prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.



Report 2: The U S  Fourth National Climate Assessment, released in 2018, concluded that "the impacts of global climate change are already being felt in the United States and are projected to intensify in the future—but the severity of future impacts will depend largely on actions taken to reduce greenhouse g as [GHG] emissions and to adapt to the changes that will occur " Although a variety of efforts seeking to reduce GHG emissions are currently underway on the international and sub-national level, federal policymakers and stakeholders have different viewpoints over what to do, if anything, about future climate change and related impacts  Their views regarding climate change cover a wide range of perspectives  For example, some contend that climate change poses a "direct, existential threat" to human society and that nations must start making significant reductions in GHG emissions in order to avoid "dire effects " To support this argument, proponents of climate change mitigation highlight the evidence and conclusions from recent reports that are generally considered authoritative, including: 1  The Intergovernmental Panel on Climate Change, Global W arming of 1 5°C , 2018; and 2  The U S  Global Change Research Program, Fourth National Climate Assessment , Volume II: Impacts, Risks, and Adaptation in the United States , 2018  On the other hand, some question whether there are sufficient risks of climate change to merit a federal program requiring GHG emission reductions  In addition, others argue that a unilateral approach to climate change by the United States could disproportionately impact domestic industries while achieving minimal results in global climate change mitigation  If Congress were to consider establishing a program to reduce GHG emissions, one option would be to apply a tax or fee on GHG emissions or the inputs that produce them  This type of approach is commonly called a carbon tax or a GHG emissions fee (see "Terminology Issues: A Carbon Tax or an Emissions Fee?")  This report does not compare and analyze the multiple policy tools available to Congress that could address climate change (see text box "Other Policy Options for Addressing GHG Emissions")  This report focuses on the policy considerations and potential impacts of using a carbon tax or GHG emissions fee to control GHG emissions  The key human-related GHG is CO 2 , which is generated primarily through the combustion of fossil fuels: coal, oil, and natural gas  In 2016, fossil fuel combustion accounted for 94% of U S  CO 2 emissions and 76% of U S  GHG emissions  A carbon tax could apply either directly to GHG emissions or to the materials—based on their carbon contents—that ultimately generate the emissions (i e , "emissions inputs")  A carbon price on emissions or their emissions inputs—mainly fossil fuels—would increase the relative price of the more carbon-intensive energy sources, particularly coal  This result could spur innovation in less carbon-intensive technologies (e g , renewable energy, nuclear power, carbon capture and sequestration [CCS]) and stimulate other behavior that may decrease emissions, such as efficiency improvements  The energy price increases could also have both economy-wide impacts and negative effects on specific industries and particular demographic groups  A carbon tax approach has received some attention and debate in recent years  In the 115 th Congress, Members introduced nine carbon tax or fee proposals  Outside of Congress, the Climate Leadership Council—a bipartisan group of former policymakers and industry leaders—published a conceptual carbon tax approach in 2017 that generated some interest  Some of the industry leaders on the council represent major energy companies, including Shell, BP, and ExxonMobil  On the other hand, many Members have expressed their opposition to a carbon tax  Starting in the 112 th Congress and going through the 115 th Congress, Members have introduced resolutions in both the House and Senate expressing the view that a carbon tax is not in the economic interests of the United States  In 2018, the House passed a resolution "expressing the sense of Congress that a carbon tax would be detrimental to the United States economy" ( H Con Res  119 )  An analogous resolution was not introduced in the Senate in the 115 th Congress  The first section of this report examines carbon tax design issues, including the point of taxation, the rate of taxation, and potential border carbon adjustments  The second section discusses issues related to the distribution of carbon tax revenues  The third section discusses additional considerations associated with a carbon tax program, including estimates of GHG emissions, federal revenue, and fossil fuel prices and changes in energy use  The fourth section provides concluding observations  If policymakers decide to establish a carbon tax system, Congress would face several key design decisions, including the point of taxation—where to impose the tax and what to tax—the rate of taxation, and whether and/or how to address imported carbon-intensive materials  Alternatively, Congress could direct one or more federal agencies to determine these design features through a rulemaking procedure  Although a few of the GHG emission reduction proposals in prior Congresses delegated such authority to an agency, such as the U S  Environmental Protection Agency (EPA), all of the proposals since the 111 th Congress have included some degree of design details in the statutory language  (A later section discusses carbon tax revenue application considerations ) The point of taxation would determine which entities would be required to (1) make tax payments based on emissions or emission inputs, such as fossil fuels, (2) monitor emissions or emission inputs, and (3) maintain records of relevant activities and transactions  This section provides some considerations for policymakers deciding which GHG emissions and/or emission sources to cover in a carbon tax system  Throughout the U S  economy, millions of discrete sources generate GHG emissions: power plants, industrial facilities, motor vehicles, households, commercial buildings, livestock, etc  Administrative costs and challenges would likely increase with a broader scope of an emissions tax  A carbon tax may apply to CO 2 emissions alone, which account for most U S  GHG emissions, or to multiple GHGs  Carbon tax proposals that apply only to CO 2 generally attach a price to a metric ton of CO 2 emissions (mtCO 2 )  Some sources emit non-CO 2 GHGs, such as methane, nitrous oxides, and sulfur hexafluoride  GHG emissions from these sources could be addressed by attaching a price to a metric ton of CO 2 emissions-equivalent (mtCO 2 e)  This term of measure is used because GHGs vary by global warming potential (GWP)  At these sources, the determined GWP values would be an important issue  Policymakers may consider limiting the tax to sectors or sources that emit above a certain percentage of total U S  GHG emissions, many of which currently report their emissions to the government  For more than 20 years, monitoring devices or systems have been installed in smokestacks of most large facilities, such as power plants, which are required to periodically report emissions data to EPA  In addition, since 2010, EPA has collected annual emissions data from approximately 8,000 facilities that directly release above certain amounts of GHG emissions  Using these established monitoring frameworks, policymakers could employ a "downstream" approach, applying a carbon tax at the point where the GHGs from these facilities are released to the atmosphere  Alternatively, the tax could be applied to reliable proxies for emissions, such as emission inputs  For example, the carbon content of fossil fuels—coal, natural gas, petroleum—can serve as a proxy for the emissions released when the fuels are combusted  Applying a tax on emission inputs allows for the consideration of various points of taxation  For instance, emission inputs could be taxed at "upstream" (e g , wells) or "midstream" stages in that process (e g , refineries), the latter allowing for potential tax administration advantages that may be provided by specific infrastructure chokepoints in the fossil fuel market  For example, with respect to petroleum, the number of upstream sources—wells that produce crude oil—is over 445,000, but the number of midstream sources—facilities that refine crude oil—is only 137  Table A-1 (in Appendix A) lists the top GHG emission sources in the United States  These sources combined to account for approximately 95% of U S  GHG emissions in 2016  Table A-1 identifies the number of entities for each source category (e g , number of coal mines, number of steel production facilities) and the percentage of total U S  GHG emissions the category contributes  In the case of fossil fuel combustion—which accounted for 76% of total U S  GHG emissions—the table provides several options for segmenting the universe of sources if policymakers choose to implement a carbon tax  It identifies the number of entities that might be subject to the carbon tax under a particular option (pending any exclusions)  For example, policymakers could address fossil fuel combustion emissions by applying a carbon tax to fossil fuels (based on their carbon content) at the following entities, which include both upstream and midstream infrastructure chokepoints: 137 petroleum refineries (based on 2017 data) and 166 petroleum importers (based on 2018 data); 671 coal mines and eight companies supplying imported coal (based on 2017 data); and 1,679 entities that report natural gas deliveries to the Energy Information Administration (EIA) on Form EIA-176 and 123 natural gas fractionators (based on 2016 data)  Some of the above points of taxation might take advantage of the administrative frameworks for existing federal excise taxes  For example, a per-barrel federal excise tax on crude oil at the refinery supports the Oil Spill Liability Trust Fund  An excise tax on the sale or use of coal supports the Black Lung Disability Trust Fund  A central policy choice when establishing a price on GHG emissions is the rate of the carbon tax  Several approaches, which are discussed below, could inform the decision  One approach would set the carbon tax rate at a level or pathway—based on modeling estimates—that would achieve a specific GHG emissions target  For example, a 2018 study estimated the carbon tax rate needed to meet the U S  GHG emission reduction targets established under the 2015 Paris Agreement: 26%-28% below 2005 net GHG emission levels by 2025  The study found that a constant tax rate of $43/ton starting in 2019 would meet the 2025 reduction target  Emissions reduction estimates from carbon tax programs are based on multiple assumptions  Accordingly, such estimates provide different tax rates needed to meet a particular emissions target depending on these assumptions  See " Impacts on GHG Emission Levels " for selected analyses of emission reductions for a given carbon price and rate of price increase  Under another approach, policymakers could base the carbon tax rate on the estimated marginal net benefits associated with reduced CO 2 emissions  The net benefits would be the avoided net damages (i e , costs) of climate change  The estimates of net benefits of avoided emissions often rely on analyses of the social cost of carbon (SC-CO 2 ) or the social cost of greenhouse gases (SC-GHG )  Therefore, policymakers could use SC-CO 2 measurements—as the basis for an estimate of the net benefits of a marginal change in emissions—to set the rate of a carbon tax or emissions fee  One potential challenge of relying on SC-CO 2 estimates to set a carbon fee are methodological concerns  For example, the existing estimates in peer-reviewed research cover a wide range  In addition, some argue that the underlying simulation models for estimating the SC-CO 2 values are insufficient  For any level of emissions, the projected increase in global average temperature may cover multiple degrees Fahrenheit, and other measures of climate change, such as precipitation patterns, may encompass directional uncertainties  No estimates of impacts are comprehensive at this time, and many of the risks are difficult to estimate and value  When valuing the SC-CO 2 , analysts encounter a range of views on methods and assumptions, and establishing study parameters may be challenging  For example, estimates of the monetary values of climate change impacts may be difficult or controversial to estimate, such as the monetary values associated with human deaths or sickness  A related framework question is whether to include global climate impacts or just domestic impacts  In addition, the element of time in climate change impacts particularly complicates the valuation  The fact that many impacts of climate change will occur in the distant future requires consideration of society's willingness to pay in the near term to reduce emissions that would cause future damages, mostly to future generations  To take time into account, economists discount future values to a calculated "present value " Economists do not agree on the appropriate discount rate(s) to use for a multi-generational, largely nonmarket issue such as human-induced climate change  The choice of discount rate can significantly increase or decrease values of the SC-CO 2   A low discount rate would give greater value today to future impacts than would a higher discount rate  High discount rates can reduce the value today of future climate change impacts to a small fraction of their undiscounted values  A high discount rate would recommend applying fewer of today's resources to addressing climate change impacts in the future  Since 2008, federal agencies have used SC-CO 2 estimates in dozens of final rulemakings as a method to estimate the net benefits of abating CO 2 emissions  An Interagency Working Group prepared SC-CO 2 estimates, which were updated over time and subjected to expert and public comment  On March 28, 2017, President Trump issued Executive Order 13783, "Promoting Energy Independence and Economic Growth," which effectively withdrew the federal SC-CO 2 estimates  Nonetheless, federal agencies have used new, interim values generated by EPA in 2017, modified from the withdrawn technical support documents, in regulatory and other decisions  Legislation could set a carbon price citing any of these SC-CO 2 values or others available from nonfederal researchers or prescribe methods for estimating new ones  Using SC-CO 2 estimates to set the tax rate would involve a cost-benefit framework  Although many posit that a cost-benefit framework remains the best option, some economists argue that a cost-benefit framework may be inappropriate for climate change policy for these reasons Many experts expect climate change—and policies to address it—to cause nonmarginal changes to economies and ecosystems  The changes are expected to increase disproportionately with incremental climate change with a potential for crossing critical "tipping points" after which systems change dramatically and rapidly  Climate change impacts are multi-generational, and uncertainty and disagreement exists about whether and how to assign a present value to social costs and benefits over generations  Some impacts from climate change may be irreversible on the timescale of human civilizations, such as melting of major ice sheets in Antarctica or Greenland  Policymakers might consider a carbon tax as a fiscal tool to help reduce the federal deficit, reduce other taxes, or pay for specific programs that may or may not be related to climate change policy  In addition, some have proposed a phased-in approach, setting a rate that is initially lower but increases at an announced or adjustable rate either for a fixed period or indefinitely  Advantages of this approach include providing an opportunity for consumers and investors to adjust their behavior before the higher tax rates go into effect, such as purchasing more energy efficient appliances or investing in low-emissions technologies  Phasing in a carbon tax, however, could delay climate-related benefits  If Congress finds agreement in principle on carbon pricing, the rate(s) could emerge from the process of reaching political agreement  Elements that might be considered include the options described above or consideration of the magnitude of overall economic impact; impacts on certain economic sectors, regions, or population groups; timing to motivate and allow an orderly transition to a lower-GHG economy; or other factors  Many stakeholders have voiced concerns over how a U S  carbon price system would interact with policies in other nations, particularly if the United States were to enact a carbon tax system that covers more sources or is more stringent than enacted elsewhere  A central concern is that a U S  carbon tax could raise U S  prices more than the prices of goods manufactured abroad, potentially creating a competitive disadvantage for some domestic businesses  Certain businesses may become less profitable, lose market share, and reduce jobs  The industries generally expected to experience disproportionate impacts under a U S  carbon tax are often described as "emission-intensive, trade-exposed" industries  An industry's CO 2 emission intensity is a function of both direct CO 2 emissions from its manufacturing process (e g , CO 2 from cement or steel production) and indirect CO 2 emissions from the inputs to the manufacturing process (e g , electricity, natural gas)  Such industries are likely to experience greater cost increases than less carbon intensive industries, all else being equal  In general, trade-exposed industries are those that face greater international competition compared to other domestic industries  A carbon tax could present a particular challenge for these industries, because they might be less able to pass along the tax in the form of higher prices, because they may lose global market share—and jobs—to competitors in countries lacking comparable carbon policies  Policymakers might consider approaches to mitigate these potential economic impacts in several ways  One approach that has received interest in recent years is a border adjustment mechanism, which is often described as a border carbon adjustment (BCA) in the carbon tax context  A BCA would apply a tariff to emission-intensive, imported goods such as steel, aluminum, cement, and certain chemicals  Each of the carbon price proposals in the 115 th Congress would have established a BCA to address emission-intensive imports  Another rationale for adding a BCA to a carbon tax system is the possibility that it would encourage other nations to adopt comparable carbon price policies  Many of the recently proposed BCA mechanisms allow for exemptions for nations with comparable programs  To date, no nations have implemented a BCA as part of their climate change policies  Establishing an economically efficient BCA would likely present substantial challenges  For example, policymakers must decide which goods and/or industries would be covered by a BCA and how the adjustment program would assess the comparability of varied climate-related policies in other nations  In addition, accurately determining and verifying the volume of GHG emissions embodied in a particular imported product would be data intensive and challenging  To alleviate some of the measurement complexity, policymakers could limit the program to selected industries and apply default values and assumptions to particular manufacturing processes  However, this simplified approach could result in less accurate import price adjustments, which could potentially affect the accuracy of GHG emission reductions achieved by the carbon tax program  Another option would be to allow companies to provide measured, independently verified emissions data as an alternative to default values  In addition, the border adjustment approach would likely raise concerns of violating international trade rules  Further, some researchers have highlighted the potential for unintended consequences from a BCA  For example, some studies have found that a border adjustment may lead to lower net exports than the carbon price alone, due to the adjustment's terms-of-trade effect on U S  currency  These issues are beyond the scope of this report, but some of the concerns may be lessened to some degree if a larger number of nations establish comparable emission reduction policies, as many have agreed to do under the Paris Agreement  Another possible rationale for a BCA is to address the concern of "emissions leakage" (or "carbon leakage")  Emissions leakage "occurs when economic activity is shifted as a result of the emission control regulation [e g , a carbon tax program] and, as a result, emission abatement achieved in one location that is subject to emission control regulation is [diminished] by increased emissions in unregulated locations " The concern of emissions leakage has been central in the debate over whether the United States (or any nation) should unilaterally address GHG emissions  A BCA may diminish the potential for emissions leakage by reducing the incentive to shift economic activity to a nation without a comparable carbon tax  However, some recent studies raise questions regarding the degree to which emissions leakage would be a concern under a unilateral U S  carbon tax  Although a tax may be levied on fossil fuels or GHG emission sources at various points in the economy, the carbon tax impacts may be experienced elsewhere  Policymakers have multiple options to address these expected impacts  Policymakers would face challenging decisions regarding the distribution of the new carbon tax revenues  As discussed below, some economic analyses indicate that certain distributions of tax revenue—depending on the level of the tax—would have a greater economic impact than the direct effects from the tax or fee on GHG emissions  Carbon tax revenues could be treated as general fund revenue without a dedication to a specific purpose in the enacting legislation (i e , subject to the annual appropriations process), or policymakers could state that the new revenues would support deficit (or debt) reduction  Alternatively, the enacting legislation could return the tax revenue to the economy in some manner, sometimes called "revenue recycling " All of the carbon tax legislative proposals in recent Congresses have proposed some manner of revenue recycling, specifically directing the carbon tax revenue to support specific policy objectives  Carbon tax revenues may be used to support a variety of policy goals  When deciding how to allocate the new revenue stream, policymakers would likely encounter trade-offs among objectives, including: reducing the economy-wide costs resulting from a carbon tax program; alleviating the costs borne by subgroups in the U S  population, particularly low-income households and/or communities most dependent on carbon-intensive economic activity; and supporting specific policy objectives, such as domestic employment, climate change adaptation, energy efficiency, technological advance, energy diversity, or federal deficit reduction, among others  In general, economic carbon tax studies have found that the relative ranking of revenue recycling options to mitigate the economy-wide impacts is generally the opposite of the relative ranking for alleviating distributional impacts  The contrasting relative rankings highlight a central tradeoff policymakers would face when deciding how to allocate carbon tax revenues  The following sections discuss these trade-offs and some of the revenue application options that have received attention in recent years  A large body of economic literature has examined the economic impacts of hypothetical carbon tax programs, particularly the impacts of using the carbon tax revenues for different purposes  Many of the economic studies cited below were prepared prior to the enactment of the Tax Cuts and Jobs Act (TCJA, P L  115-97 )  Signed by President Trump in December 2017, the act changed various elements of the U S  federal tax system  In particular, the act lowered the corporate income tax rate from 35% to 21%  As discussed below, adjusting the corporate income tax rate is one of the central policy options generally considered in carbon tax economic literature both before and after enactment of P L  115-97   Based on a selected review of the economic literature that includes the tax code changes in P L  115-97 , the central conclusions from carbon tax literature regarding revenue recycling appear to be largely unchanged  A primary concern with a carbon tax is the potential economy-wide costs that may result  Generally, a tax or fee on GHG emissions or the fuels that generate them would increase certain energy prices, namely fossil fuels, in the near- to medium-term as well as the prices of goods and services produced using these materials, like electricity  This outcome is inherent to the carbon tax, as its purpose is to increase the relative price of the more carbon-intensive energy sources compared to less carbon-intensive alternatives, encourage innovation in less carbon-intensive technologies, and promote other activity (e g , energy efficiency) that may decrease emissions  These expected outcomes will have some economy-wide impacts  Ultimately, the economy-wide effects would depend on a number of factors, including, but not limited to, the magnitude and scope of the carbon tax and, most importantly, use of the ensuing revenues  Economy-wide costs (referred to as macroeconomic costs) are often measured in terms of changes in projected gross domestic product (GDP) or another societal-scale metric, such as economic welfare  The magnitude of macroeconomic impacts from a carbon tax has been a subject of debate among policymakers and stakeholders  In addition, results of economy-wide impacts will not include comparisons of impacts to different subpopulations or geographic regions, which may be of interest to policymakers  Multiple economic studies and models have examined and compared various options for addressing the economy-wide impacts that may result from a carbon tax  One option for reducing the economic cost of a carbon tax is using the revenue to reduce existing taxes, such as those on labor, income, and investment  Economists generally describe such taxes as distortionary, because the taxes discourage economically beneficial activity, such as employment and investment  Another option for policymakers is to use the tax revenues to address the national debt  Fewer studies have examined deficit reduction scenarios, because "modeling the effects of budget deficits is much more difficult than modeling the effects of tax cuts " Some studies have concluded that using tax revenues for this purpose would help alleviate economy-wide costs from a carbon tax because of the reduced need to impose distortionary taxes in the future  These studies indicate that the economy-wide benefit would be delayed and its realization assumes policymakers would, sometime in the future, address the deficit by raising taxes  Many recent legislative proposals would distribute the carbon tax revenue back to households in lump-sum payments  Policymakers have generally included this carbon tax revenue application to address distribution impacts (discussed below)  These payments could take multiple forms  Economic analyses typically assume an equal payment to individuals or households regardless of their income or location or the effects of the carbon price on them individually  Alternatively, payments could be targeted or scaled to different segments of the population  Among the options mentioned above, economic studies indicate that using carbon tax revenues to offset reductions in existing, distortionary taxes would be the most economically efficient use of the revenues and yield the greatest benefit to the economy overall  This concept is sometimes referred to as a "tax swap " Using carbon tax or fee revenues to offset other distortionary taxes (e g , labor or capital) may yield a "double-dividend," which includes: reduced GHG emissions; and reduced market distortions by reducing other distortionary taxes, such as investment or income  The economic models that examine the economic impacts of a carbon tax differ in their frameworks and underlying assumptions and often include multiple scenarios involving different uses of carbon tax revenue  In general, the economic models find that certain revenue recycling options may reduce the economy-wide carbon tax impacts but may not eliminate them entirely  Some studies cite particular economic modeling scenarios in which a carbon tax with certain revenue recycling applications would produce a net increase in GDP or economic welfare compared to a baseline scenario  These results indicate that, in certain modeling conditions, the economic improvements gained by reducing existing distortionary taxes would be greater than the costs imposed by the new carbon tax (without including the intended climate benefits of the policy)  For example, results from a 2018 study demonstrated a net increase in GDP, compared to baseline conditions, when carbon tax revenues were used to finance proportionate reductions in labor tax rates (payroll tax)  In general, the economic carbon tax studies usually agree on the relative ranking of revenue recycling options in terms of their ability to mitigate the economy-wide impacts of a carbon tax program  The studies indicate that the approaches that use carbon tax revenue to proportionately lower existing tax rates are able to mitigate more of the carbon tax economy-wide costs than using the revenue to provide a lump-sum distribution to individuals or households  Researchers prepared multiple carbon tax analyses prior to the enactment of the TCJA in 2017 that estimated the magnitude GDP impacts  As with other estimates relating to carbon tax impacts, the results depend on the scope of the carbon tax, underlying assumptions in the analytical model, and the terms of measurement: Some estimates measure GDP growth rates; others measure actual GDP  Figure 1 illustrates the modeled GDP results from a 2018 carbon tax analysis that includes the changes made by the TCJA  This study assessed the GDP impacts under a $50/mtCO 2 e carbon tax (starting in 2020 and increasing by 2% annually) that would apply to CO 2 emissions from fossil fuel combustion and methane emissions from fossil fuel production activities  The figure compares projected GDP impacts under a baseline scenario (i e , no carbon tax) with three carbon tax revenue applications: a payroll tax rate reduction tax swap, a lump-sum distribution to households, and a scenario that would use tax revenue to reduce the national debt for 10 years and then use revenues for a lump-sum distribution to households  The figure projects GDP impacts in 2020, 2024, 2029, and 2039  As the figure indicates, the payroll tax rate scenario would result in a 0 1% loss of GDP in the first year (2020), but would yield GDP gains in subsequent years compared to baseline  The lump-sum distribution approach would yield GDP losses each year, ranging from 0 3% to 0 4% below the projected baseline  The deficit reduction approach would yield a range of GDP losses in the first 10 years—ranging from 0 4% to 0 04%—but would yield a GDP gain in 2039 (if not before), compared to baseline  Opponents of a carbon tax approach often highlight the GDP losses that would result from a carbon tax  Policymakers and stakeholders may have different perspectives regarding whether the magnitude of the GDP impacts are significant  In addition, GDP impact estimates may be presented in several ways  For example, one could compare the differences in GDP value for a particular year between carbon tax scenarios and a baseline scenario  This approach is employed in the above figure  Alternatively, one could present the GDP losses with a cumulative measure  For instance, if one were to add up the annual GDP losses (for example, over a 10-year period) from the lump-sum scenario compared to the baseline scenario, the resulting sum would be much larger  These types of calculations would require assumptions about annual GDP growth rates  Some may point out that the GDP impact estimates do not account for the environmental and public health benefits for reducing GHG emissions and that the GDP projections should be compared with the climate benefits achieved from the program as well as the estimated costs of taking no action  As discussed above, estimates of climate-related benefits and costs often contain considerable uncertainty and have generated debate in recent years  Many economic analyses have found that a carbon tax (before revenue recycling) would produce a regressive outcome among households, with lower-income households facing a larger impact from the tax than higher-income households  However, "the degree to which a carbon tax is found to disproportionately burden low-income households varies across studies, based on the metrics against which analysts measure costs " Entities that pay the carbon tax may pass its costs back to fuel producers or forward to fuel consumers  If entities pass the costs forward, consumers would face higher prices for fuels and electricity and carbon-intensive products  When the carbon tax is passed forward to consumers, lower-income households in particular would likely face a disproportionate impact (i e , regressive outcome), because a larger percentage of their income is used to pay for energy needs, such as electricity, gasoline, or home heating oil  Many economic analyses of carbon price scenarios assume that the vast majority (if not all) of the carbon tax impact is passed forward to consumers, leading to a regressive outcome  On the other hand, if entities pass the costs backward to producers, the tax impacts would fall on labor through reduced wages or owners of capital through reduced returns on investment  Economic models that assume this outcome produce more progressive results (absent revenue recycling), with lower-income households experiencing smaller impacts than higher-income households  The economic analyses appear to agree that the distributional effects among households (i e , regressive vs  progressive) of a carbon tax program would be largely dependent on how the carbon tax revenues were used  A number of economic studies have used models to estimate the impacts of a carbon tax across households under several revenue distribution scenarios  The results vary because the studies use different modeling frameworks, carbon tax rates and scopes, underlying assumptions, and ways to measure impacts  For example, a 2018 study assessed the impacts to household income for different household quintiles under a carbon tax of $50/mtCO 2 e, starting in 2020  This study examined four revenue distribution scenarios: 1  reduce federal deficit, 2  reduce corporate income tax rate, 3  reduce payroll tax rate, and 4  provide a per-capita rebate to households  This report highlights this study, because it includes carbon tax revenue applications that have generated interest in recent years  In addition, this analysis was prepared after the 2017 tax rate changes in P L  115-97   Figure 2 illustrates the modeled results, which the study measured as percentage reductions to household income  Thus, negative percentages illustrated in the figure are gains to household income  The per-capita rebate approach provides the most progressive result, yielding a net benefit for the bottom three household quintiles but a net loss for the top quintile  The fourth quintile impact is zero  By comparison, the other approaches produce varying degrees of regressive outcomes while providing a net gain for wealthier groups in two particular instances  Of the four options, the payroll tax rate reduction approach estimates the smallest variance between the income quintiles, ranging from a 0 5% loss for the lowest quintile to a 0 2% gain for the fourth quintile  The fifth quintile impact is zero  The relative ranking among options for progressivity is generally the opposite of the relative ranking for mitigating economy-wide impacts  Other economic analyses have found similar relative rankings of revenue recycling options  The contrasting rankings highlight a central tradeoff policymakers would face when deciding how to allocate carbon tax revenues  Policymakers could allot some portion of the revenues to partially support both objectives  In a 2018 carbon tax study, economic modelers assessed a scenario in which a portion of the revenue was used to offset the welfare impacts for the lowest-income household quintile and the remaining revenue supported reductions in capital tax rates  The study's models estimated that a carbon tax's impacts on the lowest-income household quintile could be counteracted with approximately 10% of the revenue  This would allow for 90% of the revenue to be used to reduce capital tax rates and thus address the economy-wide impacts from the carbon tax  As discussed above, a carbon tax is projected to disproportionately impact certain industries, particularly those that are described as "emission-intensive, trade-exposed industries " To address these concerns, many of the recent carbon tax legislative proposals have included design mechanisms that would attach a carbon price to certain imported materials and products (see " Border Carbon Adjustments ")  Another approach to addressing the competitiveness concerns of domestic industries would involve distributing a portion of the carbon tax revenues to emission-intensive, trade-exposed industries as rebates based on their output  Output rebate proposals generally determine rebate amounts by measuring emissions intensity at the relevant sector level or by a benchmark that would encourage facilities to reduce their emissions intensity  These rebates could be phased out over time or continue until other nations adopt comparable carbon price policies  Under a carbon tax system in Canada, which is scheduled to take effect in 2019, industries will be subject to an "output-based pricing system " Some contend that the data and administrative resources necessary to implement such a program would be substantial  A carbon tax system is also expected to disproportionately impact fossil fuel industries and the communities that rely on their employment  In particular, coal-mining communities are expected to experience substantial impacts based on the coal production declines predicted in carbon tax analyses  For example, one model estimates that under a $50/mtCO 2 e carbon tax, annual U S  coal production would decline by almost 80% in 2030 compared to a reference case  Policymakers may consider supporting worker transition or community transition assistance to help mitigate the economic impacts  Several of the recent carbon tax proposals would have devoted carbon tax revenues for this objective  Policymakers may also consider using the carbon tax revenues to provide funding to support a range of objectives, which may include policy goals that are not directly related to climate change  Some options are identified below, and many have been included in recent legislative proposals or in state GHG mitigation programs that raise revenues: Technology development and deployment: Efforts to reduce the costs of emission mitigation technologies—particularly carbon capture, utilization, and sequestration—are often considered in carbon tax programs, and Congress has funded such programs in other legislation  Energy efficiency programs: Although a carbon tax would likely stimulate energy efficiency to some degree, Congress may consider using the revenues to provide additional incentives and/or technical assistance, particularly to encourage households and small businesses to increase efficiency, which would also reduce the effects of the tax on their energy bills  States in the Regional Greenhouse Gas Initiative (RGGI) have used revenues from the program to support efficiency improvements, among other objectives  Biological sequestration: Trees, plants, and soils sequester carbon, removing it from the earth's atmosphere  Revenues could be used to promote carbon sequestration efforts, particularly forestry or agricultural activities, which would supplement the GHG reductions of the carbon tax  Adaptation to climate change: Regardless of emission reduction efforts taken today, climatic changes are expected due to the ongoing accumulation of GHGs in the atmosphere  Therefore, some advocate using revenues to reduce potential damage—domestically and internationally—of a changing climate  Deficit reduction: The possible contribution of a carbon tax to deficit reduction would depend on the magnitude and scope of the carbon tax, various market factors, and assumptions about the size of the deficit  Some carbon tax proposals in recent congressional sessions would have allotted a portion of revenues for deficit reduction  Infrastructure funding: Some recent proposals have provided funding for infrastructure projects  This objective could be combined with funding for adaptation activities  Multiple economic studies have estimated the emission reductions that particular carbon tax designs could achieve  Economic models provide estimates based on the best information available at the time  Comparing results from different studies is problematic, because the studies' scenarios differ in multiple ways, including the tax rate, start date, scope of the program, assumptions about economic growth and technological advances, and assumptions about other federal and state policies and their effects  A 2018 study avoided some of these comparison difficulties by inviting modeling teams to analyze a coordinated set of scenarios  The 2018 Stanford Energy Modeling Forum study ("EMF 32") assembled 11 modeling teams to analyze the economic impacts of four carbon tax scenarios starting in 2020: a $25/metric ton and $50/metric ton carbon tax, increasing annually by 1% and 5%  Within each of these carbon price frameworks, the models ran separate revenue distribution scenarios: a reduction in labor tax rates, a reduction in capital tax rates, and household rebates  Figure 3 illustrates the study's estimates of CO 2 emissions from fossil fuel combustion  The red lines in the figure display the average values for the 11 models  The shaded areas illustrate the range of results, highlighting the uncertainties in emission reduction estimates  Based on these results, the study authors concluded that each of the tax rate scenarios would likely achieve the U S  CO 2 emission reduction targets under the Paris Agreement  As Figure 3 indicates, a carbon tax or emissions fee could be set with the expectation that it would achieve an emissions reduction target, but the resulting level of emissions would be uncertain  The uncertainty of resulting emissions may lead some stakeholders to disfavor a carbon tax or fee option to control GHG emissions  Although uncertain emissions are inherent with a carbon tax approach, Congress could employ certain design elements to enhance the emission control certainty  For example, the existing GHG emission reporting data could be used to track the impact and performance of a carbon price  If policymakers determine that emission reduction is not occurring at a desired pace, the price could be amended  Legislation could establish the conditions and process by which price changes could occur  Some may argue that adjusting the carbon price to reflect actual emissions performance would undermine the benefits of price certainty  Others may point out that unplanned adjustments to the carbon price could be politically unpalatable  For example, it may be difficult for policymakers to increase the tax rate, especially during periods of high energy prices  Some have suggested that Congress authorize an independent board or agency with the mandate to modify the tax rate administratively in order to meet pre-determined emission reduction objectives  Although this approach would likely improve emission certainty, long-term price certainty may be sacrificed to some degree, depending on the authority of the delegated entity to adjust the tax rate  Some would argue that potential year-to-year emission variations under a carbon tax would not undermine efforts to control climate change so long as long-term emission goals are achieved  Indeed, they would assert that annual emission fluctuations are preferable to price volatility that could result from an emissions cap program  They support their preference for price control by suggesting that CO 2 generates damages through its overall accumulation as concentrations in the atmosphere, not its annual flow  A potential concern of a carbon tax is whether it would be effective in reducing GHG emissions in all of its covered sectors, particularly emissions in the transportation sector  As of 2016, the transportation sector contributes the largest percentage (36%) of CO 2 emissions from fossil fuel combustion, with electric power second at 35%  Carbon tax analyses generally agree that the majority of the emission reductions resulting from a carbon tax program would occur in the electricity sector  By comparison, economic models generally conclude that a carbon tax would have much less of an impact on emissions in the transportation sector  Several factors explain this projected outcome  The transportation sector offers fewer opportunities to switch to less carbon-intensive fuels in the short term than does the electric power sector, which can displace coal with natural gas relatively quickly  In addition, short-term emission changes in the transportation sector are largely influenced by changes in driving demand, which has historically been relatively insensitive to gasoline price increases  Based on these projected outcomes, some may contend that to achieve deeper, long-term reductions in total GHG emissions, policymakers would need to complement a carbon tax with other programs, such as vehicle technology standards (e g , Corporate Average Fuel Economy, CAFE) or fuel performance standards, among other options  The quantity of revenues generated under a carbon tax system depend on the program's design features, namely the tax base and rate, as well as such independent factors as prices in global energy markets  They would also depend on how covered emission sources respond to the carbon price, for example by adopting alternative technologies or changing behavior  Several carbon tax studies have prepared revenue estimates, which are presented in Table 1   From a public finance perspective, a carbon tax may not be a reliable source of long-term funding, because a primary goal of the carbon tax is to reduce its tax base—GHG emissions  The estimates in Table 1 project carbon tax revenue values in 2020  Multiple studies have projected carbon tax revenue trajectories beyond 2020  In the 2018 EMF 32 study, all but one of eight models projected carbon tax revenue increases from 2020 through 2040  The carbon tax scenarios with larger annual rate increases resulted in steeper trajectories of increasing revenues through 2040  The models' estimates of annual carbon tax revenue in 2040 ranged from approximately $250 billion to $475 billion (under the tax rate scenario of $50/metric ton, increasing 5% annually)  Fossil fuels have a wide range of CO 2 emission intensity (i e , emissions per unit of energy)  As illustrated in Figure 4 , the CO 2 emission intensity of coal is approximately 30% more than oil and approximately 80% more than natural gas  These emissions intensity differences would lead to different tax rates per unit of energy across different fuels in a carbon tax regime  Carbon taxes could affect fuel prices in complex ways  The change in consumer fuel prices would likely not be the same as the price paid by the party directly subject to the tax  Actual price impacts for consumers would depend on multiple factors, including whether: a carbon tax is applied at the beginning of the production process ("upstream") to fossil fuels; and the price impacts are passed through to end users and not absorbed by upstream energy producers or midstream entities, such as retailers  In addition, market participants such as electric power plant operators can avoid paying the increased costs by substituting fuels or technologies  Energy consumers may modify their behavior in the marketplace—energy conservation, consuming less or different products and services—to mitigate impacts from the increased prices  Table 2 includes estimates of price increases on coal, crude oil, natural gas, home heating oil, and motor gasoline based on a carbon tax rate of $25/mtCO 2 that applies CO 2 emissions from fossil fuel combustion  As indicated in the table, a carbon tax would have the greatest impact on the price of coal due to coal's relatively high CO 2 emissions intensity  By comparison, a carbon tax is expected to have less of an impact on the price of gasoline, increasing its price by 8%  Economic models have projected how carbon prices would impact energy use, particularly the consumption of different fossil fuels and less carbon-intensive alternatives, such as renewables or nuclear power  For example, the 2018 EMF 32 study, which included results from 11 modeling groups, assessed how several carbon tax scenarios would impact energy consumption  Highlights of these models' results (compared to reference case scenarios) include the following: Coal consumption could decline by 40% to nearly 100% by 2030 under a $50/mtCO 2 carbon tax, though one model projected an increase in coal due to the model incorporating CCS technology  Natural gas consumption estimates vary across the models, with some showing minimal change in 2030 and others showing declines ranging between 40% and 60%  Oil consumption estimates indicate that the largest decline (approximately 4% by 2030) would occur under the $50/mtCO 2 carbon tax scenario  Wind energy consumption could increase by 48% to 300% by 2030 under a $50/mtCO 2 carbon tax scenario  A carbon tax is one policy option to address U S  GHG emission levels, which contribute to climate change and related impacts  Economic modeling indicates that a carbon tax would achieve emission reductions, the level of which would depend on which GHG emissions and sources are covered and the rate of the carbon tax  A carbon tax would generate a new revenue stream  The magnitude of the revenues would depend on the scope and rate of the tax and multiple market factors, which introduce uncertainty in the revenue projections  A 2018 CBO study estimated that a $25/metric ton tax on CO 2 emissions from energy-related activities and other selected GHG emission sources would yield approximately $100 billion in the first year of the program  To put this estimate in context, the CBO projected that total federal revenue would be $3 5 trillion in FY2019  Policymakers would face challenging decisions regarding the distribution of the new carbon tax revenues  Depending on the level of the tax, some economic analyses indicate that the distribution of tax revenue could yield greater economic impacts than the direct impacts of the tax  Some models indicate that the economic impacts are greatest in the early years of the carbon tax  Policymakers could apply the tax revenues to support a range of policy objectives  When deciding how to allocate the revenues, policymakers would encounter trade-offs among objectives  The central trade-offs involve minimizing economy-wide costs, lessening the costs borne by specific groups—particularly low-income households—and supporting a range of specific policy objectives  A primary concern with a carbon tax is the potential economy-wide costs that may result  The potential costs would depend on a number of factors, including the magnitude, design, and use of revenues of the carbon tax  In general, economic literature finds that some of the modeled revenue applications would reduce the economy-wide costs imposed by a carbon tax but may not eliminate them entirely  Policymakers and stakeholders may have different perspectives regarding whether these estimated economy-wide costs (typically measured in terms of GDP loss) represent a significant concern  Some argue that the estimated economy-wide costs should be compared with the policy option of not establishing a carbon tax  This comparison is uncertain as carbon tax analyses do not generally consider the benefits that would be gained by reducing GHG emissions and avoiding climate change and its adverse impacts  Some studies cite particular economic modeling scenarios in which a carbon tax and revenue recycling could produce a net increase in GDP or economic welfare, compared to a baseline scenario  These scenarios involve using carbon tax revenues to offset reductions in existing, distortionary taxes, such as corporate income or payroll taxes  Although the models indicate that these revenue applications would yield the greatest benefit to the economy overall, the models also find that lower-income households would likely face a disproportionate impact under such revenue applications  As lower-income households spend a greater proportion of their income on energy needs, these households are expected to experience disproportionate impacts from a carbon tax if revenues were not recycled back to them in some fashion, such as a lump-sum distribution  Carbon tax revenues that are used to offset the burden imposed on various sectors or specific population groups would not be available to support other objectives  An additional concern with a carbon tax involves potential disproportionate impacts to "emission-intensive, trade-exposed industries " Policymakers could select among several options to address these concerns, either by establishing a border carbon adjustment program or allocating some of the carbon tax revenues to selected industry sectors based on an output-based metric  If other nations were to adopt comparable carbon price policies, this concern may be alleviated to some degree  Relatedly, a carbon tax is projected to disproportionately impact fossil fuel industries, particularly coal, and the communities that rely on their employment  To alleviate these impacts, policymakers could allocate some of the carbon tax revenue to provide transition assistance to employees or affected communities  Table A-1 identifies sources of GHG emissions that account for 0 5% or more of total U S  GHG emissions  The sources are listed in descending order by their percentage contribution  CO 2 emissions from fossil fuel combustion, which accounts for almost 76% of total U S  GHG emissions, are broken down by fossil fuel type: petroleum, coal, and natural gas  The table identifies potential points in the economy at which a carbon tax could be applied  The table lists the approximate number of entities that would be involved with different tax applications  The number of entities listed is current as of the most recent data available and varies accordingly by category  See table notes for details  The right-hand column of the table provides additional comments for some of the emission sources  In some cases the comments discuss potential opportunities for additional GHG emissions coverage at a particular source  In other cases, the comments address potential limitations of covering all of the emissions from a particular source 
Report 2:  Research Center Infrastructure: As with personnel matters, research centers have discretion to manage infrastructure in accordance with the policies and procedures of their parent institutions  While one center, Lincoln Laboratory, is located on government property, others primarily reside on property owned or leased by their parent institutions  According to agency officials, DOD contributes funding for the use and repair of these facilities through their contracts with research centers  Officials noted that Lincoln Laboratory uses military construction funding to pay for new buildings as it is located on government property  Trusted Advisor Role: FFRDCs and UARCs function as trusted advisors for the government and operate in the public interest with objectivity and independence  FFRDCs are independent, private-sector, non-profit organization units required to be free from personal or organizational conflicts of interest, as the FFRDCs answer to the government customer  As a result, DOD’s lab FFRDCs perform tasks that are closely associated with the performance of inherently governmental functions and have access to sensitive and proprietary data  Research center officials noted challenges limiting their work providing scientific expertise to DOD  FFRDCs are also limited in executing infrastructure investments  Limitation on Available Work Hours: DOD FFRDCs are limited by an annual ceiling set by Congress on the amount of staff years of technical effort (STE) that may be funded for defense FFRDCs  We previously found in October 2008 these limits were imposed in response to concerns that DOD was inefficiently using its FFRDCs  We found that the STE workload limitation aimed to ensure that FFRDC work was appropriate and limited resources were being used for DOD’s highest priorities  As a result, Software Engineering Institute officials said they decline many DOD programs’ requests for assistance due to the annual work hour limitation  Further, officials at the Office of the Secretary of Defense’s Studies and FFRDC Management Office reported that this limit significantly constrains the use of DOD’s FFRDCs and that DOD customer demand for their services is significantly greater than the annual STE limit  OSD officials indicated that FFRDC related work must be deferred to later years when these limits are reached, since there are no other legally compliant alternatives capable of fulfilling these requirements  Infrastructure: FFRDC officials we interviewed identified infrastructure challenges—including aging facilities and equipment—as hindering their research and development efforts  For example, many buildings at the Massachusetts Institute of Technology (MIT) Lincoln Laboratory are over 60 years old; MIT considers over half of them to be in substandard condition  According to an MIT official, these facilities, located on government property, were not structurally designed for modern research and have relatively poor vibration isolation, resulting in inefficient workarounds or work that could not be performed  Officials from the Defense Laboratories Office noted that the MIT Lincoln Laboratory is unique among DOD’s FFRDCs in that it is operated on government- owned property  A 2013 study, conducted on behalf of the White House Office of Science and Technology Policy, found that lab infrastructure project funding proposals must compete with hospitals, barracks, runways, and roads and, therefore, tend to be lower on the priority list for military construction funding  A 2017 Defense Science Board report and DOD officials we spoke with indicated this continues to be true  While contract research centers have significant flexibility to execute infrastructure work, they are still affected by limited availability of military construction funding  Officials at another center noted that in some instances, DOD sponsors have been unable or slow to provide required secure facilities and equipment within needed time frames  Delays of this nature can affect the research centers’ ability to deliver the technologies or related services needed by DOD  The Department of Energy (Energy) primarily relies on contractor- operated FFRDCs to operate its labs, while the majority of NASA labs and centers are government-operated  Energy’s national labs form the core of the agency’s scientific work and mission  This is in contrast to DOD-funded labs, which constitute a relatively small aspect of DOD’s overall mission  We have previously found that Energy’s labs can use funding for minor infrastructure improvements  NASA centers can also approve and fund certain facility projects, in accordance with NASA policies, and they have encountered significant challenges with aging infrastructure  Also, in some cases, energy and space research centers have significant challenges with hiring replacement staff and competing with private sector employers for staff  Energy’s labs can hire scientific personnel with the flexibility of private companies, while NASA centers were previously provided hiring flexibilities by Congress in 2004 to facilitate staff hiring  While Energy and NASA’s research entities follow their specific governance models, there are broad characteristics common across these agencies as well as DOD  Table 2 illustrates that while research centers are largely government-owned, the government is not always the operator  As we have reported, Department of Energy national labs are primarily operated by for-profit, non-profit and university FFRDC contractors using management and operating contracts, which are competed on a limited basis  Energy’s funding sponsors and headquarters officials are required to reevaluate FFRDC performance in increments not to exceed 5 years by federal acquisition regulations, which inform future decisions to renew the agreement  In 1990, we designated Energy’s contract management—including both contract administration and project management—a high-risk area because of Energy’s inadequate management and oversight of contractors, leaving the department vulnerable to fraud, waste, abuse, and mismanagement  In 2009, we subsequently narrowed the focus of Energy’s high-risk designation to the National Nuclear Security Administration and Office of Environmental Management, which together oversee four national labs  Further, in our 2017 High Risk report, we found that these two agencies had made progress in addressing our contract management concerns, but we identified continued problems with the agencies having sufficient capacity to mitigate contract and project management risks  Also, we found that they had demonstrated little progress in addressing contract management challenges, particularly in the area of financial management  The Department of Energy uses performance-based management and operating contracts, which have been subject to limited competition, with universities, non-profit companies and for-profit companies to operate the national labs on government-owned property  These contractor-operated FFRDCs provide the vast majority of Energy’s science and technology capacity, rather than supplementing the work of government-operated labs like DOD’s FFRDCs  Energy has depended on the expertise of private organizations to execute its science and technology work since the Manhattan Project produced the first atomic bomb during World War II  The Spallation Neutron Source is an experimental research facility at Oak Ridge National Laboratory—a government-owned contractor-operated laboratory  The Spallation Neutron Source includes the world’s most powerful pulsed-neutron sources and provides information about the structure and properties of materials that cannot be obtained by other means  The Spallation Neutron Source is a user facility whereby researchers from universities, national laboratories, and industry submit proposals, which are peer- reviewed and must compete for time at the user facility  The primary focus of each lab varies based on its expertise and facilities  Energy largely oversees its lab contractors through its headquarters program offices, which include the National Nuclear Security Administration, Office of Science, the Office of Fossil Energy, as well as co-located government field offices  Office of Science-sponsored labs primarily support scientific research for energy and physical sciences, while the National Nuclear Security Administration-sponsored (NNSA) labs primarily focus on nuclear weapons and related science and technologies  Energy also oversees its lab contractors’ activities through on-site Energy oversight offices that work alongside lab management at each FFRDC  Some labs specialize in earlier-phase science, while other labs work on later-phase nuclear weapons technologies in addition to earlier-phase science  As Figure 10 shows, these labs are spread across the United States  Energy has only one government-operated and government-owned lab, the National Energy Technology Laboratory  Key differences between Energy’s contractor-operated and government-operated governance models are described in table 3  Energy’s FFRDCs use their own personnel systems, which Energy officials stated provide more flexibility for hiring and retaining qualified staff  Management within these FFRDCs can move staff in or out of scientific areas more quickly than government labs can, thereby providing greater agility to meet Energy’s needs in emerging science areas  For example, Energy’s lab oversight staff at Oak Ridge National Laboratory told us that use of lab contractors’ human resources management systems allows for workforce flexibilities to meet Energy’s needs  While these contractors have leeway in managing their human resources systems, Energy’s headquarters maintains oversight—through its contracting officers—over employee compensation  Energy’s FFRDC contractors manage and operate nearly all of the department’s government-owned national lab facilities—including day-to- day management of government-controlled facilities and real property  Lab operators used funding to complete minor construction projects, which cost $10 million or less  This funding comes from a percentage of science and technology projects’ funding, requires local Energy oversight office approval, and has streamlined project management requirements  In contrast, major infrastructure upgrades are funded through relatively long and complex line-item funding processes, and projects over $50 million are subject to more rigorous project management requirements  Energy’s labs use a small portion of their funding to initiate discretionary projects for science and technologies that will benefit sponsors in the long-term by maintaining the scientific and technical vitality of the laboratories  To maintain and enhance lab expertise, the National Defense Authorization Act for Fiscal Year 1991 authorized Energy’s contractor-operated labs receiving funding for national security programs to use a percentage of lab funds to perform lab-directed R&D of a creative and innovative nature  The actual percentages allowed to be used for lab-directed R&D are subject to Energy’s approval  Energy’s entities sponsor most national lab projects based on their needs and lab expertise  Typically, earlier foundational science projects are funded through a process whereby funding sponsors issue calls for proposals to Energy’s national labs  Interested scientific teams at labs provide proposals to conduct these projects for sponsor consideration  Sponsors then assess proposals for scientific merit and decide which teams receive funding to execute their projects  NNSA provides funding for later-phase nuclear technology development projects to its labs after agreement is made regarding objectives and deliverables for specific projects, according to Lawrence Livermore National Laboratory officials  Despite their flexibilities with regard to hiring and infrastructure decisions compared to government operated labs, Energy’s lab leadership and government oversight officials noted human resource and facilities related challenges, such as: Sufficiently compensating staff located in high-cost of living areas  For example, the labor market of the San Francisco area, where several Department of Energy national labs are located, is highly competitive for employers  Commercial firms offer salaries and compensation that typically exceed those of government-funded, contractor-operated labs, although Energy’s contractors have more pay flexibility than is allowed for Energy’s government employees  Obtaining government clearances in a timely manner  Energy’s NNSA oversight officials and lab management staff, in particular, cited this challenge, which they stated has led to a backlog of people needing clearances  Government hiring freeze constraining overall hiring  Officials at Energy’s government-operated National Energy Technology Laboratory reported that as a result of a government hiring freeze, the lab has increasingly hired private contractor staff to the point that more than half of the total lab staff is now comprised of contractor employees  Major infrastructure challenges at Energy labs  Energy reported in July 2018 that over half of all national lab buildings are in either substandard or inadequate condition  The Energy Inspector General also identified infrastructure modernization as one of Energy’s top management challenges  This finding followed a mandated commission’s report in 2015 that facilities and infrastructure across Energy’s national lab network were hampered by high levels of deferred maintenance and excess facilities  The majority of NASA’s science and technology facilities are operated within the governance framework of government-operated research centers, similarly to most DOD labs  While government-operated, they have been granted additional legislative flexibilities for hiring employees beyond those normally available to government entities  NASA locates its science and technology staff at four government- operated research centers, one contractor-operated FFRDC, and at five NASA centers assisting space and space flight development  These centers and the Jet Propulsion Laboratory—NASA’s sole sponsored FFRDC—execute NASA’s research missions including technology development in exploration and aeronautics  The differences between these two governance approaches are described in Table 4  NASA also works with Johns Hopkins University Applied Physics Lab, a UARC, to develop major space flight missions  The NASA Glenn Research Center—a government- operated laboratory—is currently developing solar electric propulsion technologies intended to allow manned and unmanned spacecraft to be propelled far beyond earth orbit using solar power  This project is developing large, flexible, radiation-resistant solar arrays that can be unfurled to capture solar energy powering fuel-efficient electrostatic thrusters  Scientists expect a system-level flight test within the next decade to demonstrate key technologies supporting NASA’s Lunar Orbital Platform-Gateway project, a platform to mature necessary short- and long-duration deep space exploration capabilities  Headquarters, including funding sponsors providing oversight for their individual projects  Title 51, Chapters 201 and 203 of U S  Code and technology efforts with DOD and other organizations, including use of NASA lab and test facilities  Operated by university contractor having sole source contract  Not permitted to compete against industry, except for operation of an FFRDC  property (originally part of DOD)  5-year contract renewable to 10 years total  Headquarters, including funding sponsors providing oversight for their individual projects  Title 51, Chapters 201 and 203 of U S  Code; 10 U S C  § 2304 (c) (3)(B) ; Federal Acquisition Regulation § 35 017 based NASA oversight staff  sponsors seeking FFRDC assistance with NASA approval  “Lab” as used in this context refers to science and technology organizations equivalent to NASA Research Centers, DOD UARCs and FFRDCs  Mission leadership officials at NASA Headquarters—including the Associate Administrators for Aeronautics Research, Human Exploration, Science and Space Technology—oversee NASA’s research centers as well as the Jet Propulsion Laboratory  These officials are responsible for technology programs providing funds to research centers and the Jet Propulsion Laboratory to support their specific mission areas  NASA’s science and technology project portfolios are based on the requirements and priorities established by NASA’s leaders in collaboration with key stakeholders in academia and industry among others  In planning their science and technology work, NASA’s Glenn Research Center officials noted that NASA research center directors consider the capabilities and resources—including staff and facilities—of other research centers to minimize redundant work  NASA depends on a highly skilled civil servant and contractor workforce to plan and execute its missions  Congress provided NASA with additional human resource authorities beyond those otherwise allowed for federal government personnel through the NASA Flexibility Act of 2004  We found in September 2008 that NASA sought this flexibility to ensure that it could hire and retain the workforce it desired  This law consisted of multiple provisions to address a range of human capital challenges and to strengthen all levels of the workforce  The provisions included incentives—including compensation—to allow NASA to compete successfully in the labor market with the private sector and reshape its workforce more effectively to support the Agency’s mission  NASA also employs a significant contractor workforce across its different centers  Glenn Research Center officials we interviewed stated their portfolio of science and technology projects—and funding—mostly aligns with NASA’s top requirements and priorities  They, along with NASA sponsors, create technology roadmaps and investment plans to determine their future projects  NASA policy requires that NASA’s scientific teams offer proposals for potential research and science and technology projects  This is similar in some ways to how many DOD and Energy centers must find sponsors willing to fund specific technology development projects, rather than receiving technology development funding for a given year  These proposals are reviewed by peer review teams, who identify for selecting officials those proposals they believe have the most scientific merit  Ames Research Center officials said they believe this process can foster innovation, encourage employees to keep skills honed, and mitigate complacency  Glenn Research Center officials said that while most of the work they conduct is for sponsored applied research or advanced technology development, about 2 percent of their science and technology budget is spent on early-stage scientific innovation  Recommended projects of this nature proposed by the research center are typically approved by headquarters officials, according to these Glenn officials  NASA provides technical grants for basic research and applied science to university scientists nationwide on a competitive basis, and also funds similar research done internally at research centers  As with DOD and Energy’s research centers, NASA officials have identified some key operating challenges, including: Aging infrastructure and facilities  The NASA Inspector General listed infrastructure area as one of the top five management and performance challenges facing NASA  Further, the Inspector General identified deficiencies with facilities planning and reported that about 80 percent of facilities at three of four NASA research centers are over 50 years old, while about half of the facilities at the Jet Propulsion Laboratory and the fourth research center are that old  Infrastructure projects and upgrades of $1 million or less are undertaken by research center management instead of at the NASA headquarters level  Construction above this threshold has significantly more requirements and is approved by NASA headquarters  Glenn Research Center officials indicated it is difficult to obtain funding for projects that exceed the minor infrastructure threshold, in part, due competition with major construction of facilities proposals from across the agency for limited funds  As a result, they put most of their efforts into sustaining existing infrastructure  Workforce shortages in key technical areas  As we found in May 2018, NASA has experienced workforce challenges on several major projects such as the Mars 2020 and Europa Clipper projects  Also, over 40 percent of NASA’s workforce is either eligible to retire now or will be eligible in the next 5 years  NASA headquarters officials noted that NASA’s workforce is aging because NASA has a low attrition rate—about 4 percent annually—and high numbers of staff stay several years beyond retirement  Further, in 2017, the NASA Inspector General found gaps in NASA’s workforce planning for specific capability areas and how workforce plans would meet future needs, and recommended that NASA establish standardized guidance defining the data and analyses for these planning efforts  NASA concurred with and identified its plan to implement this recommendation  However, NASA has not implemented this recommendation, according to the NASA Inspector General’s latest semiannual report to Congress  Congress provided DOD lab directors with key authorities to foster targeted, timely investments in the most pressing technology areas  Lab directors have used these authorities—such as laboratory initiated research and direct hire authorities—to varying degrees, but more needs to be done to facilitate innovation and efficiency  Specifically, service specific obstacles in the Air Force, Navy, and Army impede lab directors from capitalizing on laboratory initiated research authority to a greater extent  Service leadership can take actions to better understand and potentially remove barriers to more fully use laboratory initiated research tools  We are making the following three recommendations to DOD: The Secretary of the Air Force should assess the potential costs and benefits of implementing accounting system improvements that would allow the Air Force Research Laboratory to charge customers a fixed percentage fee on provided science and technology activities to the extent allowed under the laboratory initiated research authority  (Recommendation 1) The Secretary of the Navy should clarify whether and how to use the laboratory initiated research authority within the Capital Investment Program  (Recommendation 2) The Secretary of the Army should assess existing Army policy for laboratory initiated research authority and determine whether to implement changes to eliminate disincentives for lab usage of the authority  (Recommendation 3) We provided a draft of this report to DOD, Energy, and NASA for review and comment  Energy and NASA did not provide any comments on the draft report  In DOD’s written comments, reproduced in appendix III, DOD concurred with our three recommendations  Further, in its response to our third recommendation, DOD stated that the Army plans to initiate a study by January 2, 2019, regarding its use of the laboratory initiated research authority  According to DOD, the Army’s study will identify potential opportunities for policy improvements  We are sending copies of this report to the appropriate congressional committees and offices; the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Secretary of Energy; and the NASA Administrator  In addition, the report will be made available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions concerning this report, please contact me at (202) 512-4841  Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report  Staff members making key contributions to the report are listed in appendix IV  This report examines (1) how the Department of Defense (DOD) labs have used selected legislative authorities to foster innovation and efficiency and identify what barriers impede their use; (2) identifies and describes governance models used by selected DOD-sponsored federally funded research centers and university affiliated research centers; and (3) identifies and describes governance models used non-defense labs, specifically at the Department of Energy (Energy) and National Aeronautics and Space Administration (NASA)  To address the first objective, we selected four specific authorities for our review based on previous work identifying science and technology best practices and expedited lab hiring: Laboratory Initiated Research Authority  The authority provided in Section 219 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, as implemented, provides lab directors with flexibility to fund projects in four allowable categories: basic and applied research; technology transition; workforce development; and revitalization, recapitalization, or repair or minor military construction of lab infrastructure  Laboratory Enhancement Pilot Program  Section 233 of the National Defense Authorization Act for Fiscal Year 2017 established a pilot program for lab directors to propose alternative and innovative methods that might lead to more effectively managing and operating labs and authorized lab directors to waive any regulation, restriction, requirement, guidance, policy, procedure, or departmental instruction that would affect implementation of these methods unless such implementation would be prohibited by a provision of an existing statute or common law  Direct Hire Authority  Four types of direct hire authorities authorized by Congress since 2008 are intended to provide a streamlined and accelerated hiring process to allow the labs to successfully compete with private industry and academia for high-quality scientific, engineering, and technician talent  Micro-purchase Authority  The Federal Acquisition Regulation states a preference for government agencies, to purchase and pay for micro-purchases of supplies or services using the government-wide commercial purchase card up to and at the micro-purchase threshold, but micro-purchases may be conducted using any of the simplified acquisition methods  While the FAR micro-purchase threshold was generally $3,500 at the time of our review, Congress increased this threshold to $10,000 for activities of DOD science and technology reinvention laboratories in Section 217 the National Defense Authorization Act for Fiscal Year 2017  Although Congress has provided additional legislative authorities to defense lab directors to address hiring, infrastructure, and technology transition challenges, the authorities that we covered in our review are the ones that our prior and current work have shown are currently, or have the potential to be, the most critical for supporting science and technology reinvention laboratories’ innovation mission within DOD labs  DOD lab leaders use these authorities to flexibly fund projects intended to facilitate research and development; propose alternative and innovative methods that might lead to more effective lab management; directly hire personnel at DOD labs including students currently enrolled in science, technology, engineering, and mathematics (STEM) programs; and expand critical science and technology purchases using simplified acquisition methods  To identify the extent to which DOD laboratories have used these authorities as well as to identify what potential barriers existed to using these authorities, we administered a survey to 44 STRL directors (or their equivalent) to collect information on the use of these specific authorities, their perceptions about the effectiveness of those authorities, and their perceptions about any barriers to using these authorities  The members of the population surveyed were the 44 defense laboratories defined as science and technology reinvention laboratories  For the purposes of our review, we defined laboratories as inclusive of Air Force technical directorates (10), Army warfare centers (17), and Navy warfare centers (17)  We emailed questionnaires to the laboratories beginning in late March 2018, and survey data collection ended in early May 2018, with 31 labs returning completed questionnaires, for an overall response rate of 71 percent at the laboratory level  We took steps to minimize the potential errors that the practical difficulties of conducting any survey may introduce  Nonresponse error can result when a survey fails to capture information from all population members selected into a survey sample  Of the 13 questionnaires not returned, 4 were Army warfare centers, and 9 were Air Force research directorates  Throughout the data collection period, we made multiple follow-up attempts by email and phone to those labs not yet responding  The Air Force Research Laboratory (AFRL) provided a single survey response for the entire laboratory enterprise  Not all returned questionnaires may have answers to every question applicable to a respondent  However, this question-level nonresponse did not exceed one for any of the questions applicable to all 31 labs  Because we selected the entire population of laboratories for our survey, our estimates are not subject to sampling error  We developed our list of the 44 labs in our population in consultation with DOD, and are confident that none were left out, so our or survey has no known sources of coverage error  We conducted pretests of the draft questionnaire with 3 laboratories in the population and made revisions to reduce the possibility of measurement error from differences in how questions were interpreted and the sources of information available to respondents  After reviewing the answers received, we also followed up as necessary with respondents to clarify apparent inconsistencies or other possible misreports, and made changes to responses where corrections were needed  A second, independent analyst checked the accuracy of all computer analyses to minimize the likelihood of errors in data processing  To obtain additional information on this objective, we reviewed relevant legislation which established or amended these authorities and reviewed applicable DOD and service policy documentation  Further, we collected military service related information on the usage of two authorities, such as: Spending data on the use of the laboratory initiated research authority  We gathered this information from DOD-mandated reports to Congress on the use of this authority and military service officials  We determined these data to be reliable based on reviews of agency documentation collected and interviews with agency officials  Data on the usage of direct hire authorities by the service laboratories  We collected direct hire data from each of the military services including the number of direct hire authority candidates hired as well as the number of direct hire positions the laboratories were authorized to hire  We determined these data to be reliable based on reviews of agency documentation collected and interviews with agency officials  We also used select findings from our May 2018 report where we evaluated DOD’s use of hiring authorities, including direct hire authority  More information about the scope and methodology of our prior work can be found in that report  In addition, we also collected information on military service proposals to utilize the laboratory enhancement pilot program authority  To obtain further information on department- and service-level involvement in and perspectives of defense laboratory authorities and challenges, we interviewed officials responsible for the management, execution, and oversight of DOD’s science and technology enterprise, including military service labs  At the Office of the Secretary of Defense and military department headquarters level, those responsible for the management and oversight of science and technology activities, we met with officials from the: Office of the Assistant Secretary of Defense for Research and DOD Defense Laboratories Office; Office of the Deputy Assistant Secretary of the Army for Research and Office of the Deputy Assistant Secretary of the Air Force for Science, Technology, and Engineering; Office of the Assistant Secretary of the Air Force for Financial Office of the Deputy Assistant Secretary of the Navy for Research, Development, Test, and Evaluation; and Office of the Budget, within the Office of the Assistant Secretary of the Navy for Financial Management and Comptroller We also met with military department lab officials responsible for the management and execution of science and technology activities from the: Army Research, Development and Engineering Command; Army Research Laboratory; Army Aviation and Missile Research, Development, and Engineering Air Force Research Laboratory; Naval Research Laboratory; Naval Surface Warfare Center, Headquarters; and Naval Surface Warfare Center, Carderock Division To identify and describe governance models used by selected DOD- sponsored federally funded research centers (FFRDCs) and university affiliated research centers (UARCs), we focused our review on the 3 FFRDCs designated as research and development labs as well as all 13 UARCS sponsored by DOD entities  We reviewed appropriate sections of the FAR language related to FFRDCs and UARCs, DOD guidance for working with FFRDCs and UARCs, relevant contracts, and performance assessments  Further, we met with officials from the office of the Deputy Director, OSD Studies and Federally Funded Research & Development Centers Management and Office to discuss overall FFRDC and UARC management, policies, and challenges facing FFRDCs and UARCs  We interviewed officials at selected research and development FFRDCs and UARCS to discuss their experience conducting DOD research and interactions with their customers, such as defense program executive offices  We met with officials at the two major research and development lab FFRDCs—The Lincoln Laboratory at the Massachusetts Institute of Technology (MIT) and the Software Engineering Institute at Carnegie Mellon University  We also selected a university affiliated research center sponsored by the Army and Navy: The Applied Physics Laboratory at Johns Hopkins University and the Institute for Soldier Nanotechnologies also at the MIT  To identify and describe governance models by non-defense labs, we selected Energy and NASA to focus our efforts  We identified 17 Energy national labs and 4 NASA research centers conducting basic and applied research similar to DOD labs  These agencies, along with DOD, represent 3 of the top 4 agencies in terms of average federal research and development spending from fiscal years 2015 to 2017  In our August 2016 GAO Technology Readiness Assessment Guide, we drew heavily from DOD, NASA, and Energy for best practices, terminology, and examples  This contributed to our decision to focus on Energy and NASA’s research entities in this laboratory governance review  We did not include the fourth agency—the National Institutes of Health—in our review because it is not as similar to DOD  We also reviewed relevant Energy and NASA guidance as well as relevant FAR sections  At Energy, we met with officials from the National Nuclear Security Administration which is semi-autonomous entity within Energy responsible for managing the nation’s nuclear weapons and nuclear security  We also met with Officials from the Office of Science, a program office responsible for supporting energy related fundamental science and research  To gain further insights on operating structures, funding arrangements, and their overall experience we met with lab leadership at selected Energy labs which were chosen based on initial discussions with agency officials and our review of past GAO work: Oak Ridge National Laboratory, Lawrence Berkeley National Laboratory, Lawrence Livermore National Laboratory, and National Energy Technology Laboratory (the sole Energy government owned and operated laboratory) We also met with leadership from Battelle Memorial Institute, which is the sole or joint contract manager for five Energy national labs including Oak Ridge National Laboratory  In addition, Battelle is an integrated subcontractor at Lawrence Livermore National Laboratory  At NASA, we met with officials with NASA’s Science Mission Directorate and Mission Support Directorate to discuss overall research center management and operations  We also leveraged ongoing and recently completed work at GAO to gain additional insight on NASA’s operations such as human capital management  Almost all of NASA’s research, space, and space flight centers conduct research and development activities  However, we focused our review on four research centers where NASA primarily conducts its aeronautics research, which has substantial overlap with DOD activities  To gain additional insight into the experience of lab leaders at NASA research centers, we met with officials at NASA’s Glenn Research Center and Ames Research Center  In addition, we also met with officials at the NASA Jet Propulsion Center, which is the only NASA-sponsored FFRDC  We conducted this performance audit from July 2017 to December 2018 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  Office of the Secretary of Defense (OSD) In addition to the contact named above, Christopher R  Durbin (Assistant Director); Charlie Shivers, III (Analyst-in-Charge); Emily Bond; Lorraine Ettaro; Carl Ramirez; Sylvia Schatz; Sean Seales; Brian Smith; and Robin Wilson made significant contributions to this report 

ground_truth: SBA's 7(a) program is required to serve creditworthy small business borrowers who cannot obtain credit through a conventional lender at reasonable terms. The Joint Explanatory Statement of the Consolidated Appropriations Act, 2017 includes a provision for GAO to review the 7(a) program. This report discusses, among other things, (1) how SBA monitors lenders' compliance with the credit elsewhere requirement, (2) the extent to which SBA evaluates trends in lender credit elsewhere practices, and (3) lenders' views on the credit elsewhere criteria for 7(a) loans. GAO analyzed SBA data on 7(a) loans approved for fiscal years 2007–2016, the latest available, and reviewed literature on small business lending; reviewed standard operating procedures, other guidance, and findings from SBA reviews performed in fiscal year 2016; and interviewed lender associations and a nonrepresentative sample of 7(a) lenders selected that concentrated on larger lenders. For its 7(a) loan program, the Small Business Administration (SBA) has largely delegated authority to lenders to make 7(a) loan determinations for those borrowers who cannot obtain conventional credit at reasonable terms elsewhere. To monitor lender compliance with the “credit elsewhere” requirement SBA primarily uses on-site reviews conducted by third-party contractors with SBA participation and oversight, and other reviews. According to SBA guidance, lenders making 7(a) loans must take steps to ensure and document that borrowers meet the program's credit elsewhere requirement. However, GAO noted a number of concerns with SBA's monitoring efforts. Specifically, GAO found the following: Over 40 percent (17 of 40) of the on-site lender reviews performed in fiscal year 2016 identified lender noncompliance with the requirement. On-site reviewers identified several factors, such as weakness in lenders' internal control processes that were the cause for lender noncompliance. Most on-site reviewers did not document their assessment of lenders' policies or procedures, because SBA does not require them to do so. As a result SBA does not have information that could help explain the high noncompliance rate. Federal internal control standards state that management should design control activities, including appropriate documentation, and use quality information to achieve the entity's objectives. Without better information on lenders' procedures for complying with the documentation requirement, SBA may be limited in its ability to promote compliance with requirements designed to help ensure that the 7(a) program reaches its target population. SBA does not routinely collect or analyze information on the criteria used by lenders for credit elsewhere justifications. SBA recently began collecting some information on lenders' use of the criteria, but this information is limited, and SBA does not analyze the information that it does collect to better understand lenders' practices. Federal internal control standards state that management should use quality information to achieve the entity's objectives. Without more robust information and analysis, SBA may be limited in its ability to understand how lenders are using the credit elsewhere criteria and identify patterns of use by certain lenders that place them at a higher risk of not reaching borrowers who cannot obtain credit from other sources at reasonable terms. In general, representatives from 8 of 11 lenders that GAO interviewed stated that SBA's credit elsewhere criteria are adequate for determining small business eligibility for the 7(a) program. These criteria help them target their lending to small businesses that would otherwise have difficulty obtaining conventional credit because they are often new businesses or have a shortage of collateral. However, they also said that other factors—such as lender policies and economic conditions—can affect their decisions to offer 7(a) loans. In January 2018, SBA issued revised guidance for the 7(a) program and has provided training on this new guidance to lenders and trade associations. Lenders told GAO they are still in the process of understanding the new requirements. GAO recommends that SBA (1) require its on-site reviewers to document their assessment of lenders' policies and procedures related to the credit elsewhere documentation requirement, (2) collect information on lenders' use of credit elsewhere criteria, and (3) analyze that information to identify trends. SBA generally agreed with the recommendations.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.

Report 1: Under SBA’s 7(a) loan program, SBA guarantees loans made by commercial lenders to small businesses for working capital and other general business purposes  These lenders are mostly banks, but some are non-bank lenders, including small business lending companies— lenders whose lending activities are not subject to regulation by any federal or state regulatory agency, but were previously licensed by SBA and authorized to provide 7(a) loans to qualified small businesses  The guarantee assures the lender that if a borrower defaults on a loan, the lender will receive an agreed-upon portion (generally between 50 percent and 85 percent) of the outstanding balance  For a majority of 7(a) loans, SBA relies on lenders with delegated authority to approve and service 7(a) loans and to ensure that borrowers meet the program’s eligibility requirements  To be eligible for the 7(a) program, a business must be an operating for-profit small firm (according to SBA’s size standards) located in the United States and must meet the credit elsewhere requirement  Because the 7(a) program is required to serve borrowers who cannot obtain conventional credit at reasonable terms, lenders making 7(a) loans must take steps to ensure that borrowers meet the program’s credit elsewhere requirement  Because SBA relies on lenders with delegated authority to make these determinations, SBA’s oversight of these lenders is particularly important  However, we found in a 2009 report that SBA’s lack of guidance to lenders on how to document compliance with the credit elsewhere requirement was impeding the agency’s ability to oversee compliance with the credit elsewhere requirement  To improve SBA’s oversight of lenders’ compliance with the credit elsewhere requirement, we recommended in 2009 that SBA issue more detailed guidance to lenders on how to document their compliance with the credit elsewhere requirement  As a result, SBA revised its standard operating procedure to state that each loan file must contain documentation that specifically identifies the factors in the present financing that meet the credit elsewhere test, which we believe met the spirit of our recommendation  SBA’s current credit elsewhere criteria for determining 7(a) loan eligibility include the following factors: 1  the business needs a longer maturity than the lender’s policy permits; 2  the requested loan exceeds the lender’s policy limit regarding the amount that it can lend to one customer; 3  the collateral does not meet the lender’s policy requirements; 4  the lender’s policy normally does not allow loans to new businesses or businesses in the applicant’s industry; or 5  any other factors relating to the credit which, in the lender’s opinion, cannot be overcome except for the guarantee  When the 7(a) program was first implemented, borrowers were generally required to show proof of credit denials from banks that documented, among other things, the reasons for not granting the desired credit  Similar requirements remained in effect until 1985, when SBA amended the rule to permit a lender’s certification made in its application for an SBA guarantee to be sufficient documentation  This certification requirement remained when the rule was rewritten in 1996  SBA stated that it believed requiring proof of loan denials was demoralizing to small businesses and unenforceable by SBA  SBA and lender roles vary among 7(a) program categories—including regular 7(a), the Preferred Lenders Program, and SBA Express  Under the regular (nondelegated) 7(a) program, SBA makes the loan approval decision, including the credit determination  Under the Preferred Lenders Program and SBA Express, SBA delegates to the lender the authority to make loan approval decisions, including credit determinations, without prior review by SBA  For each 7(a) program category, lenders are required to ensure that borrowers meet the credit elsewhere requirement for all 7(a) loans  The maximum loan amount under the SBA Express program is $350,000, as opposed to $5 million for other 7(a) loans  The program allows lenders to utilize, to the maximum extent possible, their own credit analyses and loan underwriting procedures  In return for the expanded authority and autonomy provided by the program, SBA Express lenders agree to accept a maximum SBA guarantee of 50 percent  Other 7(a) loans generally have a maximum guarantee of 75 percent or 85 percent, depending on the loan amount  In fiscal year 2016, 1,991 lenders approved 7(a) loans, of which 1,321 approved at least one loan with some form of delegated authority  SBA’s Office of Credit Risk Management is responsible for overseeing 7(a) lenders, including those with delegated authority  SBA created this office in fiscal year 1999 to help ensure consistent and appropriate supervision of SBA’s lending partners  The office is responsible for managing all activities regarding lender reviews; preparing written reports; evaluating new programs; and recommending changes to existing programs to assess risk potential  Generally, the office oversees SBA lenders to identify unacceptable risk profiles using its risk rating system and enforce loan program requirements  According to SBA’s standard operating procedures, one of the agency’s purposes of its monitoring and oversight activities is to promote responsible lending that supports SBA’s mission to increase access to capital for small businesses  In the federal budget, the 7(a) program is generally required to set fees that it charges to lenders and borrowers at a level to cover the estimated cost of the program associated with borrower defaults (in present value terms)  To offset some of the costs of the program, such as default costs, SBA assesses lenders two fees on each 7(a) loan  First, depending on the term of the loan, the guarantee fee must be paid by the lender within either 90 days of loan approval or 10 business days of the SBA loan number being assigned  This fee is based on the amount of the loan and the level of the guarantee, and lenders can pass the fee on to the borrower  Second, the servicing fee must be paid annually by the lender and is based on the outstanding balance of the guaranteed portion of the loan  The 7(a) program accounts for a small portion of total small business lending  According to a May 2017 report by the Consumer Financial Protection Bureau, the total debt financing available to small businesses was estimated to be $1 4 trillion  Of that amount, the Consumer Financial Protection Bureau estimated that about 7 percent was SBA loans, including 7(a) loans  SBA and some other researchers have suggested that there may be disparities in credit access among small businesses, based on characteristics of the borrower and firm  SBA lists as a strategic objective to “ensure inclusive entrepreneurship by expanding access and opportunity to small businesses and entrepreneurs in communities where market gaps remain ” In 2007, we reported that some studies had noted disparities among some races and genders in the conventional lending market, but the studies did not offer conclusive evidence on the reasons for those differences  Much of the research we reviewed in 2007 relied on the Board of Governors of the Federal Reserve System’s Survey of Small Business Finance, which was last implemented in 2003  Although this survey is no longer available, recently the 12 Federal Reserve Banks conducted the Small Business Credit Survey  In a series of reports based on the more recent survey, researchers found disparities in credit availability based on gender, the age of the firm, and minority status  From fiscal years 2007 through 2016, a majority of loan dollars guaranteed under the 7(a) program went to small businesses that were new, partially or wholly owned by women, or located in a distressed area  As previously mentioned, recent studies we reviewed by the Federal Reserve Banks and other researchers suggest that certain small business borrowers—including businesses that are new or owned by women—have difficulty obtaining conventional small business loans, which may put them at a disadvantage  As shown in figure 1, almost two-thirds of loan dollars guaranteed under the 7(a) program for this period went to small businesses that were in these two categories or located in a distressed area  The remaining 37 percent of 7(a) loan dollars went to businesses that were established, solely male-owned, and not located in economically distressed areas  See appendixes II and III for additional data on 7(a) loans, such as the total volume, percentage of lending provided by year and by state, and other borrower characteristics, including SBA’s loan- and lender-level Small Business Risk Portfolio Solutions score (predictive score) information  In the following figures, we present more detailed data on 7(a) loans to small businesses based on their status as a new business; gender of ownership; location relative to economically distressed areas; and minority ownership for fiscal years 2007 through 2016  New businesses  As shown in figure 2, the percentage of 7(a) loans that went to new businesses decreased from 36 percent in fiscal year 2007 to 23 percent in fiscal year 2011 before increasing to 35 percent by 2016  Gender  From fiscal years 2007 through 2016, the share of the total value of approved 7(a) loans by gender of owner remained fairly consistent (see fig  3)  An average of 70 percent of the total loan value went to male- owned businesses, and the remaining 30 percent went to businesses that were majority (more than 50 percent) or partially (50 percent or less) owned by women  Economically distressed areas  SBA did not provide data on whether 7(a) loans go to businesses located in economically distressed neighborhoods  However, we used data from the American Community Survey for 2011 through 2015, the most recent version available at the time of our analysis, along with zip code information provided by SBA to determine the average poverty rate by zip code (see fig  4)  From fiscal years 2007 through 2016, the proportion of the total value of 7(a) loans approved that went to borrowers in economically distressed areas remained between 23 percent and 26 percent  We defined distressed areas as zip codes where at least 20 percent of the households had incomes below the national poverty line  Minority/Nonminority status of borrower  From fiscal years 2007 through 2016, the proportion of the total value of 7(a) loans approved that went to minority borrowers decreased overall—from 43 percent to 30 percent—with the lowest share at 24 percent in fiscal year 2010 (see fig  5)  The share of approved loan dollars that went to nonminority borrowers varied, increasing to 69 percent in fiscal year 2010 before decreasing to 56 percent in fiscal year 2016  Notably, the share of the total value of loans approved that went to borrowers whose race/ethnicity was categorized as undetermined increased from 5 percent in fiscal year 2007 to 13 percent in fiscal year 2016  This increase does not fully account for the declined share for minority borrowers  However, according to SBA officials, borrowers voluntarily provide self-reported information on race and ethnicity and therefore the associated trend data should be viewed with caution  SBA relies on on-site reviews as its primary mechanism for evaluating lenders’ compliance with the credit elsewhere requirement  The reviews are performed by third-party contractors with SBA staff participation and additional oversight from SBA  According to SBA’s standard operating procedures, these reviews are generally conducted every 12 to 24 months for all 7(a) lenders with outstanding balances on the SBA- guaranteed portions of their loan portfolios of $10 million or more, although SBA may conduct on-site reviews of any SBA lender at any time as it considers necessary  In fiscal year 2016, SBA conducted 40 on-site reviews of 7(a) lenders, representing approximately 35 percent of SBA’s total outstanding 7(a) loan portfolio  As part of SBA’s on-site reviews, reviewers judgmentally selected a sample of approximately 30 to 40 loan files using a risk-based approach  These loan files accounted for approximately 6 percent to 19 percent of each lender’s total gross SBA dollars in fiscal year 2016  For each lender, approximately 70 percent to 90 percent of the loan files in the sample were reviewed to evaluate compliance with the credit elsewhere requirement  According to SBA’s contractors, loans that were selected for other reasons, such as issues related to liquidation, were not required to be reviewed for credit elsewhere compliance  SBA requires lenders to provide a narrative to support the credit elsewhere determination in the credit memorandum included in each loan file  SBA’s standard operating procedures state that lenders must substantiate that credit is not available elsewhere by (1) discussing the criteria that demonstrate an identifiable weakness in a borrower’s credit and (2) including the specific reasons why the borrower does not meet the lender’s conventional loan policy requirements  In keeping with SBA’s documentation requirement, third-party contractors and SBA staff who conduct on-site reviews are supposed to assess whether lenders have adequately documented the credit elsewhere criteria and provided specific reasons supporting the criteria in the credit memorandum  According to SBA’s contractors, adequate documentation of the credit elsewhere determination in the credit memorandum would include not just which of the criteria a borrower met but also a discussion of the basis or justification for the decision  For example, if a lender determined that a borrower needed a longer maturity, the lender should explain in the credit memorandum the reasons why a longer maturity was necessary  SBA’s contractors also told us that they carefully review a lender’s loan policies in preparation for on-site reviews and refer to a lender’s policies throughout the reviews  Reviewers do not attempt to verify the evidence given in support of the credit elsewhere reason beyond the information provided in the credit memorandum  Based on our review of fiscal year 2016 reports, on-site reviews can result in three levels of noncompliance response: Finding: This is the most severe result and is associated with a corrective action for the lender to remedy the issue  Observation: This is a deficiency recorded in the review’s summary but may not warrant a corrective action for the lender  Deficiency Noted: This is the lowest level of response  It is a deficiency noted as part of the review that is not included in the review’s summary and also may not warrant a corrective action  According to SBA officials, SBA’s policy has been that any noncompliance with SBA loan program requirements results in a finding  However, according to SBA officials and our review of the fiscal year 2016 on-site review reports, if a single instance of noncompliance was identified in fiscal year 2016, SBA generally would not issue a finding  Instead, SBA’s contractors said they would attempt to determine whether that instance was an inadvertent error, such as by examining additional loan files  Lenders that are subject to corrective actions are generally required to submit a response to SBA within 30 days to document how they have addressed or plan to address the identified issues  SBA subsequently asks for documentation to show that the lender has remedied the issue, and in some cases will conduct another review that usually includes an assessment of 5 to 10 additional loan files to determine whether the credit elsewhere reason has been adequately documented  According to SBA officials, SBA may also review lenders’ compliance with corrective actions from recent on-site reviews during targeted reviews (discussed below) and delegated authority renewal reviews (for lenders with delegated authority)  In addition to on-site reviews, SBA also monitors lenders’ compliance with the credit elsewhere requirement through targeted reviews (performed on- or off-site)  Targeted reviews of a specific process or issue may be conducted for a variety of reasons at SBA’s discretion, including assessing a lender’s compliance with the credit elsewhere requirement  In fiscal year 2016, SBA conducted 24 targeted reviews that included an examination of lenders’ compliance with the credit elsewhere documentation requirement  For these reviews, SBA examined loan files for 5 judgmentally selected loans that were provided to SBA electronically, as well as copies of the credit elsewhere reasoning (among other underwriting documentation) for 10 additional recently-approved loans  SBA also conducts periodic off-site reviews that use loan- and lender- level portfolio metrics to evaluate the risk level of lenders’ 7(a) portfolios  According to agency officials, SBA also began using off-site reviews to evaluate lenders’ compliance with the credit elsewhere requirement in fiscal year 2016  In that year, SBA conducted off-site reviews of 250 lenders and required these lenders to report the credit elsewhere justification for a sample of 10 loans per lender that were identified by SBA’s selection process  Lenders were not required to provide supporting documentation, and SBA did not follow up with lenders or review loan files to ensure the validity of the self-reported reasons  According to SBA, off-site reviews followed the same procedures in fiscal year 2017 as in 2016 and that the agency planned to use the same procedures for these reviews in the future  According to the agency, it also routinely evaluates and revises its review processes and procedures  In addition, SBA’s Loan Guaranty Processing Center and National Guaranty Purchase Center conduct Improper Payments Elimination and Recovery Act and quality control reviews at the time of loan approval and at the time of guaranty purchase, respectively  These reviews examine the credit elsewhere requirement, among other issues  Lastly, since 2014 SBA’s Office of Inspector General has also examined whether high-dollar or early-defaulted 7(a) loans were made in accordance with rules; regulations; policies; and procedures, including the credit elsewhere requirement  Our review of the on-site reviews conducted in fiscal year 2016 found that 17 of the 40 reviews—more than 40 percent—identified compliance issues with the credit elsewhere documentation requirement  Of those 17 reviews, 10 reviews resulted in a Finding (all with associated corrective 3 reviews resulted in an Observation (none with associated corrective actions or requirements), and 4 reviews resulted in a Deficiency Noted (one with an associated requirement)  For all of the 17 on-site reviews that identified an instance of noncompliance, the issue was related to the lender’s documentation of the credit elsewhere criteria or justification  For example, one review found that the lender’s “regulatory practices demonstrate material noncompliance with SBA Loan Program requirements regarding documentation of the Credit Elsewhere Test ” Another review found that the lender “failed to demonstrate with adequate documentation that credit was not available elsewhere on reasonable terms and conditions ” For 2 of the 17 reviews, the issue was partly related to a discrepancy between the credit elsewhere justification used for some of the sample loan files and the lender’s own loan policy limits  With regard to SBA’s targeted reviews, 7 of 24 reviews (29 percent) conducted in fiscal year 2016 found a compliance issue with the credit elsewhere requirement  Of those 7 reviews, 6 reviews resulted in a Finding (all with associated corrective actions), 1 review resulted in an Observation (without an associated corrective no reviews resulted in a Deficiency Noted  For all of the 7 targeted reviews that identified a compliance issue, the issue was wholly related to the lender’s documentation of the credit elsewhere reason or justification  For example, 4 reviews found that for at least one loan reviewed, “the Lender failed to document justification that credit was unavailable elsewhere ” Another review found that for “three SBA Express loans and one Small Loan Advantage loan reported “other factors relating to the credit that in the lender’s opinion cannot be overcome except for the guaranty’ without specific identification of the factors ” Based on our review of on-site review reports and an interview with one reviewer, the key factors underlying lenders’ high rate of noncompliance with the credit elsewhere documentation requirement were lenders’ lack of proper internal controls and procedures and lack of awareness of the credit elsewhere documentation requirement  In fiscal year 2016, SBA’s corrective actions related to the credit elsewhere requirement required the lenders to establish or strengthen their policies; procedures; underwriting processes; or internal controls  In addition, contractors conducting the on- site reviews with whom we spoke stated that some lenders appeared to be unfamiliar with SBA’s standard operating procedures or were unclear on how to interpret them  For the 11 on-site reviews conducted in 2016 that included corrective actions, SBA generally required lenders to improve controls or procedures  For example, one lender was required to “correct its policy, modify its procedure, and amend its internal controls to ensure that its consideration and documentation of credit unavailable elsewhere identifies the specific fact(s) which are applicable to the specific loan and the determination is rendered and accurate for each individual SBA loan that it originates ” Another lender was required to “improve underwriting processes and controls to ensure that the borrower meets the [credit elsewhere] requirement” and to “document the loan file with the reasons for the determination ” Similarly, for the six targeted reviews in 2016 that included corrective actions, SBA issued a general requirement for the lender to “identify the causes for the Findings and implement corrective actions ” Based on our review of these targeted reviews, lenders generally remedied or intended to remedy the issue by amending their internal controls or procedures  For example, one lender stated that the “Credit Elsewhere test will be incorporated into the Credit Department process ” Another lender stated that it would “centralize all SBA underwriting and has developed an SBA addendum that will be utilized for all SBA-guaranteed loans ” Although some of SBA’s on-site reviews for fiscal year 2016 identified factors leading to noncompliance, they generally did not document reviewers’ assessment of lenders’ policies and practices for complying with the credit elsewhere documentation requirement  SBA’s standard operating procedures state that the on-site reviewers should determine whether or not lenders’ policies and practices adhere to the requirement, but they do not require them to document their assessment of these policies and practices  Only 4 of the 40 fiscal year 2016 review reports that we examined included such an assessment  As a result, although SBA required corrective actions by the lender to address deficiencies, there usually was no record of the underlying factors that resulted in the lender’s noncompliance  Federal internal control standards state that management should design control activities to achieve objectives and respond to risks, including appropriate documentation of transactions and internal control  Because SBA does not require reviewers to document their assessment of lenders’ policies and practices for complying with the credit elsewhere documentation requirement, the agency does not have good information to help explain why so many lenders are not in compliance  This hinders SBA’s ability to take informed and effective actions to improve lender compliance with the requirement and ensure that the program is reaching its intended population  SBA does not routinely collect information on the criteria lenders use in their credit elsewhere justifications  As previously discussed, lenders are required to maintain documentation of borrower eligibility (including the credit elsewhere justification) in each loan file for loans approved through lenders’ delegated authority  However, SBA cannot readily aggregate information on lenders’ credit elsewhere justifications for both delegated and nondelegated loans: For delegated loans, lenders are required to certify the loan’s credit elsewhere eligibility on E-Tran, SBA’s online portal for origination of delegated and nondelegated loans  However, lenders are only required to check a box to certify that the loan file contains the required credit elsewhere justification and are not required to submit any additional information, including which of the criteria was used to make the determination  According to SBA officials, delegated loans account for loans approved by approximately 70 percent of lenders  For nondelegated loans, lenders are required to submit credit elsewhere documentation to be reviewed by SBA’s Loan Guaranty Processing Center  For these loans, which comprise loans approved by the remaining 30 percent of lenders, SBA might maintain paper records of data on borrowers’ eligibility but does not compile such data electronically and thus cannot readily aggregate the data for analysis  Instead, SBA relies on on-site reviews or lender-reported information to review lenders’ credit elsewhere justifications and collects limited data from these reviews  For its on-site reviews, SBA does not collect sample data on lenders’ use of the credit elsewhere criteria  For its off-site reviews, SBA collected sample data on lenders’ use of the credit elsewhere criteria based on 250 such reviews conducted in fiscal year 2016  For these reviews, SBA asked lenders to self-report a short description of the credit elsewhere justifications used for an SBA-selected sample of 10 loans  However, as discussed earlier, SBA did not request or examine loan files as part of these off-site reviews and did not follow up with lenders or review loan files to ensure the validity of the self- reported reasons  One reason why SBA does not routinely collect complete information on lenders’ use of the credit elsewhere criteria is that SBA’s loan origination system, E-Tran, is not equipped to record or tabulate this information  In addition, according to an SBA official, on-site reviews do not collect data on the credit elsewhere criteria because the loans reviewed are judgmentally selected and would not accurately represent the larger population  Federal internal control standards state that management should use quality information to achieve the entity’s objectives  To do so, management should identify the information needed to achieve the objectives and address the risks, obtain relevant data from reliable internal and external sources in a timely manner, and process the obtained data into quality information  More robust information on lenders’ credit elsewhere justifications, including the credit elsewhere criteria, would allow SBA to evaluate patterns in lender practices related to the credit elsewhere requirement and, in turn, help the agency ensure compliance with the requirement  In this context, generalizable data, which can be collected through random sampling, or complete data through required reporting for every loan would allow SBA to better understand patterns in lender practices across the 7(a) program  Further, nongeneralizable data, which are available through SBA’s current off- and on-site review processes, would allow SBA to examine specific groups of lenders and could help SBA determine if it is necessary to collect additional data  SBA does not analyze the limited data it collects to help it monitor lenders’ compliance with the credit elsewhere requirement  According to agency officials, SBA has not performed lender-level analyses of the criteria lenders use for their credit elsewhere justifications  Additionally, SBA has not analyzed 7(a) lenders’ use of the “other factors” criterion— that is, factors not specified in the other criteria that, in the lender’s opinion, cannot be overcome except for the guarantee—for example, by collecting data on the frequency of its use or examining why lenders rely on it  While some 7(a) lenders told us they avoided relying on the “other factors” criterion because it was vague and open to interpretation, some lenders have used it when a borrower’s profile did not meet any of the other criteria  For example, one lender stated that this criterion was used for a borrower who was no longer a start-up but had experienced fluctuations in cash flow due to relocation or change in ownership  Another lender stated that the criterion was used more frequently during the 2007-2009 financial recession to extend financing to borrowers whose owners had experienced a home foreclosure but were otherwise sound  Federal internal control standards state that management should establish and operate monitoring activities to monitor the internal control system and evaluate the results  Analyzing data on lenders’ use of the credit elsewhere criteria as part of its monitoring procedures could help SBA determine whether there are patterns in lender practices related to the criteria that could predict lender noncompliance  For example, SBA could analyze lenders’ use of the criteria along with lender review results and other data on loan characteristics and performance to determine whether certain patterns indicate that a lender might be applying the requirement inconsistently  Additionally, such analysis could inform SBA’s selection of which lenders to review by improving its ability to identify lenders at risk of noncompliance with the credit elsewhere requirement  Better selection criteria for its lender reviews could, in turn, improve identification and remediation of such noncompliance, helping ensure that the 7(a) program serves its target population  Representatives at 8 of the 11 lenders that we contacted said they believed that SBA’s current credit elsewhere criteria are adequate in targeting small business borrowers who cannot obtain credit at reasonable terms  Representatives of these lenders also agreed that the criteria generally serve the types of small businesses that would otherwise have trouble obtaining conventional credit, such as new businesses or those with a shortage of collateral  One lender representative told us its most commonly used criterion related to the overall time in business because of the higher risk of failure  Another lender representative cited the lack of collateral as the most common criterion used  Additionally, representatives at an industry association told us that one of the most commonly used criteria was the one related to loan maturity and many small businesses seek 7(a) loans because they offer repayment terms of up to 10 years, compared to 1 to 3 years for conventional loans  Representatives of two other lenders suggested that the credit elsewhere criteria should not be overly prescriptive, which could limit lenders’ ability to make 7(a) loans to some businesses  For example, one representative said the credit elsewhere criteria should remain flexible because banks have different lending policies  In addition, representatives at three lenders indicated that they were hesitant to use the “other factors” criterion  One lender believed the requirement was open to interpretation and could be used inappropriately with lenders determining their own individual conventional loan policies  Another lender commented that the criterion was vague and rarely used by his institution, noting that SBA should provide some additional guidance on its use  Lenders consider multiple factors in determining whether to offer small businesses a conventional loan or a 7(a) loan, according to stakeholders with whom we spoke  For example, representatives at an industry association stated that a bank goes through several analyses to determine what loan product to offer the borrower  These representatives stated that the credit elsewhere requirement is embedded in the analysis a bank performs, such as whether the borrower qualifies for a loan and has a financial need for an SBA loan and whether the 7(a) program is right for that borrower  Representatives at two other lenders also stated that many small businesses have already been turned down for conventional loans before they seek a 7(a) loan  One representative noted that the “reasonable rates and terms” component of the 7(a) program was important as it allows lenders to look more broadly at a borrower’s needs  For instance, the representative explained, lenders can assess whether repayment terms are reasonable given a particular borrower’s situation and the resources the borrower will have to repay the loan  Economic conditions also affect lending policies, including whether borrowers qualify for a conventional loan, according to representatives at seven lenders with whom we spoke  For example, during the recent economic downturn, banks tightened their underwriting standards for small businesses and were less willing to lend without a government guarantee, according to one lender representative  SBA has issued revised primary operational guidance for the 7(a) program, effective January 1, 2018  As discussed previously, lenders are required to make a determination that the desired credit is not available to the applicant from nonfederal sources  Under the previous guidance, the lender had to determine that some or the entire loan was not available from nonfederal sources or the resources of the applicant business  However under the revised guidance, the scope of nonfederal sources a lender must review was further defined to include sources both related and unrelated to the applicant  The updated guidance states that lenders must consider: Nonfederal sources related to the applicant, including the liquidity of owners of 20 percent or more of the equity of the applicant, their spouses and minor children, and the applicant itself; or Nonfederal sources unrelated to the applicant, including conventional lenders or other sources of credit  Representatives of five lenders told us they have been determining how to interpret the new procedures with a few stating they would like additional guidance, including what information to retain in the file  Representatives of two lenders stated that there is some ambiguity in how to determine nonfederal resources and how to assess whether small business owners have too many available liquid resources to qualify for a 7(a) loan  One representative said that lenders can have different interpretations of what constitutes “available resources,” which is not specified in the new SOP  As a result, he said, there may be some confusion about how to assess family members of the borrower who have high net worths and whether the borrower should decline a family member contribution to qualify for an SBA loan  A representative of one lender stated that lenders will not know what SBA expects until loans are approved under the new procedures, default, and are then reviewed  Another lender’s representative suggested additional guidance on documentation, such as whether the bank must obtain a personal financial statement for each owner of the business  A SBA staff told us SBA has provided multiple training presentations to SBA staff, lenders, and trade associations on the statutory changes to the credit elsewhere requirements and standard operating procedure updates  These have included a presentation at a trade association conference, four monthly conference calls for SBA staff, and two conference calls for SBA lenders  SBA staff said SBA also plans to hold monthly training sessions with SBA field offices, quarterly training sessions with the industry, and at least four training sessions in 2018 at lender trade conferences  Additionally, a representative from an industry association told us it is providing industry training on SBA’s revised procedures, including the credit elsewhere liquidity requirement  SBA’s 7(a) loan program is required to serve creditworthy small business borrowers who cannot obtain credit through a conventional lender at reasonable terms, and SBA largely relies on lenders with delegated authority to make credit elsewhere determinations  However, although there is a high rate of lender noncompliance with the credit elsewhere documentation requirement, SBA does not require its reviewers to document their assessment of the policies and procedures lenders use to meet the requirement  Without better information from lender reviews on how lenders are implementing the requirement to document their credit elsewhere decisions, SBA may be limited in its ability to promote compliance with requirements and, in turn, use such information to help ensure that 7(a) loans are reaching their target population  Furthermore, SBA does not routinely collect or analyze information on the criteria used for credit elsewhere justifications to evaluate patterns in lender practices  SBA recently began collecting some information on lenders’ use of the criteria, but this information is limited, and SBA does not analyze the information that it does collect to better understand lenders’ practices  Without more robust information and analysis, SBA may be limited in its ability to understand how lenders are using the credit elsewhere criteria and whether 7(a) loans are reaching borrowers who cannot obtain credit from other sources at reasonable terms  We are making the following three recommendations to SBA  The Administrator of SBA should require reviewers to consistently document their assessments of a lender’s policies and practices  (Recommendation 1) The Administrator of SBA should use its on-site and off-site reviews to routinely collect information on lenders’ use of credit elsewhere criteria as part of its monitoring of lender practices related to the credit elsewhere requirement  (Recommendation 2) The Administrator of SBA should analyze information on lenders’ use of credit elsewhere criteria obtained from its reviews to identify lenders that may be at greater risk of noncompliance and to inform its selection of lenders for further review for credit elsewhere compliance  (Recommendation 3) We provided a draft of this report for review and comment  SBA’s written comments are reprinted in appendix IV  SBA generally agreed with the recommendations  SBA also provided additional comments on certain statements in the draft report, which are summarized below with our responses  SBA noted that the draft Highlights did not discuss how credit elsewhere is determined for nondelegated loans  We have not revised the Highlights in response to this comment because our review focused on delegated lenders  In the body of the report we note that approximately 70 percent of 7(a) loans are approved under delegated authority  We also refer to SBA’s nondelegated loans in the report for additional context  According to SBA, the statement on our draft Highlights did not fully reflect its monitoring of lender compliance  SBA identified a variety of reviews it uses in addition to on-site reviews by third party contractors, which we discuss in the body of the report  We have modified the Highlights to reflect these other reviews  Also in reference to the draft Highlights, SBA stated that it provides oversight on every on-site lender review and that an SBA employee is present as a subject-matter expert on every review  We revised the Highlights by adding that SBA provides oversight to the on-site reviews conducted by third-party contractors  In response to a statement in our draft report that SBA guarantees loans to small businesses for working capital and other general business purposes, SBA commented that working capital generally is not the primary purpose for SBA-guaranteed loans  We did not revise the statement because SBA’s SOP 50 10 5 (version J) specifies that SBA’s 7(a) loan proceeds may be used for permanent working capital and revolving working capital, among other things  In relation to a footnote in our report that mentions two lender reviews for which we did not receive documentation, SBA stated that on February 15, 2018, it provided documentation to us related to the reviews and that we had confirmed its receipt  However, the text in the footnote in question refers to two targeted lender reviews from 2016 that included corrective actions  The information SBA provided to us on February 15, 2018, was related to on-site reviews conducted in 2016  As a result, we did not revise the footnote  SBA’s letter also contained technical comments that we incorporated as appropriate  We are sending copies of this report to congressional committees, agencies, and other interested parties  In addition, this report will be available at no charge on our website at http://www gao gov  If you or your staff members have any questions about this report, please contact me at (202) 512-8678 or shearw@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  This report discusses (1) 7(a) lending to selected categories of small business borrowers from fiscal years 2007 through 2016; (2) how the Small Business Administration (SBA) monitors lenders’ compliance with the credit elsewhere requirement; (3) the extent to which SBA evaluates trends in lender practices related to the credit elsewhere requirement; and (4) lenders’ views on the criteria used to determine eligibility for 7(a) loans and other issues related to the 7(a) program  For background on the 7(a) program and the credit elsewhere requirement, we reviewed the legislative history of the 7(a) program and our previous reports  We also interviewed officials from SBA’s Office of Credit Risk Management on guidance provided to 7(a) lenders  For background on constraints in the small business credit market, we reviewed recent academic literature on the characteristics of small businesses that historically have had more difficulty accessing credit  In addition, we reviewed recent studies published by the Federal Reserve Banks of Atlanta; Cleveland; Kansas City; and New York  To describe the population of borrowers served by the 7(a) program, we selected characteristics (such as gender, minority status, and percentage of new business) that we used in our 2007 report and that were the subject of the recent studies by Federal Reserve Banks  We obtained and analyzed SBA loan-level data to describe 7(a) loans and borrowers  Specifically, SBA provided us with 581,393 records from its administrative data systems, which contained information on all loans approved and disbursed in fiscal years 2007 through 2016  The SBA data included various types of information describing each loan, including the total gross approval amount; the amount guaranteed by SBA; the loan term; and the interest rate; delivery method; and status of the loan  The SBA data also included information on borrower characteristics: Age of business  Firms were classified as new (less than 2 years in operation) or existing  Gender  Firms were classified as 100 percent male-owned; 50 percent or greater women owned; 50 percent or less women-owned; or “unknown ” Information on gender was voluntarily provided by borrowers  Economically distressed area  We identified borrowers in economically distressed areas by matching borrower zip codes provided by SBA to those in the 2011 through 2015 American Community Survey  We defined distressed areas as zip codes where at least 20 percent of households had incomes below the national poverty line  In about 1 percent of the cases, we were unable to classify a lender because a zip code had changed or had insufficient population to report a poverty rate  We consider 1 percent of unmatched cases to be low by data reliability standards  Race/ethnicity  Borrowers were placed in one of nine categories of race/ethnicity, including an “unknown” category  We aggregated these to create minority, nonminority, and undetermined categories  The minority category included all borrowers who reported being a race/ethnicity other than white  The nonminority category included borrowers who reported being white  Information on race was voluntarily provided by borrowers  Industry  Firms were assigned a North American Industrial Classification code  These six-digit codes begin with a two-digit sector code that we used to draw more general conclusions about industries  Geographic information  The data provided the state where the borrower is located  In addition, we obtained information from SBA on loan- and lender-level Small Business Risk Portfolio Solution scores (predictive scores) provided by Dunn & Bradstreet and Fair Isaac Company, for loans approved in fiscal year 2016, the latest available  We were able to obtain predictive scores for approximately 81 percent of the loans for which SBA had provided other information  According to SBA, some loans may not have been disbursed at the time we obtained the predictive scores and, as a result, we do not have scores associated with these loans  We analyzed the information to determine the range of predictive scores and the range of average predictive scores by lender  To assess the reliability of loan-level data on borrower and loan characteristics and predictive scores we received from SBA, we interviewed agency officials knowledgeable about the data and reviewed related documentation  We also conducted electronic testing, including checks for outliers, missing data, and erroneous values  We determined that the data were sufficiently reliable for the purposes of describing the characteristics of borrowers who received 7(a) loans and the distribution of predictive scores  To assess how SBA monitors lenders’ compliance with the credit elsewhere requirement and criteria, we reviewed SBA’s standard operating procedures and other guidance on 7(a) program regulations and lender oversight  Specifically, we reviewed SOP 50 10 5 (versions I and J) on Lender and Development Company Loan Programs, SOP 50 53(A) on Lender Supervision and Enforcement, and SOP 51 00, On-Site Lender Reviews/Examinations, as well as information and policy notices related to the credit elsewhere requirement  Additionally, we interviewed representatives including those at SBA’s Office of Capital Access and Office of Credit Risk Management on lender oversight and lender review processes  We reviewed all the on-site lender review reports (40 reviews), including corrective actions or requirements related to the credit elsewhere requirement (documentation for 11 lenders), and targeted review reports that had credit elsewhere findings (7 reviews) that SBA conducted in fiscal year 2016  We also interviewed officials and reviewed recent reports from SBA’s Office of Inspector General  To assess the extent to which SBA evaluates trends in lender practices related to the credit elsewhere requirement, we interviewed SBA officials and reviewed documentation for SBA’s online portal for loan origination  We also incorporated information from interviews with a nongeneralizable, nonrepresentative sample of 7(a) lenders, which we discuss below  To obtain lenders’ views on the criteria used to determine eligibility for 7(a) loans and other program-related issues, we interviewed SBA staff including from the Office of Capital Access, and representatives of the National Association of Government Guaranteed Lenders; American Bankers Association; Independent Community Bankers Association; and National Federation of Independent Businesses  We also interviewed 11 banks (one bank provided written responses) in order to obtain the lender perspective of credit elsewhere  Nine of the banks were selected by us using a random process that concentrated on larger lenders  These nine lenders selected by us represent about 13 percent of the loans approved and 16 percent of the dollars approved in 2016  In addition, we interviewed two additional banks that represented an industry group – one larger bank and one small bank  Although we partially selected at random, the lenders we interviewed should not be considered generalizable because of the small number  We conducted this performance audit from August 2017 to June 2018 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  In this appendix, we provide information on the total amount and number of approved 7(a) loans and the top eight industry sectors receiving 7(a) loans  Data are also presented on fiscal year 2016 loan volume by state and per capita  As shown in figure 6 below, the total amount of approved 7(a) loans decreased during the period associated with the Great Recession (2007 through 2009)  From fiscal year 2009 on, the total amount of approved 7(a) loans increased until a decline in fiscal year 2012  During this timeframe, the American Recovery and Reinvestment Act of 2009 and the Small Business Jobs Act of 2010 provided fee relief and higher guaranties  The Small Business Jobs Act of 2010 also provided a temporary increase in Small Business Administration (SBA) Express loan limits to $1 million (instead of $350,000)  These programs have since expired  7(a) Loans by North American Industry Classification System (NAICS) code  Table 1 shows the largest eight industrial sectors by proportion of the total amount of 7(a) loans approved, using the NAICS code  The combined share of the top eight sectors declined slightly from 85 percent to 80 percent of the total lending from fiscal years 2007 through 2016, with an average of 82 percent  During this period, the Accommodation and Food Services sector had the largest average share of total loan amount at 17 percent, followed by the Retail Trade sector at 15 percent  Approved loan amount and per capita dollars by state  As shown in figure 7, California; Texas; Florida; Georgia; and New York received the highest total of approved loan dollars in fiscal year 2016  The average approval amount across all loans was $380,619  Georgia and Arkansas had the largest average approval amount in 2016  Also, during this period, Utah; Colorado; Georgia; California; and Washington received the highest per capita approved loan dollars  In fiscal-year 2016, creditworthiness varied widely among 7(a) program borrowers  We analyzed creditworthiness using the Small Business Administration’s (SBA) Small Business Risk Portfolio Solution score (predictive score), which ranges from 70 to 300, with 300 indicating the least risky loan  According to SBA, loans with scores above 180 are considered “lower risk,” scores between 140 and 179 are considered “moderate risk,” and scores 139 and lower are considered “higher risk ” There did not appear be differences in score based on the gender of the borrower or the age of the business  While SBA relies on the Predictive Score data to identify lenders that may pose excessive risk to the SBA 7(a) portfolio, the data also provide potential insights related to lender implementation of the credit elsewhere requirement  Variation  We found that some 7(a) borrowers were much more creditworthy than others  In 2016, the only year for which we obtained data, the predictive score at origination varied widely among borrowers  In 2016, the scores of borrowers ranged from a low of 91 to a high of 246  However, most scores were between 171 and 203, and the median score was 188  Race/ethnicity  We found that there were slight differences in creditworthiness by race/ethnicity, with median scores ranging from 180 to 189 depending on the category  Specifically, loans to African Americans in 2016 had a median score of 180, and loans to Hispanics had a median score of 183  In contrast, loans to whites had a median score of 188, and loans to Asian and Pacific Islanders had a median score of 189  Lender size  We found that lenders with larger numbers of SBA loans tended to have slightly more creditworthy borrowers  The top 5 percent of lenders had a median average score of 187, whereas the bottom 75 percent of lenders had a median average score of 182 5  Among the top 5 percent of lenders (with 374 loans per lender on average, collectively representing about 70 percent of the loans approved), the average score ranged from 171 to 195  Among all lenders, the average score ranged from 116 to 233  However, because many lenders only approved one or two loans in 2016, the average may reflect very few borrowers for that lender, making it difficult to tell whether the scores reflect a real difference between lenders  In addition to the contact named above, Harry Medina (Assistant Director); Janet Fong (Analyst in Charge); Benjamin A  Bolitzer; Gita DeVaney; David S  Dornisch; Amanda D  Gallear (intern); Marc W  Molino; Jennifer W  Schwartz; and Tyler L  Spunaugle made key contributions to this report 


Report 2:  Research Center Infrastructure: As with personnel matters, research centers have discretion to manage infrastructure in accordance with the policies and procedures of their parent institutions  While one center, Lincoln Laboratory, is located on government property, others primarily reside on property owned or leased by their parent institutions  According to agency officials, DOD contributes funding for the use and repair of these facilities through their contracts with research centers  Officials noted that Lincoln Laboratory uses military construction funding to pay for new buildings as it is located on government property  Trusted Advisor Role: FFRDCs and UARCs function as trusted advisors for the government and operate in the public interest with objectivity and independence  FFRDCs are independent, private-sector, non-profit organization units required to be free from personal or organizational conflicts of interest, as the FFRDCs answer to the government customer  As a result, DOD’s lab FFRDCs perform tasks that are closely associated with the performance of inherently governmental functions and have access to sensitive and proprietary data  Research center officials noted challenges limiting their work providing scientific expertise to DOD  FFRDCs are also limited in executing infrastructure investments  Limitation on Available Work Hours: DOD FFRDCs are limited by an annual ceiling set by Congress on the amount of staff years of technical effort (STE) that may be funded for defense FFRDCs  We previously found in October 2008 these limits were imposed in response to concerns that DOD was inefficiently using its FFRDCs  We found that the STE workload limitation aimed to ensure that FFRDC work was appropriate and limited resources were being used for DOD’s highest priorities  As a result, Software Engineering Institute officials said they decline many DOD programs’ requests for assistance due to the annual work hour limitation  Further, officials at the Office of the Secretary of Defense’s Studies and FFRDC Management Office reported that this limit significantly constrains the use of DOD’s FFRDCs and that DOD customer demand for their services is significantly greater than the annual STE limit  OSD officials indicated that FFRDC related work must be deferred to later years when these limits are reached, since there are no other legally compliant alternatives capable of fulfilling these requirements  Infrastructure: FFRDC officials we interviewed identified infrastructure challenges—including aging facilities and equipment—as hindering their research and development efforts  For example, many buildings at the Massachusetts Institute of Technology (MIT) Lincoln Laboratory are over 60 years old; MIT considers over half of them to be in substandard condition  According to an MIT official, these facilities, located on government property, were not structurally designed for modern research and have relatively poor vibration isolation, resulting in inefficient workarounds or work that could not be performed  Officials from the Defense Laboratories Office noted that the MIT Lincoln Laboratory is unique among DOD’s FFRDCs in that it is operated on government- owned property  A 2013 study, conducted on behalf of the White House Office of Science and Technology Policy, found that lab infrastructure project funding proposals must compete with hospitals, barracks, runways, and roads and, therefore, tend to be lower on the priority list for military construction funding  A 2017 Defense Science Board report and DOD officials we spoke with indicated this continues to be true  While contract research centers have significant flexibility to execute infrastructure work, they are still affected by limited availability of military construction funding  Officials at another center noted that in some instances, DOD sponsors have been unable or slow to provide required secure facilities and equipment within needed time frames  Delays of this nature can affect the research centers’ ability to deliver the technologies or related services needed by DOD  The Department of Energy (Energy) primarily relies on contractor- operated FFRDCs to operate its labs, while the majority of NASA labs and centers are government-operated  Energy’s national labs form the core of the agency’s scientific work and mission  This is in contrast to DOD-funded labs, which constitute a relatively small aspect of DOD’s overall mission  We have previously found that Energy’s labs can use funding for minor infrastructure improvements  NASA centers can also approve and fund certain facility projects, in accordance with NASA policies, and they have encountered significant challenges with aging infrastructure  Also, in some cases, energy and space research centers have significant challenges with hiring replacement staff and competing with private sector employers for staff  Energy’s labs can hire scientific personnel with the flexibility of private companies, while NASA centers were previously provided hiring flexibilities by Congress in 2004 to facilitate staff hiring  While Energy and NASA’s research entities follow their specific governance models, there are broad characteristics common across these agencies as well as DOD  Table 2 illustrates that while research centers are largely government-owned, the government is not always the operator  As we have reported, Department of Energy national labs are primarily operated by for-profit, non-profit and university FFRDC contractors using management and operating contracts, which are competed on a limited basis  Energy’s funding sponsors and headquarters officials are required to reevaluate FFRDC performance in increments not to exceed 5 years by federal acquisition regulations, which inform future decisions to renew the agreement  In 1990, we designated Energy’s contract management—including both contract administration and project management—a high-risk area because of Energy’s inadequate management and oversight of contractors, leaving the department vulnerable to fraud, waste, abuse, and mismanagement  In 2009, we subsequently narrowed the focus of Energy’s high-risk designation to the National Nuclear Security Administration and Office of Environmental Management, which together oversee four national labs  Further, in our 2017 High Risk report, we found that these two agencies had made progress in addressing our contract management concerns, but we identified continued problems with the agencies having sufficient capacity to mitigate contract and project management risks  Also, we found that they had demonstrated little progress in addressing contract management challenges, particularly in the area of financial management  The Department of Energy uses performance-based management and operating contracts, which have been subject to limited competition, with universities, non-profit companies and for-profit companies to operate the national labs on government-owned property  These contractor-operated FFRDCs provide the vast majority of Energy’s science and technology capacity, rather than supplementing the work of government-operated labs like DOD’s FFRDCs  Energy has depended on the expertise of private organizations to execute its science and technology work since the Manhattan Project produced the first atomic bomb during World War II  The Spallation Neutron Source is an experimental research facility at Oak Ridge National Laboratory—a government-owned contractor-operated laboratory  The Spallation Neutron Source includes the world’s most powerful pulsed-neutron sources and provides information about the structure and properties of materials that cannot be obtained by other means  The Spallation Neutron Source is a user facility whereby researchers from universities, national laboratories, and industry submit proposals, which are peer- reviewed and must compete for time at the user facility  The primary focus of each lab varies based on its expertise and facilities  Energy largely oversees its lab contractors through its headquarters program offices, which include the National Nuclear Security Administration, Office of Science, the Office of Fossil Energy, as well as co-located government field offices  Office of Science-sponsored labs primarily support scientific research for energy and physical sciences, while the National Nuclear Security Administration-sponsored (NNSA) labs primarily focus on nuclear weapons and related science and technologies  Energy also oversees its lab contractors’ activities through on-site Energy oversight offices that work alongside lab management at each FFRDC  Some labs specialize in earlier-phase science, while other labs work on later-phase nuclear weapons technologies in addition to earlier-phase science  As Figure 10 shows, these labs are spread across the United States  Energy has only one government-operated and government-owned lab, the National Energy Technology Laboratory  Key differences between Energy’s contractor-operated and government-operated governance models are described in table 3  Energy’s FFRDCs use their own personnel systems, which Energy officials stated provide more flexibility for hiring and retaining qualified staff  Management within these FFRDCs can move staff in or out of scientific areas more quickly than government labs can, thereby providing greater agility to meet Energy’s needs in emerging science areas  For example, Energy’s lab oversight staff at Oak Ridge National Laboratory told us that use of lab contractors’ human resources management systems allows for workforce flexibilities to meet Energy’s needs  While these contractors have leeway in managing their human resources systems, Energy’s headquarters maintains oversight—through its contracting officers—over employee compensation  Energy’s FFRDC contractors manage and operate nearly all of the department’s government-owned national lab facilities—including day-to- day management of government-controlled facilities and real property  Lab operators used funding to complete minor construction projects, which cost $10 million or less  This funding comes from a percentage of science and technology projects’ funding, requires local Energy oversight office approval, and has streamlined project management requirements  In contrast, major infrastructure upgrades are funded through relatively long and complex line-item funding processes, and projects over $50 million are subject to more rigorous project management requirements  Energy’s labs use a small portion of their funding to initiate discretionary projects for science and technologies that will benefit sponsors in the long-term by maintaining the scientific and technical vitality of the laboratories  To maintain and enhance lab expertise, the National Defense Authorization Act for Fiscal Year 1991 authorized Energy’s contractor-operated labs receiving funding for national security programs to use a percentage of lab funds to perform lab-directed R&D of a creative and innovative nature  The actual percentages allowed to be used for lab-directed R&D are subject to Energy’s approval  Energy’s entities sponsor most national lab projects based on their needs and lab expertise  Typically, earlier foundational science projects are funded through a process whereby funding sponsors issue calls for proposals to Energy’s national labs  Interested scientific teams at labs provide proposals to conduct these projects for sponsor consideration  Sponsors then assess proposals for scientific merit and decide which teams receive funding to execute their projects  NNSA provides funding for later-phase nuclear technology development projects to its labs after agreement is made regarding objectives and deliverables for specific projects, according to Lawrence Livermore National Laboratory officials  Despite their flexibilities with regard to hiring and infrastructure decisions compared to government operated labs, Energy’s lab leadership and government oversight officials noted human resource and facilities related challenges, such as: Sufficiently compensating staff located in high-cost of living areas  For example, the labor market of the San Francisco area, where several Department of Energy national labs are located, is highly competitive for employers  Commercial firms offer salaries and compensation that typically exceed those of government-funded, contractor-operated labs, although Energy’s contractors have more pay flexibility than is allowed for Energy’s government employees  Obtaining government clearances in a timely manner  Energy’s NNSA oversight officials and lab management staff, in particular, cited this challenge, which they stated has led to a backlog of people needing clearances  Government hiring freeze constraining overall hiring  Officials at Energy’s government-operated National Energy Technology Laboratory reported that as a result of a government hiring freeze, the lab has increasingly hired private contractor staff to the point that more than half of the total lab staff is now comprised of contractor employees  Major infrastructure challenges at Energy labs  Energy reported in July 2018 that over half of all national lab buildings are in either substandard or inadequate condition  The Energy Inspector General also identified infrastructure modernization as one of Energy’s top management challenges  This finding followed a mandated commission’s report in 2015 that facilities and infrastructure across Energy’s national lab network were hampered by high levels of deferred maintenance and excess facilities  The majority of NASA’s science and technology facilities are operated within the governance framework of government-operated research centers, similarly to most DOD labs  While government-operated, they have been granted additional legislative flexibilities for hiring employees beyond those normally available to government entities  NASA locates its science and technology staff at four government- operated research centers, one contractor-operated FFRDC, and at five NASA centers assisting space and space flight development  These centers and the Jet Propulsion Laboratory—NASA’s sole sponsored FFRDC—execute NASA’s research missions including technology development in exploration and aeronautics  The differences between these two governance approaches are described in Table 4  NASA also works with Johns Hopkins University Applied Physics Lab, a UARC, to develop major space flight missions  The NASA Glenn Research Center—a government- operated laboratory—is currently developing solar electric propulsion technologies intended to allow manned and unmanned spacecraft to be propelled far beyond earth orbit using solar power  This project is developing large, flexible, radiation-resistant solar arrays that can be unfurled to capture solar energy powering fuel-efficient electrostatic thrusters  Scientists expect a system-level flight test within the next decade to demonstrate key technologies supporting NASA’s Lunar Orbital Platform-Gateway project, a platform to mature necessary short- and long-duration deep space exploration capabilities  Headquarters, including funding sponsors providing oversight for their individual projects  Title 51, Chapters 201 and 203 of U S  Code and technology efforts with DOD and other organizations, including use of NASA lab and test facilities  Operated by university contractor having sole source contract  Not permitted to compete against industry, except for operation of an FFRDC  property (originally part of DOD)  5-year contract renewable to 10 years total  Headquarters, including funding sponsors providing oversight for their individual projects  Title 51, Chapters 201 and 203 of U S  Code; 10 U S C  § 2304 (c) (3)(B) ; Federal Acquisition Regulation § 35 017 based NASA oversight staff  sponsors seeking FFRDC assistance with NASA approval  “Lab” as used in this context refers to science and technology organizations equivalent to NASA Research Centers, DOD UARCs and FFRDCs  Mission leadership officials at NASA Headquarters—including the Associate Administrators for Aeronautics Research, Human Exploration, Science and Space Technology—oversee NASA’s research centers as well as the Jet Propulsion Laboratory  These officials are responsible for technology programs providing funds to research centers and the Jet Propulsion Laboratory to support their specific mission areas  NASA’s science and technology project portfolios are based on the requirements and priorities established by NASA’s leaders in collaboration with key stakeholders in academia and industry among others  In planning their science and technology work, NASA’s Glenn Research Center officials noted that NASA research center directors consider the capabilities and resources—including staff and facilities—of other research centers to minimize redundant work  NASA depends on a highly skilled civil servant and contractor workforce to plan and execute its missions  Congress provided NASA with additional human resource authorities beyond those otherwise allowed for federal government personnel through the NASA Flexibility Act of 2004  We found in September 2008 that NASA sought this flexibility to ensure that it could hire and retain the workforce it desired  This law consisted of multiple provisions to address a range of human capital challenges and to strengthen all levels of the workforce  The provisions included incentives—including compensation—to allow NASA to compete successfully in the labor market with the private sector and reshape its workforce more effectively to support the Agency’s mission  NASA also employs a significant contractor workforce across its different centers  Glenn Research Center officials we interviewed stated their portfolio of science and technology projects—and funding—mostly aligns with NASA’s top requirements and priorities  They, along with NASA sponsors, create technology roadmaps and investment plans to determine their future projects  NASA policy requires that NASA’s scientific teams offer proposals for potential research and science and technology projects  This is similar in some ways to how many DOD and Energy centers must find sponsors willing to fund specific technology development projects, rather than receiving technology development funding for a given year  These proposals are reviewed by peer review teams, who identify for selecting officials those proposals they believe have the most scientific merit  Ames Research Center officials said they believe this process can foster innovation, encourage employees to keep skills honed, and mitigate complacency  Glenn Research Center officials said that while most of the work they conduct is for sponsored applied research or advanced technology development, about 2 percent of their science and technology budget is spent on early-stage scientific innovation  Recommended projects of this nature proposed by the research center are typically approved by headquarters officials, according to these Glenn officials  NASA provides technical grants for basic research and applied science to university scientists nationwide on a competitive basis, and also funds similar research done internally at research centers  As with DOD and Energy’s research centers, NASA officials have identified some key operating challenges, including: Aging infrastructure and facilities  The NASA Inspector General listed infrastructure area as one of the top five management and performance challenges facing NASA  Further, the Inspector General identified deficiencies with facilities planning and reported that about 80 percent of facilities at three of four NASA research centers are over 50 years old, while about half of the facilities at the Jet Propulsion Laboratory and the fourth research center are that old  Infrastructure projects and upgrades of $1 million or less are undertaken by research center management instead of at the NASA headquarters level  Construction above this threshold has significantly more requirements and is approved by NASA headquarters  Glenn Research Center officials indicated it is difficult to obtain funding for projects that exceed the minor infrastructure threshold, in part, due competition with major construction of facilities proposals from across the agency for limited funds  As a result, they put most of their efforts into sustaining existing infrastructure  Workforce shortages in key technical areas  As we found in May 2018, NASA has experienced workforce challenges on several major projects such as the Mars 2020 and Europa Clipper projects  Also, over 40 percent of NASA’s workforce is either eligible to retire now or will be eligible in the next 5 years  NASA headquarters officials noted that NASA’s workforce is aging because NASA has a low attrition rate—about 4 percent annually—and high numbers of staff stay several years beyond retirement  Further, in 2017, the NASA Inspector General found gaps in NASA’s workforce planning for specific capability areas and how workforce plans would meet future needs, and recommended that NASA establish standardized guidance defining the data and analyses for these planning efforts  NASA concurred with and identified its plan to implement this recommendation  However, NASA has not implemented this recommendation, according to the NASA Inspector General’s latest semiannual report to Congress  Congress provided DOD lab directors with key authorities to foster targeted, timely investments in the most pressing technology areas  Lab directors have used these authorities—such as laboratory initiated research and direct hire authorities—to varying degrees, but more needs to be done to facilitate innovation and efficiency  Specifically, service specific obstacles in the Air Force, Navy, and Army impede lab directors from capitalizing on laboratory initiated research authority to a greater extent  Service leadership can take actions to better understand and potentially remove barriers to more fully use laboratory initiated research tools  We are making the following three recommendations to DOD: The Secretary of the Air Force should assess the potential costs and benefits of implementing accounting system improvements that would allow the Air Force Research Laboratory to charge customers a fixed percentage fee on provided science and technology activities to the extent allowed under the laboratory initiated research authority  (Recommendation 1) The Secretary of the Navy should clarify whether and how to use the laboratory initiated research authority within the Capital Investment Program  (Recommendation 2) The Secretary of the Army should assess existing Army policy for laboratory initiated research authority and determine whether to implement changes to eliminate disincentives for lab usage of the authority  (Recommendation 3) We provided a draft of this report to DOD, Energy, and NASA for review and comment  Energy and NASA did not provide any comments on the draft report  In DOD’s written comments, reproduced in appendix III, DOD concurred with our three recommendations  Further, in its response to our third recommendation, DOD stated that the Army plans to initiate a study by January 2, 2019, regarding its use of the laboratory initiated research authority  According to DOD, the Army’s study will identify potential opportunities for policy improvements  We are sending copies of this report to the appropriate congressional committees and offices; the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Secretary of Energy; and the NASA Administrator  In addition, the report will be made available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions concerning this report, please contact me at (202) 512-4841  Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report  Staff members making key contributions to the report are listed in appendix IV  This report examines (1) how the Department of Defense (DOD) labs have used selected legislative authorities to foster innovation and efficiency and identify what barriers impede their use; (2) identifies and describes governance models used by selected DOD-sponsored federally funded research centers and university affiliated research centers; and (3) identifies and describes governance models used non-defense labs, specifically at the Department of Energy (Energy) and National Aeronautics and Space Administration (NASA)  To address the first objective, we selected four specific authorities for our review based on previous work identifying science and technology best practices and expedited lab hiring: Laboratory Initiated Research Authority  The authority provided in Section 219 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, as implemented, provides lab directors with flexibility to fund projects in four allowable categories: basic and applied research; technology transition; workforce development; and revitalization, recapitalization, or repair or minor military construction of lab infrastructure  Laboratory Enhancement Pilot Program  Section 233 of the National Defense Authorization Act for Fiscal Year 2017 established a pilot program for lab directors to propose alternative and innovative methods that might lead to more effectively managing and operating labs and authorized lab directors to waive any regulation, restriction, requirement, guidance, policy, procedure, or departmental instruction that would affect implementation of these methods unless such implementation would be prohibited by a provision of an existing statute or common law  Direct Hire Authority  Four types of direct hire authorities authorized by Congress since 2008 are intended to provide a streamlined and accelerated hiring process to allow the labs to successfully compete with private industry and academia for high-quality scientific, engineering, and technician talent  Micro-purchase Authority  The Federal Acquisition Regulation states a preference for government agencies, to purchase and pay for micro-purchases of supplies or services using the government-wide commercial purchase card up to and at the micro-purchase threshold, but micro-purchases may be conducted using any of the simplified acquisition methods  While the FAR micro-purchase threshold was generally $3,500 at the time of our review, Congress increased this threshold to $10,000 for activities of DOD science and technology reinvention laboratories in Section 217 the National Defense Authorization Act for Fiscal Year 2017  Although Congress has provided additional legislative authorities to defense lab directors to address hiring, infrastructure, and technology transition challenges, the authorities that we covered in our review are the ones that our prior and current work have shown are currently, or have the potential to be, the most critical for supporting science and technology reinvention laboratories’ innovation mission within DOD labs  DOD lab leaders use these authorities to flexibly fund projects intended to facilitate research and development; propose alternative and innovative methods that might lead to more effective lab management; directly hire personnel at DOD labs including students currently enrolled in science, technology, engineering, and mathematics (STEM) programs; and expand critical science and technology purchases using simplified acquisition methods  To identify the extent to which DOD laboratories have used these authorities as well as to identify what potential barriers existed to using these authorities, we administered a survey to 44 STRL directors (or their equivalent) to collect information on the use of these specific authorities, their perceptions about the effectiveness of those authorities, and their perceptions about any barriers to using these authorities  The members of the population surveyed were the 44 defense laboratories defined as science and technology reinvention laboratories  For the purposes of our review, we defined laboratories as inclusive of Air Force technical directorates (10), Army warfare centers (17), and Navy warfare centers (17)  We emailed questionnaires to the laboratories beginning in late March 2018, and survey data collection ended in early May 2018, with 31 labs returning completed questionnaires, for an overall response rate of 71 percent at the laboratory level  We took steps to minimize the potential errors that the practical difficulties of conducting any survey may introduce  Nonresponse error can result when a survey fails to capture information from all population members selected into a survey sample  Of the 13 questionnaires not returned, 4 were Army warfare centers, and 9 were Air Force research directorates  Throughout the data collection period, we made multiple follow-up attempts by email and phone to those labs not yet responding  The Air Force Research Laboratory (AFRL) provided a single survey response for the entire laboratory enterprise  Not all returned questionnaires may have answers to every question applicable to a respondent  However, this question-level nonresponse did not exceed one for any of the questions applicable to all 31 labs  Because we selected the entire population of laboratories for our survey, our estimates are not subject to sampling error  We developed our list of the 44 labs in our population in consultation with DOD, and are confident that none were left out, so our or survey has no known sources of coverage error  We conducted pretests of the draft questionnaire with 3 laboratories in the population and made revisions to reduce the possibility of measurement error from differences in how questions were interpreted and the sources of information available to respondents  After reviewing the answers received, we also followed up as necessary with respondents to clarify apparent inconsistencies or other possible misreports, and made changes to responses where corrections were needed  A second, independent analyst checked the accuracy of all computer analyses to minimize the likelihood of errors in data processing  To obtain additional information on this objective, we reviewed relevant legislation which established or amended these authorities and reviewed applicable DOD and service policy documentation  Further, we collected military service related information on the usage of two authorities, such as: Spending data on the use of the laboratory initiated research authority  We gathered this information from DOD-mandated reports to Congress on the use of this authority and military service officials  We determined these data to be reliable based on reviews of agency documentation collected and interviews with agency officials  Data on the usage of direct hire authorities by the service laboratories  We collected direct hire data from each of the military services including the number of direct hire authority candidates hired as well as the number of direct hire positions the laboratories were authorized to hire  We determined these data to be reliable based on reviews of agency documentation collected and interviews with agency officials  We also used select findings from our May 2018 report where we evaluated DOD’s use of hiring authorities, including direct hire authority  More information about the scope and methodology of our prior work can be found in that report  In addition, we also collected information on military service proposals to utilize the laboratory enhancement pilot program authority  To obtain further information on department- and service-level involvement in and perspectives of defense laboratory authorities and challenges, we interviewed officials responsible for the management, execution, and oversight of DOD’s science and technology enterprise, including military service labs  At the Office of the Secretary of Defense and military department headquarters level, those responsible for the management and oversight of science and technology activities, we met with officials from the: Office of the Assistant Secretary of Defense for Research and DOD Defense Laboratories Office; Office of the Deputy Assistant Secretary of the Army for Research and Office of the Deputy Assistant Secretary of the Air Force for Science, Technology, and Engineering; Office of the Assistant Secretary of the Air Force for Financial Office of the Deputy Assistant Secretary of the Navy for Research, Development, Test, and Evaluation; and Office of the Budget, within the Office of the Assistant Secretary of the Navy for Financial Management and Comptroller We also met with military department lab officials responsible for the management and execution of science and technology activities from the: Army Research, Development and Engineering Command; Army Research Laboratory; Army Aviation and Missile Research, Development, and Engineering Air Force Research Laboratory; Naval Research Laboratory; Naval Surface Warfare Center, Headquarters; and Naval Surface Warfare Center, Carderock Division To identify and describe governance models used by selected DOD- sponsored federally funded research centers (FFRDCs) and university affiliated research centers (UARCs), we focused our review on the 3 FFRDCs designated as research and development labs as well as all 13 UARCS sponsored by DOD entities  We reviewed appropriate sections of the FAR language related to FFRDCs and UARCs, DOD guidance for working with FFRDCs and UARCs, relevant contracts, and performance assessments  Further, we met with officials from the office of the Deputy Director, OSD Studies and Federally Funded Research & Development Centers Management and Office to discuss overall FFRDC and UARC management, policies, and challenges facing FFRDCs and UARCs  We interviewed officials at selected research and development FFRDCs and UARCS to discuss their experience conducting DOD research and interactions with their customers, such as defense program executive offices  We met with officials at the two major research and development lab FFRDCs—The Lincoln Laboratory at the Massachusetts Institute of Technology (MIT) and the Software Engineering Institute at Carnegie Mellon University  We also selected a university affiliated research center sponsored by the Army and Navy: The Applied Physics Laboratory at Johns Hopkins University and the Institute for Soldier Nanotechnologies also at the MIT  To identify and describe governance models by non-defense labs, we selected Energy and NASA to focus our efforts  We identified 17 Energy national labs and 4 NASA research centers conducting basic and applied research similar to DOD labs  These agencies, along with DOD, represent 3 of the top 4 agencies in terms of average federal research and development spending from fiscal years 2015 to 2017  In our August 2016 GAO Technology Readiness Assessment Guide, we drew heavily from DOD, NASA, and Energy for best practices, terminology, and examples  This contributed to our decision to focus on Energy and NASA’s research entities in this laboratory governance review  We did not include the fourth agency—the National Institutes of Health—in our review because it is not as similar to DOD  We also reviewed relevant Energy and NASA guidance as well as relevant FAR sections  At Energy, we met with officials from the National Nuclear Security Administration which is semi-autonomous entity within Energy responsible for managing the nation’s nuclear weapons and nuclear security  We also met with Officials from the Office of Science, a program office responsible for supporting energy related fundamental science and research  To gain further insights on operating structures, funding arrangements, and their overall experience we met with lab leadership at selected Energy labs which were chosen based on initial discussions with agency officials and our review of past GAO work: Oak Ridge National Laboratory, Lawrence Berkeley National Laboratory, Lawrence Livermore National Laboratory, and National Energy Technology Laboratory (the sole Energy government owned and operated laboratory) We also met with leadership from Battelle Memorial Institute, which is the sole or joint contract manager for five Energy national labs including Oak Ridge National Laboratory  In addition, Battelle is an integrated subcontractor at Lawrence Livermore National Laboratory  At NASA, we met with officials with NASA’s Science Mission Directorate and Mission Support Directorate to discuss overall research center management and operations  We also leveraged ongoing and recently completed work at GAO to gain additional insight on NASA’s operations such as human capital management  Almost all of NASA’s research, space, and space flight centers conduct research and development activities  However, we focused our review on four research centers where NASA primarily conducts its aeronautics research, which has substantial overlap with DOD activities  To gain additional insight into the experience of lab leaders at NASA research centers, we met with officials at NASA’s Glenn Research Center and Ames Research Center  In addition, we also met with officials at the NASA Jet Propulsion Center, which is the only NASA-sponsored FFRDC  We conducted this performance audit from July 2017 to December 2018 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  Office of the Secretary of Defense (OSD) In addition to the contact named above, Christopher R  Durbin (Assistant Director); Charlie Shivers, III (Analyst-in-Charge); Emily Bond; Lorraine Ettaro; Carl Ramirez; Sylvia Schatz; Sean Seales; Brian Smith; and Robin Wilson made significant contributions to this report 

ground_truth: The U.S. Fourth National Climate Assessment, released in 2018, concluded that "the impacts of global climate change are already being felt in the United States and are projected to intensify in the future—but the severity of future impacts will depend largely on actions taken to reduce greenhouse gas [GHG] emissions and to adapt to the changes that will occur." Members of Congress and stakeholders articulate a wide range of perspectives over what to do, if anything, about GHG emissions, future climate change, and related impacts. If Congress were to consider establishing a program to reduce GHG emissions, one option would be to attach a price to GHG emissions with a carbon tax or GHG emissions fee. In the 115th Congress, Members introduced nine bills to establish a carbon tax or emissions fee program. However, many Members have expressed their opposition to such an approach. In particular, in the 115th Congress, the House passed a resolution "expressing the sense of Congress that a carbon tax would be detrimental to the United States economy." Multiple economic studies have estimated the emission reductions that particular carbon tax would achieve. For example, a 2018 study analyzed various impacts of four carbon tax rate scenarios: a $25/metric ton of CO2 and $50/metric ton of CO2 carbon tax, increasing annually by 1% and 5%. The study concluded that each of the scenarios would likely achieve the U.S. GHG emission reduction target pledged under the international Paris Agreement (at least in terms of CO2 emissions). A carbon tax system would generate a new revenue stream, the magnitude of which would depend on the scope and rate of the tax, among other factors. In 2018, the Congressional Budget Office (CBO) estimated that a $25/metric ton carbon tax would yield approximately $100 billion in its first year. CBO projected that federal revenue would total $3.5 trillion in FY2019. Policymakers would face challenging decisions regarding the distribution of the new carbon tax revenues. Congress could apply revenues to support a range of policy objectives but would encounter trade-offs among the objectives. The central trade-offs involve minimizing economy-wide costs, lessening the costs borne by specific groups—particularly low-income households and displaced workers in certain industries (e.g., coal mining)—and supporting other policy objectives. A primary argument against a carbon tax regards it potential economy-wide impacts, often measured as impacts to the U.S. gross domestic product (GDP). Some may argue that projected impacts should be compared with the climate benefits achieved from the program as well as the estimated costs of taking no action. The potential impacts would depend on a number of factors, including the program's magnitude and design and, most importantly, the use of carbon tax revenues. In general, economic literature finds that some of the revenue applications would reduce the economy-wide costs from a carbon tax but may not eliminate them entirely. In addition, some studies cite particular economic modeling scenarios in which certain carbon tax revenue applications produce a net increase in GDP compared to a baseline scenario. These scenarios involve using carbon tax revenues to offset reductions in other tax rates (e.g., corporate income or payroll taxes). Although economic models generally indicate that these particular revenue applications would yield the greatest benefit to the economy overall, the models also find that lower-income households would likely face a disproportionate impact under such an approach. As lower-income households spend a greater proportion of their income on energy needs (electricity, gasoline), these households are expected to experience disproportionate impacts from a carbon tax if revenues were not recycled back to them in some fashion (e.g., lump-sum distribution). A price on GHG emissions could create a competitive disadvantage for some industries, particularly "emission-intensive, trade-exposed industries." Policymakers have several options to address this concern, including establishing a "border carbon adjustment" program, which would levy a fee on imports from countries without comparable GHG reduction programs. Alternatively, policymakers could allocate (indefinitely or for a period of time) some of the carbon tax revenues to selected industry sectors or businesses. Relatedly, a carbon tax system is projected to disproportionately impact fossil fuel industries, particularly coal, and the communities that rely on their employment. To alleviate these impacts, policymakers may consider using some of the revenue to provide transition assistance to employees or affected communities.