other agencies and important delegations. These important activities are counted in CS highlights—weekly reporting on noteworthy events or successes in a country or region—but 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’s 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’s primary export promotion objectives.
Conclusions
The National Export Initiative lays out a comprehensive strategy for marshaling the nation’s 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’s 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.
CS’s 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’ 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’s fiscal year 2010 measures, some issues remain—for 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’s greater importance to the NEI. Additionally, though CS has a role that is inherently customer focused, CS’s 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.
To 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’s 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.
Recommendations for Executive Action
We 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. 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. 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.
Agency Comments and Our Evaluation
Commerce 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.
In 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—as noted in our report—can 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’s 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.
As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to 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.
If 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.
Appendix I: Scope and Methodology
To 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’s 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’s Deputy Under Secretary, Department of Commerce’s NEI Director, and the Director of the Trade Promotion Coordinating Committee. In addition, we met with officials from CS’s Advocacy Center and from Commerce’s Market Access and Compliance unit, as both contribute to CS’s 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’s 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’s 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.
To determine if CS performance measures accurately reflect its activities and align with the NEI, we reviewed CS’s 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’s annual performance and accountability reports from 2008 through 2010. In addition, we reviewed Commerce’s congressional budget submissions for 2011 and 2012 to identify upcoming changes to CS’s performance measures. Additionally, we reviewed CS’s 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’s performance measures to learn about the development of the 2010 and 2012 measures.
To 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’s export potential scores were consistent with NEI priorities. We also performed a statistical analysis of the model’s variables to evaluate the model’s 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’s 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’s 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.
To 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.
Regarding 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.
Regarding CS’s 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’s 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.
We 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.
Appendix II: Distribution of Domestic CS Staff in U.S. Export Assistance Centers by State, Fiscal Year 2010
Appendix III: Country Groupings and Allocation of Overseas CS Staff in Fiscal Year 2010
Export market group Partner group
Appendix IV: Locations of State Department Partnership Posts Providing Export Promotion Services
State Department partnership post (45)
Commercial Service post (75+)
Appendix V: Country Groupings and U.S. Exports, Calendar Years 2008-2010
Export market group Partner group
Export market group Partner group
Korea (South)
Export market group Partner group
Export market group Partner group
Appendix VI: Example of Network Analysis of CS Fee-for-Service Activities
We conducted network analysis of 3 years of CS’s 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—Brazil, China, and India—and the 15 most active U.S. domestic offices. Figure 13 shows five domestic offices—Chicago, Cleveland, Houston, Newport Beach, and Northern Virginia—that 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.
Appendix VII: Comments from the Department of Commerce
Appendix VIII: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In 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. | Why GAO Did This Study
Recognizing 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.
What GAO Found
CS'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.
What GAO Recommends
GAO 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. |
gao_GAO-02-51 | gao_GAO-02-51_0 | Background
The establishment of DOE brought together a collection of agencies with diverse institutional cultures, structures, and procedures. Since its inception, funding priorities for the department’s varied mission responsibilities have shifted and new challenges have been added. Over the years, DOE’s 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’s missions and structure.
Missions and Organization of DOE
To foster a secure and reliable energy system that is environmentally and economically sustainable; to be a responsible steward of the Nation’s nuclear weapons; to clean up the department’s facilities; to lead in the physical sciences and advance the biological, environmental, and computational sciences; and to provide premier scientific instruments for the Nation’s research enterprise.
DOE groups these responsibilities into four “business lines,” 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’s applied missions and to provide remarkable insights into the physical and biological world.
Supporting these mission-related business lines is a “corporate management” function that constitutes a fifth “business line.” 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’s workforce and the public, and to protect the environment; and practices to ensure accountability to the public. According to DOE, “the department’s success within its diverse portfolio of programs is largely dependent upon a strong and sound corporate management function.”
DOE’s 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’s 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).
DOE 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’s 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’s other laboratories are program- specific. The budgets for all 22 laboratories total nearly $8 billion annually.
DOE 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 “operations” offices and several smaller, affiliated “area” and “site” 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.
Contractors manage and operate DOE’s 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’s 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’s predecessor agencies, with participating industry and academic organizations, to reimburse all of the contractors’ 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.
GAO’s Call for a New Assessment of DOE
In August 1995 we reported that a fundamental reevaluation of DOE was warranted, based on prior reviews by us, DOE’s 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’s structure and mission responsibilities.
Our 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.
Overwhelmingly, 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.
DOE Initiated Major Reforms in the 1990s
In the early to mid-1990s, newly appointed Energy Secretary Hazel O’Leary 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’s 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.
In 1993, DOE launched an internal initiative to improve safety and awareness of good practices throughout all aspects of the department’s 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’s own senior managers questioned the continued justification for the department’s 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.
Also in 1993, the Energy Secretary told the Congress that DOE was not adequately in control of its major facility and site contracts and, therefore, “not in a position to ensure effective and efficient expenditures of taxpayer dollars.” 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’s 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.
DOE also commissioned two special task forces in 1993 to examine the quality and effectiveness of the department’s 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’s final report, issued in February 1995, concluded that DOE’s laboratories were in “serious jeopardy, owing to patterns of management and organization that have grown in complexity, cost, and intrusiveness over a long period.” 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.
The Secretary chartered The Task Force on Strategic Energy Research and Development, chaired by energy analyst Daniel Yergin, to examine DOE’s energy resources business line. The June 1995 report of this task force assessed the rationale for the federal government’s 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.
The Galvin and Yergin reports led to many changes in how DOE interacts with its contractors, including a streamlining of departmental orders and procedures.
In 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 “total quality management” and the desire to increase “stakeholder” participation in decision-making. Under this plan, the department organized itself by “business lines” 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 “privatization”). 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’s performance and accountability.
DOE 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 “no assurance DOE’s initiatives will succeed, we know that no alternative approach can provide that assurance either.” The department continued to assert that its reforms, unprecedented in its history, would transform the department into a “positive model of organizational change and effectiveness.” According to the Deputy Secretary at the time, the department’s initiative promised to “fundamentally alter how we look and how we conduct business….”
Unresolved Management Weaknesses Contribute to Performance Problems
Unresolved 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’s 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.
Strategic Plan Not Used to Organize and Integrate Diverse Missions
DOE 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 “business lines” and the way the department is actually organized. While DOE’s 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.
Shortcomings 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’s 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.
DOE 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’s lack of control and influence over the program budgeting processes.
Problems 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.
Roles and Responsibilities Remain Unclear
Since 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.
A 1997 study by the Institute for Defense Analyses revealed that the coordination between DOE programs is an “undisciplined, uncoordinated, essentially ad hoc process between the field managers and each of the program assistant secretaries.” The institute concluded that there was no assurance that resource decisions are weighed against each other in a complete and consistent manner.
A 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’s Foreign Intelligence Advisory Board reported that DOE’s “decentralized 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.…” The board labeled DOE’s organization as a “dysfunctional” 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 “for the past two decades, the Department of Energy had embodied science at its best and security at its worst.”
A 1999 National Research Council review of DOE’s project management problems found that DOE’s “organizational structure makes it much more difficult to carry out projects than in comparable private and public sector organizations.” 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’s Spallation Neutron Source project under construction in Oak Ridge, Tennessee, and at DOE’s National Ignition Facility being built in Livermore, California, to, among other problems, DOE’s complex management and organizational structure and unclear lines of authority.
A March 2000 National Academy of Public Administration report on DOE’s 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 “significant differences in understanding of the roles and responsibilities for program and project management.”
Recognizing 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’s field offices now report to whichever headquarters program office provides the most funding to the contractor sites overseen by the field managers—an 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’s multiprogram national security laboratories, where work is conducted on all of DOE’s 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.
The 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 “clarify functional authority, reduce management layers, eliminate micromanagement [of the laboratories], and downsize.” 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’s 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 “some of the more fundamental management problems [with DOE] still remain to be addressed.”
Lack of Qualified Staff Has Impeded Effective Contractor Oversight
Lack 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’s budget, the department needed to make advance preparations to avert the loss of technically competent safety personnel.
Responding 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’s workforce.
We 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’s 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 “the necessary experience, knowledge, skills, procedures or abilities to prepare good performance measures” for its contracts.
In its fiscal year 2001 Annual Performance Plan, the department stated that it had “fully addressed” 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’s 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’s 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.
In 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, “Five-Year Workforce Restructuring Plan,” prepared in response to an Office of Management and Budget requirement of all federal agencies. The plan describes itself as a “corporate roadmap” for, among other things, reducing manager and organizational layers, increasing spans of control, and redeploying positions.
Contract Management Reforms Not Fully Implemented
DOE 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.
In an October 1997 report, DOE’s Inspector General reported problems with performance-based contracting at DOE’s 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.
The National Research Council’s 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.
DOE’s Inspector General reported in April 2000 that performance-based incentives in the contract for DOE’s 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.
DOE’s 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’s 20 major for-profit operating contracts did not incorporate liabilities provisions called for under contract reform.
A December 1999 audit concluded that the department’s award procedure “effectively circumvented federal requirements designed to promote and ensure the appropriate use of competition in contracting.”
A 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.
A February 2000 audit found that only one of the four contractors reviewed had fully met a requirement to prepare “make-or-buy” plans to obtain supplies and services on a least-cost basis.
A 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’s major contractors.
DOE has also struggled to effectively implement its privatization program, which is intended to keep the department’s environmental cleanup projects on schedule at budgeted costs. For example, the cleanup contracts were terminated at two noteworthy privatization projects—the Hanford tank-waste project and the Idaho Pit 9 cleanup project—because of concerns with rapidly escalating costs and the contractor performance.
Finally, 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’s 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 “actively considers the use of competitive procedures for such contracts and has competed them where appropriate.” DOE also said that it retained its contracts with the University of California based on “national security considerations.”
Persistent Management Weaknesses Contribute to Project Management Problems
Several 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.
DOE 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’s record calls into question the credibility of its procedures for developing designs and cost estimates and managing projects.
The 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’s 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 “culture” of the department.
DOE acknowledged the persistence of problems in its project management practices in the department’s fiscal year 2001 performance and accountability report. DOE stated that “the 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.”
In response to the Council’s 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’s leadership commitment to implementing the report’s recommendations, particularly regarding the role of the Office of Engineering and Construction Management.
In 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.
Diverse Missions, Dysfunctional Structure, and Weak Culture of Accountability Are Fundamental Impediments to Improvement
The 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’s diverse missions, dysfunctional organizational structure, and weak culture of accountability impede fundamental improvement at DOE. Unless these underlying and interrelated impediments are addressed, DOE’s management and performance problems will likely continue.
Diverse Missions Resist Integration
Fundamental improvement in DOE’s performance is impeded by the difficulty of effectively integrating the management of the department’s diverse missions. DOE’s 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.
The National Research Council’s 1999 report on DOE project management noted that “cultures, attitudes and organizational commitments have shaped service delivery, and as DOE’s missions changed in response to external conditions, the diversity of cultures inherited by the department’s collection of agencies did not necessarily change with it.” 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’s national security programs have a long history of operating in secret, which leads to practices that are quite different from DOE’s science programs, which are more open and flexible—yet 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’s ability to oversee contractors.
It 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’s contract with Los Alamos contained few incentives for controlling classified material but many rewards for high quality science work—yet 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’s overall DOE rating and subsequent performance fee.
In 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.
Organizational Structure Precludes Effective Management and Performance
Over 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.
The 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’s Foreign Intelligence Advisory Board noted in its 1999 report that “convoluted, confusing, and often contradictory reporting channels have made the relationships between DOE headquarters and the laboratories, in particular, tense, internecine, and chaotic.” In addition, the panel found that much of the confusion centered on the role and power of the field offices. As the panel reported, “senior 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.”
To address long-standing security problems across the nuclear weapons complex, the panel concluded that because “DOE was incapable of reforming itself—bureaucratically and institutionally—in a lasting way,” 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.
DOE and NNSA officials are now attempting to develop and implement an organizational plan that can operate effectively within DOE’s overall field and headquarters structure. Historically, DOE’s efforts to reorganize assumed that current missions will be retained under any new structure. However, as DOE’s 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’s current mission requirements. Making changes in the current environment is further complicated by the need to consider DOE’s potentially expanded role on homeland security matters on overall departmental missions.
Weak Culture of Accountability
DOE’s 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’s 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.
The reluctance of past Secretaries to open all major DOE site and facility contracts to competitive bidding has diluted accountability by weakening the department’s 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.
DOE’s shifting policies on external regulation also reflect DOE leadership’s ambivalence toward accountability. Despite the position of former Secretary O’Leary—and her internal managers and consultants— that external regulation would give DOE credibility and make its facilities safer, subsequent leaders reversed course. At first, Secretary Federico Peña, O’Leary’s 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’s own pilot program results and was inconsistent with conclusions reached by the Nuclear Regulatory Commission and the Occupational Safety and Health Administration— DOE’s likely regulators.
Finally, DOE’s 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.
Conclusions
Past 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’s diverse missions, dysfunctional organizational structure, and weak culture of accountability.
While 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.
DOE must also have an organizational structure that effectively meets the needs of the department’s 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’s missions may simply not be possible. New leadership, ongoing organizational changes, and the need to consider how DOE’s responsibilities contribute to homeland security missions, make this an opportune time to address the root causes of performance problems in DOE.
Recommendations for Executive Action
To 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.
Pending the results of a comprehensive review of DOE’s missions, the Secretary of Energy should take immediate steps to improve the department’s 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.
Agency Comments
In 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.
DOE'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’s 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 “national security” mission can subsume each of DOE’s highly diverse programs in science, environmental quality, and energy resources. Developing measurable national security objectives for environmental management, DOE’s largest budget category, will be particularly challenging.
Also, 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’s 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.
Many 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’s 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.
Finally, 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.
Appendix III includes the full text of DOE's comments and our response.
We 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.
As 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.
Appendix I: Scope and Methodology
We 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’s 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.
To 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’s comments on our August 1995 report to represent DOE’s position on the significance of its initiated reforms.
To 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’s 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’s performance since 1995. The Congressional Research Service, DOE’s 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.
To 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.
We conducted our review from November 2000 through September 2001 in accordance with generally accepted government auditing standards.
Appendix II: Documents Reviewed
GAO Reports
Department of Energy: Views on the Progress of the National Nuclear Security Administration in Implementing Title 32 (GAO-01-602T, Apr. 1, 2001).
Information Security: Safeguarding of Data in Excessed Department of Energy Computers (GAO-01-469, Mar. 29, 2001).
Nuclear Cleanup: Progress Made at Rocky Flats, but Closure by 2006 Is Unlikely, and Costs May Increase (GAO-01-284, Feb. 28, 2001).
High Risk Series: An Update (GAO-01-263, Jan. 2001).
Major Management Challenges and Program Risks: Department of Energy (GAO-01-246, Jan. 2001).
Nuclear Weapons: Improved Management Needed to Implement Stockpile Stewardship Program Effectively (GAO-01-48, Dec. 14, 2000).
Financial Management: Billions in Improper Payments Continue to Require Attention (GAO-01-44, Oct. 27, 2000).
Reinventing Government: Status of NPR Recommendations at 10 Federal Agencies (GAO/GGD-00-145, Sept. 21, 2000).
Government Performance and Results Act: Information on Science Issues in the Department of Energy’s Accountability Report for Fiscal Year 1999 and Performance Plans for Fiscal Years 2000 and 2001 (GAO/RCED-00-268R, Aug. 25, 2000).
National Ignition Facility: Management and Oversight Failures Caused Major Cost Overruns and Schedule Delays (GAO/RCED-00-271, Aug. 8, 2000).
Department of Energy: Uncertainties and Management Problems Have Hindered Cleanup at Two Nuclear Waste Sites (GAO/T-RCED-00-248, July 12, 2000).
Nuclear Security: Information on DOE’s Requirements for Protecting and Controlling Classified Documents (GAO/T-RCED-00-247, July 11, 2000).
Observations on the Department of Energy’s Fiscal Year 1999 Accountability Report and Fiscal Year 2000/2001 Performance Plan (GAO/RCED-00-209R, June 30, 2000).
Nuclear Waste Cleanup: DOE’s Cleanup Plan for the Paducah, Kentucky, Site Faces Uncertainties and Excludes Costly Activities (GAO/T-RCED-00-225, June 27, 2000).
Department of Energy: National Security Controls Over Contractors Traveling to Foreign Countries Need Strengthening (GAO/RCED-00-140, June 26, 2000).
Nuclear Waste: Observations on DOE’s Privatization Initiative for Complex Cleanup Projects (GAO/T-RCED-00-215, June 22, 2000).
Information Security: Vulnerabilities in DOE’s Systems for Unclassified Civilian Research (GAO/AIMD-00-140, June 9, 2000).
Nuclear Waste: DOE’s Advanced Mixed Waste Treatment Project: Uncertainties May Affect Performance, Schedule, and Price (GAO/RCED-00-106, Apr. 28, 2000).
Nuclear Waste Cleanup: DOE’s Paducah Plan Faces Uncertainties and Excludes Costly Cleanup Activities (GAO/RCED-00-96, Apr. 28, 2000).
Federal Research: DOE Is Providing Independent Review of the Scientific Merit of Its Research (GAO/RCED-00-109, Apr. 25, 2000).
Low-Level Radioactive Wastes: Department of Energy Has Opportunities to Reduce Disposal Costs (GAO/RCED-00-64, Apr. 12, 2000).
Department of Energy: Views on Proposed Civil Penalties, Security Oversight, and External Safety Regulation Legislation (GAO/T-RCED-00-135, Mar. 22, 2000).
Nuclear Security: Security Issues at DOE and Its Newly Created National Nuclear Security Administration (GAO/T-RCED-00-123, Mar. 14, 2000).
Nuclear Nonproliferation: Limited Progress in Improving Nuclear Material Security in Russia and the Newly Independent States (GAO/RCED/NSIAD-00-82, Mar. 6, 2000).
Department of Energy: Views on DOE’s Plan to Establish the National Nuclear Security Administration (GAO/T-RCED-00-113, Mar. 2, 2000).
Nuclear Security: Improvements Needed in DOE’s Safeguards and Security Oversight (GAO/RCED-00-62, Feb. 24, 2000).
Occupational Safety and Health: Federal Agencies Identified as Promoting Workplace Safety and Health (GAO/HEHS-00-45R, Jan. 31, 2000).
Nuclear Weapons: Challenges Remain for Successful Implementation of DOE’s Tritium Supply Decision (GAO/RCED-00-24, Jan. 2000).
Nuclear Waste: DOE’s Hanford Spent Nuclear Fuel Storage Project— Cost, Schedule, and Management Issues (GAO/RCED-99-267, Sept. 20, 1999).
Department of Energy: Uncertain Future for External Regulation of Worker and Nuclear Facility Safety (GAO/T-RCED-99-269, July 22, 1999).
Observations on the Department of Energy’s Fiscal Year 2000 Performance Plan (GAO/RCED-99-218R, July 20, 1999).
Department of Energy: Problems in the Management and Use of Supercomputers (GAO/T-RCED-99-257, July 14, 1999).
Department of Energy: Need to Address Longstanding Management Weaknesses (GAO/T-RCED-99-255, July 13, 1999).
Nuclear Safety: Department of Energy Should Strengthen Its Enforcement Program (GAO/T-RCED-99-228, June 29, 1999).
Nuclear Weapons: DOE Needs to Improve Oversight of the $5 Billion Strategic Computing Initiative (GAO/RCED-99-195, June 28, 1999).
Department of Energy: DOE’s Nuclear Safety Enforcement Program Should Be Strengthened (GAO/RCED-99-146, June 10, 1999).
Department of Energy: Cost Estimates for the Hanford Tank Waste Remediation Project (GAO/RCED-99-188R, May 19, 1999).
National Laboratories: DOE Needs to Assess the Impact of Using Performance-Based Contracts (GAO/RCED-99-141, May 7, 1999).
Nuclear Waste: DOE’s Accelerated Cleanup Strategy Has Benefits but Faces Uncertainties (GAO/RCED-99-129, Apr. 30, 1999).
Department of Energy: Accelerated Closure of Rocky Flats: Status and Obstacles (GAO/RCED-99-100, Apr. 30, 1999).
Nuclear Waste: Process to Remove Radioactive Waste From Savannah River Tanks Fails to Work (GAO/RCED-99-69, Apr. 30, 1999).
Department of Energy: Key Factors Underlying Security Problems at DOE Facilities (GAO/T-RCED-99-159, Apr. 20, 1999).
DOE Management: Opportunities for Saving Millions in Contractor Travel Costs (GAO/RCED-99-107, Apr. 1, 1999).
Department of Energy: Usefulness of Performance Plan Could Be Improved (GAO/T-RCED-99-134, Mar. 24, 1999).
Department of Energy: Challenges Exist in Managing the Spallation Neutron Source Project (GAO/T-RCED-99-103, Mar. 3, 1999).
Nuclear Nonproliferation: Concerns With DOE’s Efforts to Reduce the Risks Posed by Russia’s Unemployed Weapons Scientists (GAO/RCED-99-54, Feb. 19, 1999).
Department of Energy: Actions Necessary to Improve DOE’s Training Program (GAO/RCED-99-56, Feb. 12, 1999).
Major Management Challenges and Program Risks: Department of Energy (GAO/OGC-99-6, Jan. 1999).
Nuclear Weapons: Key Nuclear Weapons Component Issues Are Unresolved (GAO/RCED-99-1, Nov. 9, 1998).
Department of Energy: Management of Excess Property (GAO/RCED-99-3, Nov. 4, 1998).
Department of Energy: DOE Needs to Improve Controls Over Foreign Visitors to Its Weapons Laboratories (GAO/T-RCED-99-28, Oct. 14, 1998).
Nuclear Waste: Department of Energy’s Hanford Tank Waste Project— Schedule, Cost, and Management Issues (GAO/RCED-99-13, Oct. 8, 1998).
Nuclear Waste: Schedule, Cost, and Management Issues at DOE’s Hanford Tank Waste Project (GAO/T-RCED-99-21, Oct. 8, 1998).
Department of Energy: Problems in DOE’s Foreign Visitor Program Persist (GAO/T-RCED-99-19, Oct. 6, 1998).
Nuclear Waste: Further Actions Needed to Increase the Use of Innovative Cleanup Technologies (GAO/RCED-98-249, Sept. 25, 1998).
Department of Energy: DOE Lacks an Effective Strategy for Addressing Recommendations From Past Laboratory Advisory Groups (GAO/T-RCED-98-274, Sept. 23, 1998).
Department of Energy: Uncertain Progress in Implementing National Laboratory Reforms (GAO/RCED-98-197, Sept. 10, 1998).
Department of Energy: Lessons Learned Incorporated Into Performance- Based Incentive Contracts (GAO/RCED-98-223, July 29, 1998).
Information Technology: Department of Energy Does Not Effectively Manage Its Supercomputers (GAO/RCED-98-208, July 17, 1998).
Financial Management: Fostering the Effective Implementation of Legislative Goals (GAO/T-AIMD-98-215, June 18, 1998).
DOE Management: Functional Support Costs at DOE Facilities (GAO/RCED-98-193R, June 12, 1998).
DOE Fiscal Year 1999 Budget Request for Energy Efficiency and Renewable Energy and Financial Management Issues (GAO/RCED-98-186R, June 10, 1998).
Department of Energy: Alternative Financing and Contracting Strategies for Cleanup Projects (GAO/RCED-98-169, May 29, 1998).
Results Act: Observations on DOE’s Annual Performance Plan for Fiscal Year 1999 (GAO/RCED-98-194R, May 28, 1998).
Department of Energy: Clear Strategy on External Regulation Needed for Worker and Nuclear Facility Safety (GAO/T-RCED-98-205, May 21, 1998).
Department of Energy: Clear Strategy on External Regulation Needed for Worker and Nuclear Facility Safety (GAO/RCED-98-163, May 21, 1998).
Nuclear Waste: Management Problems at the Department of Energy’s Hanford Spent Fuel Storage Project (GAO/T-RCED-98-119, May 12, 1998).
Department of Energy: DOE Contractor Employee Training (GAO/RCED-98-155R, May 8, 1998).
Department of Energy: Problems and Progress in Managing Plutonium (GAO/RCED-98-68, Apr. 17, 1998).
Results Act: DOE Can Improve Linkages Among Plans and Between Resources and Performance (GAO/RCED-98-94, Apr. 14, 1998).
Nuclear Weapons: Design Reviews of DOE’s Tritium Extraction Facility (GAO/RCED-98-75, Mar. 31, 1998).
Nuclear Waste: Understanding of Waste Migration at Hanford Is Inadequate for Key Decisions (GAO/RCED-98-80, Mar. 13, 1998).
Best Practices: Elements Critical to Successfully Reducing Unneeded RDT&E Infrastructure (GAO/NSIAD/RCED-98-23, Jan. 8, 1998).
Department of Energy: Subcontracting Practices (GAO/RCED-98-30R, Nov. 24, 1997).
Department of Energy: Information on the Tritium Leak and Contractor Dismissal at the Brookhaven National Laboratory (GAO/RCED-98-26, Nov. 4, 1997).
Department of Energy: Clearer Missions and Better Management Are Needed at the National Laboratories (GAO/T-RCED-98-25, Oct. 9, 1997).
Department of Energy: DOE Needs to Improve Controls Over Foreign Visitors to Weapons Laboratories (GAO/RCED-97-229, Sept. 25, 1997).
Results Act: Observations on the Department of Energy’s August 15, 1997, Draft Strategic Plan (GAO/RCED-97-248R, Sept. 2, 1997).
Results Act: Observations on Federal Science Agencies (GAO/T-RCED-97-220, July 30, 1997).
Nuclear Waste: Department of Energy’s Pit 9 Cleanup Project Is Experiencing Problems (GAO/T-RCED-97-221, July 28, 1997).
Nuclear Waste: Department of Energy’s Project to Clean Up Pit 9 at Idaho Falls Is Experiencing Problems (GAO/RCED-97-180, July 28, 1997).
Results 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).
Results Act: Observations on the Department of Energy’s Draft Strategic Plan (GAO/RCED-97-199R, July 11, 1997).
Department of Energy: Status of DOE’s Efforts to Improve Training (GAO/RCED-97-178R, June 27, 1997).
High-Risk Program: Information on Selected High-Risk Areas (GAO/HR-97-30, May 1997).
Department of Energy: Opportunity for Enhanced Oversight of Major System Acquisitions (GAO/RCED-97-146R, Apr. 30, 1997).
Department 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).
Department of Energy: Funding and Workforce Reduced, but Spending Remains Stable (GAO/RCED-97-96, Apr. 24, 1997).
Department of Energy: Plutonium Needs, Costs, and Management Programs (GAO/RCED-97-98, Apr. 17, 1997).
Department of Energy: Improving Management of Major System Acquisitions (GAO/T-RCED-97-92, Mar. 6, 1997).
Department of Energy: Management and Oversight of Cleanup Activities at Fernald (GAO/RCED-97-63, Mar. 14, 1997).
High-Risk Series: Department of Energy Contract Management (GAO/HR-97-13, Feb. 1997).
Nuclear Waste: DOE’s Estimates of Potential Savings From Privatizing Cleanup Projects (GAO/RCED-97-49R, Jan. 31, 1997).
Nuclear Waste: Impediments to Completing the Yucca Mountain Repository Project (GAO/RCED-97-30, Jan. 17, 1997).
Department of Energy: Contract Reform Is Progressing, but Full Implementation Will Take Years (GAO/RCED-97-18, Dec. 10, 1996).
Department of Energy: Opportunity to Improve Management of Major System Acquisitions (GAO/RCED-97-17, Nov. 26, 1996).
DOE Security: Information on Foreign Visitors to the Weapons Laboratories (GAO/T-RCED-96-260, Sept. 26, 1996).
Department of Energy: Observations on the Future of the Department (GAO/T-RCED-96-224, Sept. 4, 1996).
Hanford Waste Privatization (GAO/RCED-96-213R, Aug. 2, 1996).
Nuclear Weapons: Improvements Needed to DOE’s Nuclear Weapons Stockpile Surveillance Program (GAO/RCED-96-216, July 31, 1996).
Information Management: Energy Lacks Data to Support Its Information System Streamlining Effort (GAO/AIMD-96-70, July 23, 1996).
Energy Management: Technology Development Program Taking Action to Address Problems (GAO/RCED-96-184, July 9, 1996).
DOE’s Cleanup Cost Savings (GAO/RCED-96-163R, July 1, 1996).
DOE’s Laboratory Facilities (GAO/RCED-96-183R, June 26, 1996).
Energy Research: Opportunities Exist to Recover Federal Investment in Technology Development Projects (GAO/RCED-96-141, June 26, 1996).
Department of Energy: Progress Made Under Its Strategic Alignment and Downsizing Initiative (GAO/T-RCED-96-197, June 12, 1996).
Federal Facilities: Consistent Relative Risk Evaluations Needed for Prioritizing Cleanups (GAO/RCED-96-150, June 7, 1996).
Managing DOE: The Department’s Efforts to Control Litigation Costs (GAO/T-RCED-96-170, May 14, 1996).
Energy Downsizing: While DOE Is Achieving Budget Cuts, It Is Too Soon to Gauge Effects (GAO/RCED-96-154, May 13, 1996).
Success Stories Response (GAO/OCG-96-3R, May 13, 1996).
DOE Cleanup: Status and Future Costs of Uranium Mill Tailings Program (GAO/T-RCED-96-167, May 1, 1996).
DOE’s Success Stories Report (GAO/RCED-96-120R, Apr. 15, 1996).
Environmental Protection: Issues Facing the Energy and Defense Environmental Management Programs (GAO/T-RCED/NSIAD-96-127, Mar. 21, 1996).
Nuclear Weapons: Status of DOE’s Nuclear Stockpile Surveillance Program (GAO/T-RCED-96-100, Mar. 13, 1996).
Federal R&D Laboratories (GAO/RCED/NSIAD-96-78R, Feb. 29, 1996).
Nuclear Nonproliferation: Concerns With the U.S. International Nuclear Materials Tracking System (GAO/T-RCED/AIMD-96-91, Feb. 28, 1996).
Uranium Mill Tailings: Status and Future Costs of Cleanup (GAO/T-RCED-96-85, Feb. 28, 1996).
Energy’s Financial Resources and Workforce (GAO/RCED-96-69R, Feb. 28, 1996).
Nuclear Waste: Management and Technical Problems Continue to Delay Characterizing Hanford’s Tank Waste (GAO/RCED-96-56, Jan. 26, 1996).
Uranium Mill Tailings: Cleanup Continues, but Future Costs Are Uncertain (GAO/RCED-96-37, Dec. 15, 1995).
Department of Energy: A Framework for Restructuring DOE and Its Missions (GAO/RCED-95-197, Aug. 21, 1995).
Other Reports
Report to Congress on the Plan for Organizing the National Nuclear Security Administration (Department of Energy, National Nuclear Security Administration, May 3, 2001).
Special Report: Performance Measures at the Department of Energy (Department of Energy, Office of Inspector General, DOE/IG-0504, May 2001).
Prepared 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).
Statement 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).
Audit Report: Bechtel Jacobs Company LLC’s Management and Integration Contract at Oak Ridge (Department of Energy, Office of Inspector General, DOE/IG-0498, Mar. 21, 2001).
Science and Technology Issues Facing the 107th Congress: First Session (Congressional Research Service-RL30869, Mar. 1, 2001).
Department of Energy: Performance and Accountability Report Fiscal Year 2000 (Department of Energy/CR-0071, Feb. 16, 2001).
Federal Managers’ 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).
FY 2000 Report to Congress of the Panel to Assess the Reliability, Safety, and Security of the United States Nuclear Stockpile (Feb. 1, 2001).
Eleventh Annual Report to Congress (Defense Nuclear Facilities Safety Board, Feb. 2001).
H.R. 376—To Abolish the Department of Energy (107th Congress, Jan. 31, 2001).
Interim Letter Report for the Improved Project Management in the Department of Energy (The National Academies, Jan. 17, 2001).
The Department of Energy’s Tritium Production Program (Congressional Research Service-RL30425, Jan. 12, 2001).
Nuclear Energy Policy (Congressional Research Service-IB88090, Jan. 12, 2001).
Civilian Nuclear Waste Disposal (Congressional Research Service- IB92059, Jan. 10, 2001).
The National Ignition Facility: Management, Technical, and Other Issues (Congressional Research Service-RL30540, Jan. 4, 2001).
Department of Energy Research and Development Budget for FY 2001: Description and Analysis (Congressional Research Service-RL30445, Jan. 3, 2001).
Annual Performance Plan for FY 2001 (Department of Energy/CR-0068-9).
China: Suspected Acquisition of U.S. Nuclear Weapon Secrets (Congressional Research Service-RL30143, Dec. 20, 2000).
DOE Science for the Future: A Discussion Paper (Academic Panel, Dec. 14, 2000).
Performance-Based Management at the Department of Energy (External Members of the Laboratory Operations Board, Dec. 7, 2000).
Contributions 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).
Special Report: Management Challenges at the Department of Energy (Department of Energy, Office of Inspector General, DOE/IG-0491, Nov. 28, 2000).
United States Department of Energy: Fact Book FY 2000 (Department of Energy, Office of Management and Administration, Office of Management and Operations Support, Nov. 2000).
Establishing 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).
DOE’s Civilian Information Technology Program (Congressional Research Service-RS20626, Oct. 5, 2000).
Field Restructuring (Department of Energy, Memorandum for Heads of Departmental Elements from T. J. Glauthier, Sept. 26, 2000).
Restructuring DOE and Its Laboratories: Issues in the 106th Congress (Congressional Research Service-IB10036, Sept. 13, 2000).
The Department of Energy’s Spallation Neutron Source Project: Description and Issues (Congressional Research Service-RL30385, Sept. 12, 2000).
Strategic Plan: Powering the 21st Century—Strength Through Science (Department of Energy/CR-0070, Sept. 2000).
Audit Report: Security Overtime at the Oak Ridge Operations Office (Department of Energy, Office of Inspector General, ER-B-00-02, June 21, 2000).
Roles 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).
Audit Report: Central Shops at Brookhaven National Laboratory (Department of Energy, Office of Inspector General, ER-B-00-01, May 11, 2000).
Audit 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).
Statement 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).
Charitable 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).
A Review of Management in the Office of Energy Efficiency and Renewable Energy (National Academy of Public Administration, Mar. 2000).
Audit Report: The Department’s Management and Operating Contractor Make-or-Buy Program (Department of Energy, Office of Inspector General, DOE/IG-0460, Feb. 17, 2000).
Tenth Annual Report to Congress (Defense Nuclear Facilities Safety Board, Feb. 2000).
Strength Through Science—U.S. Department of Energy FY 2001 Budget Request to Congress—Budget Highlights (Department of Energy, Office of Chief Financial Officer, Feb. 2000)
Congress and the Fusion Energy Sciences Program: A Historical Analysis (Congressional Research Service-RL30417, Jan. 31, 2000).
Audit 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).
Audit Report: The Management of Tank Waste Remediation at the Hanford Site (Department of Energy, Office of Inspector General, DOE/IG-0456, Jan. 21, 2000).
Audit Report: Outsourcing Opportunities at the Los Alamos National Laboratory (Department of Energy, Office of Inspector General, WR-B-00-03, Jan. 18, 2000).
Research and Development Budget of the Department of Energy for FY2000: Description and Analysis (Congressional Research Service- RL30054, Dec. 16, 1999).
Inspection Report: Inspection of Alleged Improprieties Regarding Issuance of a Contract (DOE/IG-INS-O-00-02, Dec. 16, 1999).
Contractor 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).
Stockpile Stewardship Program: 30-Day Review (Department of Energy, Nov. 23, 1999).
FY 1999 Report of the Panel to Assess the Reliability, Safety, and Security of the United States Nuclear Stockpile (Nov. 8, 1999).
Department of Energy: Programs and Reorganization Proposals (Congressional Research Service-RL30307, Sept. 17, 1999).
DOE Security: Protecting Nuclear Material and Information (Congressional Research Service-RS20243, July 23, 1999).
Glauthier Announces DOE Project Management Reforms (Department of Energy Press Release, June 25, 1999).
Technology Transfer to China: An Overview of the Cox Committee Investigation Regarding Satellites, Computers, and DOE Laboratory Management (Congressional Research Service-RL30231, June 11, 1999).
Science at its Best, Security at its Worst: A Report on Security Problems at the U.S. Department of Energy (A Special Investigative Panel, President’s Foreign Intelligence Advisory Board, June 1999).
Changes to the Departmental Management Structure (Department of Energy, Memorandum from the Secretary of Energy to Heads of Departmental Elements, Apr. 21, 1999).
Commission on Maintaining United States Nuclear Weapons Expertise: Report to the Congress and Secretary of Energy (Mar. 1, 1999).
Ninth Annual Report to Congress (Defense Nuclear Facilities Safety Board, Feb. 1999).
Audit Report: The U.S. Department of Energy’s Implementation of the Government Performance and Results Act (Department of Energy, Office of Inspector General, DOE/IG-0439, Feb. 4, 1999).
U.S. National Security and Military/Commercial Concerns with the People’s Republic of China (Select Committee, United States House of Representatives, Jan. 3, 1999).
Department of Energy: Accountability Report Fiscal Year 1999 (Department of Energy/CR-0069, 1999).
Improving Project Management in the Department of Energy (National Research Council, 1999).
U.S. Department of Energy Strategic Alignment Initiative, Fiscal Year 1998 Status Report (Department of Energy, 1999).
Audit Report: The U.S. Department of Energy’s 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).
Audit Report: Project Hanford Management Contract Costs and Performance (Department of Energy, Office of Inspector General, DOE/IG-0430, Nov. 5, 1998).
Audit Report: The U.S. Department of Energy’s Prime Contractor Fees on Subcontractor Costs (Department of Energy, Office of Inspector General, DOE/IG-0427, Sept. 11, 1998).
Unlocking Our Future: Toward a New National Science Policy (A Report to Congress by the House Committee on Science, Sept. 24, 1998).
Audit 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).
Inspection Report: The Fiscal Year 1996 Performance Based Incentive Program at the Savannah River Operations Office (Department of Energy, Office of Inspector General, May 1998).
Assessing the Need for Independent Project Reviews in the DOE (National Research Council, 1998).
Audit of Support Services Subcontracts at Argonne National Laboratory (Department of Energy, Office of the Inspector General, DOE/IG-0416, Dec. 23, 1997).
Departmental Reporting Relationships (Department of Energy, Memorandum from J. M. Wilcynski, Manager, Idaho Operations Office, to the Deputy Secretary and Under Secretary, Nov. 26, 1997).
Audit 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).
Restructuring DOE and Its Laboratories: Issues in the 105th Congress (Congressional Research Service-IB97012, Oct. 15, 1997).
External Members of the Laboratory Operations Board Analysis of Headquarters and Field Structure Issues (Secretary of Energy Advisory Board, Oct. 2, 1997).
DOE Laboratory Restructuring Legislation in the 104th Congress (Congressional Research Service-97-558SPR, May 13, 1997).
The Organization and Management of the Nuclear Weapons Program: 120-Day Study (Institute for Defense Analysis, Feb. 27, 1997).
Seventh Annual Report to Congress (Defense Nuclear Facilities Safety Board, Feb. 1997).
Department of Energy Strategic Alignment Initiative Status Report— Fiscal Year 1996 (DOE, Dec. 1996).
How to Close Down the Department of Energy (The Heritage Foundation, Nov. 9, 1995).
Department of Energy Abolition? Implications for the Nuclear Weapons Program (Congressional Research Service-95-1020F, Sept. 29, 1995).
Strategic Alignment: Tracking Our Progress (Department of Energy, Sept. 5, 1995).
Energy R&D: Shaping Our Nation’s Future in a Competitive World (Final Report of the Task Force on Strategic Energy Research and Development, June 1995).
Alternative Futures for the DOE National Laboratories (Task Force on Alternative Futures for the National Laboratories (Secretary of Energy Advisory Board, Feb. 1995).
Appendix III: Comments From the Department of Energy
The following are GAO's comments on the Department of Energy's letter dated November 30, 2001.
GAO Comments
1. Our response is included in the body of the report. 2.
In our report, we acknowledge and support DOE’s 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 …" 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’s 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’s 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…" 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.
Appendix IV: GAO Contacts and Staff Acknowledgments
GAO Contacts
Staff Acknowledgments
In 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. | Why GAO Did This Study
The 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.
What GAO Found
Despite 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. |
gao_GGD-99-147 | gao_GGD-99-147_0 | Background
In 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.
Figure 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.
Since 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.
Over half of the population growth in the 935 ZIP Code area occurred in two cities, Lancaster and Palmdale. From 1980 to 1990, Lancaster’s population grew from about 48,000 to 97,300, and Palmdale’s population grew from about 12,300 to 68,900. During this same period, Mojave’s 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.
Mail 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’ 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.
Administrative 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.
Postal 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’s 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.
The 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.
Scope and Methodology
To evaluate the Service’s 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.
We 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’s 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.
We 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.
The Service Followed Most of its Key Requirements for Advance Site Acquisition
The 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’s 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.
Table 2 presents the key requirements in the Service’s 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.
The Postal Service’s 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’s 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’s 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’s Five-Year Major Facilities Priority List. This list is to be updated annually and included as part of the Service’s annual budget, which is then reviewed and approved by postal management and the Board of Governors.
As 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’s 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 “to be sure that the Headquarters CIC concurs with the scope (especially the justification, alternatives, and strategic compatibility) before the expenditure of substantial planning resources.”
Site Acquisition Permitted Prior to Final Project Approval
According to the Service’s 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’s 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.
The 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.
Available Analyses to Support Advance Site Acquisition Decisions Were Incomplete and Documentation Was Inadequate
Service 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—construction of a new processing facility in Lancaster—were available prior to site acquisition. Moreover, the available documentation did not explain why this alternative was preferred over the other alternatives considered.
According 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. “The 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.” “The 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.”
However, 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.
Need to Improve Inadequate Documentation Previously Identified
The problem of inadequate documentation of the Service’s real estate acquisition decisions is not a new issue. In 1989, we reviewed the Service’s 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’s 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’s 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’s operational requirements but that justification for such selections should be required when smaller, less costly contending sites were available.
In the Service’s 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, “The 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.”
However, 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’s June 25, 1991, memorandum requesting approval for advance site acquisition in Lancaster stated, “No excess land is expected to remain.” Another internal memorandum dated October 25, 1991—the date of final settlement for the purchase of the Lancaster site—discussed preparation of the final cost estimates for the proposed Antelope Valley Area project and stated “Please note that the required site is considerably less than the selected site.” 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.
Project Delays and Resulting Negative Effects Remain Unresolved
As of the beginning of July 1999, the Service’s 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.
Reduced Funding and Classification Inconsistencies Contributed to Project Delays
Initiated 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.
Postal 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.
It 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.
Operational Processing And Delivery Deficiencies Remain Unaddressed
Ten 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.
Since 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.
In 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.
Delays Incur Additional Costs
Project 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.
In 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.
It 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—Facilities, 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.
In 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’s use of funds to purchase the Lancaster site in October 1991. We estimated that the interest cost associated with the Service’s $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.
Delays Create Uncertainty for Affected Communities
The 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.
The 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.
Conclusion
The 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’s requirements for advance site acquisition were unclear because they did not specify the types or depth of analyses required. The Service’s 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.
We 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’s 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.
Given 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’s 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.
Recommendation
To address the long-standing uncertainties related to the proposed Antelope Valley project, we recommend that the Postmaster General take the following actions:
Resolve 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
Require 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.
Agency Comments and Our Evaluation
We 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’s 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.
The 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’s 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.
Regarding 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.
We 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.
Comments From the United States Postal Service
GAO Contacts and Staff Acknowledgments
GAO Contacts
Acknowledgments
Teresa Anderson, Melvin Horne, Hazel Bailey, Joshua Bartzen, and Jill Sayre made key contributions to this report.
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Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists. | Why GAO Did This Study
Pursuant 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.
What GAO Found
GAO 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. |
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