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



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

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: This report provides background information and issues for Congress on multiyear procurement (MYP) and block buy contracting (BBC), which are special contracting mechanisms that Congress permits the Department of Defense (DOD) to use for a limited number of defense acquisition programs  Compared to the standard or default approach of annual contracting, MYP and BBC have the potential for reducing weapon procurement costs by a few or several percent  Potential issues for Congress concerning MYP and BBC include whether to use MYP and BBC in the future more frequently, less frequently, or about as frequently as they are currently used; whether to create a permanent statute to govern the use of BBC, analogous to the permanent statute that governs the use of MYP; and whether the Coast Guard should begin making use of MYP and BBC  Congress's decisions on these issues could affect defense acquisition practices, defense funding requirements, and the defense industrial base  A contract that the Air Force has for the procurement of Evolved Expendable Launch Vehicle (EELV) Launch Services (ELS) has sometimes been referred to as a block buy, but it is not an example of block buy contracting as discussed in this report  The Air Force in this instance is using the term block buy to mean something different  This report does not discuss the ELS contract  (For additional discussion, see " Terminology Alert: Block Buy Contracting vs  Block Buys " below ) In discussing MYP, BBC, and incremental funding, it can be helpful to distinguish contracting mechanisms from funding approaches  The two are often mixed together in discussions of DOD acquisition, sometimes leading to confusion  Stated briefly Funding approaches are ways that Congress can appropriate funding for weapon procurement programs, so that DOD can then put them under contract  Examples of funding approaches include traditional full funding (the standard or default approach), incremental funding, and advance appropriations  Any of these funding approaches might make use of advance procurement (AP) funding  Contracting mechanisms are ways for DOD to contract for the procurement of weapons systems, once funding for those systems has been appropriated by Congress  Examples of contracting mechanisms include annual contracting (the standard or default DOD approach), MYP, and BBC  Contracting mechanisms can materially change the total procurement cost of a ship  The use of a particular funding approach in a defense acquisition program does not dictate the use of a particular contracting mechanism  Defense acquisition programs consequently can be implemented using various combinations of funding approaches and contracting mechanisms  Most DOD weapon acquisition programs use a combination of traditional full funding and annual contracting  A few programs, particularly certain Navy shipbuilding programs, use incremental funding as their funding approach  A limited number of DOD programs use MYP as their contracting approach, and to date three Navy shipbuilding programs have used BBC as their contracting approach  The situation is summarized in Table 1   This report focuses on the contracting approaches of MYP and BBC and how they compare to annual contracting  Other CRS reports discuss the funding approaches of traditional full funding, incremental funding, and advance appropriations  What is MYP, and how does it differ from annual contracting? MYP, also known as multiyear contracting, is an alternative to the standard or default DOD approach of annual contracting  Under annual contracting, DOD uses one or more contracts for each year's worth of procurement of a given kind of item  Under MYP, DOD instead uses a single contract for two to five years' worth of procurement of a given kind of item, without having to exercise a contract option for each year after the first year  DOD needs congressional approval for each use of MYP  To illustrate the basic difference between MYP and annual contracting, consider a hypothetical DOD program to procure 20 single-engine aircraft of a certain kind over the 5-year period FY2018-FY2022, at a rate of 4 aircraft per year: Under annual contracting , DOD would issue one or more contracts for each year's procurement of four aircraft  After Congress funds the procurement of the first four aircraft in FY2018, DOD would issue one or more contracts (or exercise a contract option) for those four aircraft  The next year, after Congress funds the procurement of the next four aircraft in FY2019, DOD would issue one or more contracts (or exercise a contract option) for those four aircraft, and so on  Under MYP , DOD would issue one contract covering all 20 aircraft to be procured during the 5-year period FY2018-FY2022  DOD would award this contract in FY2018, at the beginning of the five-year period, following congressional approval to use MYP for the program, and congressional appropriation of the FY2018 funding for the program  To continue the implementation of the contract over the next four years, DOD would request the FY2019 funding for the program as part of DOD's proposed FY2019 budget, the FY2020 funding as part of DOD's proposed FY2020 budget, and so on  How much can MYP save? Compared with estimated costs under annual contracting, estimated savings for programs being proposed for MYP have ranged from less than 5% to more than 15%, depending on the particulars of the program in question, with many estimates falling in the range of 5% to 10%  In practice, actual savings from using MYP rather than annual contracting can be difficult to observe or verify because of cost growth during the execution of the contract that was caused by developments independent of the use of MYP rather than annual contracting  A February 2012 briefing by the Cost Assessment and Program Evaluation (CAPE) office within the Office of the Secretary of Defense (OSD) states that "MYP savings analysis is difficult due to the lack of actual costs on the alternative acquisition path, i e , the path not taken " The briefing states that CAPE up to that point had assessed MYP savings for four aircraft procurement programs—F/A-18E/F strike fighters, H-60 helicopters, V-22 tilt-rotor aircraft, and CH-47F helicopters—and that CAPE's assessed savings ranged from 2% to 8%  A 2008 Government Accountability Office (GAO) report stated that DOD does not have a formal mechanism for tracking multiyear results against original expectations and makes few efforts to validate whether actual savings were achieved by multiyear procurement  It does not maintain comprehensive central records and historical information that could be used to enhance oversight and knowledge about multiyear performance to inform and improve future multiyear procurement (MYP) candidates  DOD and defense research centers officials said it is difficult to assess results because of the lack of historical information on multiyear contracts, comparable annual costs, and the dynamic acquisition environment  How does MYP potentially save money? Compared to annual contracting, using MYP can in principle reduce the cost of the weapons being procured in two primary ways: Contractor optimization of workforce and production facilities   An MYP contract gives the contractor (e g , an airplane manufacturer or shipbuilder) confidence that a multiyear stream of business of a known volume will very likely materialize  This confidence can permit the contractor to make investments in the firm's workforce and production facilities that are intended to optimize the facility for the production of the items being procured under the contract  Such investments can include payments for retaining or training workers, or for building, expanding, or modernizing production facilities  Under annual contracting, the manufacturer might not have enough confidence about its future stream of business to make these kinds of investments, or might be unable to convince its parent firm to finance them  E conomic order quan tity (EOQ) purchases of selected long-leadtime components  Under an MYP contract, DOD is permitted to bring forward selected key components of the items to be procured under the contract and to purchase the components in batch form during the first year or two of the contract  In the hypothetical example introduced earlier, using MYP could permit DOD to purchase, say, the 20 engines for the 20 aircraft in the first year or two of the 5-year contract  Procuring selected components in this manner under an MYP contract is called an economic order quantity (EOQ) purchase  EOQ purchases can reduce the procurement cost of the weapons being procured under the MYP contract by allowing the manufacturers of components to take maximum advantage of production economies of scale that are possible with batch orders  What gives the contractor confidence that the multiyear stream of business will materialize? At least two things give the contractor confidence that DOD will not terminate an MYP contract and that the multiyear stream of business consequently will materialize: For a program to qualify for MYP, DOD must certify, among other things, that the minimum need for the items to be purchased is expected to remain substantially unchanged during the contract in terms of production rate, procurement rate, and total quantities  Perhaps more important to the contractor, MYP contracts include a cancellation penalty intended to reimburse a contractor for costs that the contractor has incurred (i e , investments the contractor has made) in anticipation of the work covered under the MYP contract  The undesirability of paying a cancellation penalty acts as a disincentive for the government against canceling the contract  (And if the contract is canceled, the cancellation penalty helps to make the contractor whole ) Is there a permanent statute governing MYP contracting? There is a permanent statute governing MYP contracting—10 U S C  2306b  The statute was created by Section 909 of the FY1982 Department of Defense Authorization Act ( S  815 / P L  97-86 of December 1, 1981), revised and reorganized by Section 1022 of the Federal Acquisition Streamlining Act of 1994 ( S  1587 / P L  103-355 of October 13, 1994), and further amended on several occasions since  For the text of 10 U S C  2306b, see Appendix A   DOD's use of MYP contracting is further governed by DOD acquisition regulations  Under this statute, what criteria must a program meet to qualify for MYP? 10 U S C  2306b(a) states that to qualify for MYP, a program must meet several criteria, including the following: Significant savings  DOD must estimate that using an MYP contract would result in "significant savings" compared with using annual contracting  Realistic cost estimates   DOD's estimates of the cost of the MYP contract and the anticipated savings must be realistic  Stable need for the items  DOD must expect that its minimum need for the items will remain substantially unchanged during the contract in terms of production rate, procurement rate, and total quantities  Stable design for the items   The design for the items to be acquired must be stable, and the technical risks associated with the items must not be excessive  10 U S C  includes provisions requiring the Secretary of Defense or certain other DOD officials to find, determine, or certify that these and other statutory requirements for using MYP contracts have been met, and provisions requiring the heads of DOD agencies to provide written notifications of certain things to the congressional defense committees 30 days before awarding or initiating an MYP contract, or 10 days before terminating one  10 U S C  2306b also requires DOD MYP contracts to be fixed-price type contracts  What is meant by " significant savings"? The amount of savings required under 10 U S C  2306b to qualify for using an MYP contract has changed over time; the requirement was changed from "substantial savings" to "significant savings" by Section 811 of the FY2016 National Defense Authorization Act ( S  1356 / P L  114-92 of November 25, 2015)  The joint explanatory statement for the FY2016 National Defense Authorization Act states the following regarding Section 811: Amendment relating to multiyear contract authority for acquisition of property (sec  811) The House bill contained a provision (sec  806) that would strike the existing requirement that the head of an agency must determine that substantial savings would be achieved before entering into a multiyear contract  The Senate amendment contained no similar provision  The Senate recedes with an amendment that would require that significant savings would be achieved before entering into a multiyear contract  The conferees agree that the government should seek to maximize savings whenever it pursues multiyear procurement  However, the conferees also agree that significant savings (estimated to be greater than $250 0 million), and other benefits, may be achieved even if it does not equate to a minimum of 10 percent savings over the cost of an annual contract  The conferees expect a request for authority to enter into a multiyear contract will include (1) the estimated cost savings, (2) the minimum quantity needed, (3) confirmation that the design is stable and the technical risks are not excessive, and (4) any other rationale for entering into such a contract  In addition, 10 U S C  2306b states the following: If for any fiscal year a multiyear contract to be entered into under this section is authorized by law for a particular procurement program and that authorization is subject to certain conditions established by law (including a condition as to cost savings to be achieved under the multiyear contract in comparison to specified other contracts) and if it appears (after negotiations with contractors) that such savings cannot be achieved, but that significant savings could nevertheless be achieved through the use of a multiyear contract rather than specified other contracts, the President may submit to Congress a request for relief from the specified cost savings that must be achieved through multiyear contracting for that program  Any such request by the President shall include details about the request for a multiyear contract, including details about the negotiated contract terms and conditions  What is meant by "stable design"? The term "stable design" is generally understood to mean that the design for the items to be procured is not expected to change substantially during the period of the contract  Having a stable design is generally demonstrated by having already built at least a few items to that design (or in the case of a shipbuilding program, at least one ship to that design) and concluding, through testing and operation of those items, that the design does not require any substantial changes during the period of the contract  What happens if Congress does not provide the annual funding requested by DOD to continue the implementation of the contract? If Congress does not provide the funding requested by DOD to continue the implementation of an MYP contract, DOD would be required to renegotiate, suspend, or terminate the contract  Terminating the contract could require the government to pay a cancellation penalty to the contractor  Renegotiating or suspending the contract could also have a financial impact  What effect does using MYP have on flexibility for making procurement changes? A principal potential disadvantage of using MYP is that it can reduce Congress's and DOD's flexibility for making changes (especially reductions) in procurement programs in future years in response to changing strategic or budgetary circumstances, at least without incurring cancellation penalties  In general, the greater the portion of DOD's procurement account that is executed under MYP contracts, the greater the potential loss of flexibility  The use of MYP for executing some portion of the DOD procurement account means that if policymakers in future years decide to reduce procurement spending below previously planned levels, the spending reduction might fall more heavily on procurement programs that do not use MYP, which in turn might result in a less-than-optimally balanced DOD procurement effort  How does Congress approve the use of MYP? Congress approves the use of MYP on a case-by-case basis, typically in response to requests by DOD  Congressional approval for DOD MYP contracts with a value of more than $500 million must occur in two places: an annual DOD appropriations act and an act other than the annual DOD appropriations act  In annual DOD appropriations acts, the provision permitting the use of MYP for one or more defense acquisition programs is typically included in the title containing general provisions, which typically is Title VIII  As shown in Table B-2 , since FY2011, it has been Section 8010  An annual national defense authorization act (NDAA) is usually the act other than an appropriations act in which provisions granting authority for using MYP contracting on individual defense acquisition programs are included  Such provisions typically occur in Title I of the NDAA, the title covering procurement programs  Provisions in which Congress approves the use of MYP for a particular defense acquisition program may include specific conditions for that program in addition to the requirements and conditions of 10 U S C  2306b  How often is MYP used? MYP is used for a limited number of DOD acquisition programs  As shown in the Appendix B , annual DOD appropriations acts since FY1990 typically have approved the use of MYP for zero to a few DOD programs each year  An August 28, 2017, press report states the following: The Pentagon's portfolio of active multiyear procurement contracts is on track to taper from $10 7 billion in fiscal year 2017—or more than 8 percent of DOD procurement spending—to $1 2 billion by FY-19, according to data recently compiled by the Pentagon comptroller for lawmakers  However, there are potential new block-buy deals in the works, including several large Navy deals  According to the Multiyear Procurement Contracts Report for FY-17, which includes data current as of June 27, seven major defense acquisition programs are being purchased through multiyear procurement contracts, collectively obligating the U S  government to spend $16 billion across the five-year spending plan with $14 5 billion of the commitments lashed to FY-17 and FY-18  In an interview published on January 13, 2014, Sean Stackley, the Assistant Secretary of the Navy for Research, Development, and Acquisition (i e , the Navy's acquisition executive), stated the following: What the industrial base clamors for is stability, so they can plan, invest, train their work force  It gives them the ability in working with say, the Street [Wall Street], to better predict their own performance, then meet expectations in the same fashion we try to meet our expectations with the Hill  It's emblematic of stability that we've got more multiyear programs in the Department of the Navy than the rest of the Department of Defense combined  We've been able to harvest from that significant savings, and that has been key to solving some of our budget problems  It's allowed us in certain cases to put the savings right back into other programs tied to requirements  A February 2012 briefing by the Cost Assessment and Program Evaluation (CAPE) office within the Office of the Secretary of Defense (OSD) shows that the total dollar value of DOD MYP contracts has remained more or less stable between FY2000 and FY2012 at roughly $7 billion to $13 billion per year  The briefing shows that since the total size of DOD's procurement budget has increased during this period, the portion of DOD's total procurement budget accounted for by programs using MYP contracts has declined from about 17% in FY2000 to less than 8% in FY2012  The briefing also shows that the Navy makes more use of MYP contracts than does the Army or Air Force, and that the Air Force made very little use of MYP in FY2010-FY2012  A 2008 Government Accountability Office (GAO) report stated the following: Although DOD had been entering into multiyear contracts on a limited basis prior to the 1980s, the Department of Defense Authorization Act, [for fiscal year] 1982, codified the authority for DOD to procure on a multiyear basis major weapon systems that meet certain criteria  Since that time, DOD has annually submitted various weapon systems as multiyear procurement candidates for congressional authorization  Over the past 25 years, Congress has authorized the use of multiyear procurement for approximately 140 acquisition programs, including some systems approved more than once  What is BBC, and how does it compare to MYP? BBC is similar to MYP in that it permits DOD to use a single contract for more than one year's worth of procurement of a given kind of item without having to exercise a contract option for each year after the first year  BBC is also similar to MYP in that DOD needs congressional approval for each use of BBC  BBC differs from MYP in the following ways: There is no permanent statute governing the use of BBC  There is no requirement that BBC be approved in both a DOD appropriations act and an act other than a DOD appropriations act  Programs being considered for BBC do not need to meet any legal criteria to qualify for BBC because there is no permanent statute governing the use of BBC that establishes such criteria  A BBC contract can cover more than five years of planned procurements  The BBC contracts that were used by the Navy for procuring Littoral Combat Ships (LCSs), for example, covered a period of seven years (FY2010-FY2016)  Economic order quantity (EOQ) authority does not come automatically as part of BBC authority because there is no permanent statute governing the use of BBC that includes EOQ authority as an automatic feature  To provide EOQ authority as part of a BBC contract, the provision granting authority for using BBC in a program may need to state explicitly that the authority to use BBC includes the authority to use EOQ  BBC contracts are less likely to include cancellation penalties  Given the one key similarity between BBC and MYP (the use of a single contract for more than one year's worth of procurement), and the various differences between BBC and MYP, BBC might be thought of as a less formal stepchild of MYP  When and why was BBC invented? BBC was invented by Section 121(b) of the FY1998 National Defense Authorization Act ( H R

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 2:  1119 / P L  105-85 of November 18, 1997), which granted the Navy the authority to use a single contract for the procurement of the first four Virginia (SSN-774) class attack submarines  The 4 boats were scheduled to be procured during the 5-year period FY1998-FY2002 in annual quantities of 1-1-0-1-1  Congress provided the authority granted in Section 121(b) at least in part to reduce the combined procurement cost of the four submarines  Using MYP was not an option for the Virginia-class program at that time because the Navy had not even begun, let alone finished, construction of the first Virginia-class submarine, and consequently could not demonstrate that it had a stable design for the program  When Section 121(b) was enacted, there was no name for the contracting authority it provided  The term block buy contracting came into use later, when observers needed a term to refer to the kind of contracting authority that Congress authorized in Section 121(b)  As discussed in the next section, this can cause confusion, because the term block buy was already being used in discussions of DOD acquisition to refer to something else  What's the difference between block buy cont r acting and block buys? In discussions of defense procurement, the term "block buy" by itself (without "contracting" at the end) is sometimes used to refer to something quite different from block buy contracting—namely, the simple act of funding the procurement of more than one copy of an item in a single year, particularly when no more than one item of that kind might normally be funded in a single year  For example, when Congress funded the procurement of two aircraft carriers in FY1983, and another two in FY1988, these acts were each referred to as block buys, because aircraft carriers are normally procured one at a time, several years apart from one another  This alternate meaning of the term block buy predates by many years the emergence of the term block buy contracting  The term block buy is still used in this alternate manner, which can lead to confusion in discussions of defense procurement  For example, for FY2017, the Air Force requested funding for procuring five Evolved Expendable Launch Vehicles (EELVs) for its EELV Launch Services (ELS) program  At the same time, Navy officials sometimes refer to the use of block buy contracts for the first four Virginia-class submarines, and in the LCS program, as block buys, when they might be more specifically referred to as instances of block buy contract ing   How much can BBC save, compared with MYP? BBC can reduce the unit procurement costs of ships by amounts less than or perhaps comparable to those of MYP, if the authority granted for using BBC explicitly includes authority for making economic order quantity (EOQ) purchases of components  If the authority granted for using BBC does not explicitly include authority for making EOQ purchases, then the savings from BBC will be less  Potential savings under BBC might also be less than those under MYP if the BBC contract does not include a cancellation penalty, or includes one that is more limited than typically found in an MYP contract, because this might give the contractor less confidence than would be the case under an MYP contract that the future stream of business will materialize as planned, which in turn might reduce the amount of money the contractor invests to optimize its workforce and production facilities for producing the items to be procured under the contract  How frequently has BBC been used? Since its use at the start of the Virginia-class program, BBC has been used very rarely  The Navy did not use it again in a shipbuilding program until December 2010, when it awarded two block buy contracts, each covering 10 LCSs to be procured over the six-year period FY2010-FY2015, to the two LCS builders  (Each contract was later amended to include an 11 th ship in FY2016, making for a total of 22 ships under the two contracts ) A third example is the John Lewis (TAO-205) class oiler program, in which the Navy is using a block buy contract to procure the first six ships in the program  A fourth example, arguably, is the Air Force's KC-46 aerial refueling tanker program, which is employing a fixed price incentive fee (FPIF) development contract that includes a "back end" commitment to procure certain minimum numbers of KC-46s in certain fiscal years  When might BBC be suitable as an alternative to MYP? BBC might be particularly suitable as an alternative to MYP in cases where using a multiyear contract can reduce costs, but the program in question cannot meet all the statutory criteria needed to qualify for MYP  As shown in the case of the first four Virginia-class boats, this can occur at or near the start of a procurement program, when design stability has not been demonstrated through the production of at least a few of the items to be procured (or, for a shipbuilding program, at least one ship)  What i s the difference between an MYP or block buy contract and a contract with options? The military services sometimes use contracts with options to procure multiple copies of an item that are procured over a period of several years  The Navy, for example, used a contract with options to procure Lewis and Clark (TAKE-1) class dry cargo ships that were procured over a period of several years  A contract with options can be viewed as somewhat similar to an MYP or block buy contract in that a single contract is used to procure several years' worth of procurement of a given kind of item  There is, however, a key difference between an MYP or block buy contract and a contract with options: In a contract with options, the service is under no obligation to exercise any of the options, and a service can choose to not exercise an option without having to make a penalty payment to the contractor  In contrast, in an MYP or block buy contract, the service is under an obligation to continue implementing the contract beyond the first year, provided that Congress appropriates the necessary funds  If the service chooses to terminate an MYP or block buy contract, and does so as a termination for government convenience rather than as a termination for contractor default, then the contractor can, under the contract's termination for convenience clause, seek a payment from the government for cost incurred for work that is complete or in process at the time of termination, and may include the cost of some of the investments made in anticipation of the MYP or block buy contract being fully implemented  The contractor can do this even if the MYP or block buy contract does not elsewhere include a provision for a cancellation penalty  As a result of this key difference, although a contract with options looks like a multiyear contract, it operates more like a series of annual contracts, and it cannot achieve the kinds of savings that are possible under MYP and BBC  Potential issues for Congress concerning MYP and BBC include whether to use MYP and BBC in the future more frequently, less frequently, or about as frequently as they are currently used; and whether to create a permanent statute to govern the use of BBC, analogous to the permanent statute that governs the use of MYP  Should MYP and BBC in the future be used more frequently, less frequently, or about as frequently as they are currently used? Supporters of using MYP and BBC more frequently in the future might argue the following: Since MYP and BBC can reduce procurement costs, making greater use of MYP and BBC can help DOD get more value out of its available procurement funding  This can be particularly important if DOD's budget in real (i e , inflation-adjusted) terms remains flat or declines in coming years, as many observers anticipate  The risks of using MYP have been reduced by Section 811 of the FY2008 National Defense Authorization Act ( H R  4986 / P L  110-181 of January 28, 2008), which amended 10 U S C  2306b to strengthen the process for ensuring that programs proposed for MYP meet certain criteria (see " Permanent Statute Governing MYP ")  Since the value of MYP contracts equated to less than 8% of DOD's procurement budget in FY2012, compared to about 17% of DOD's procurement budget in FY2000, MYP likely could be used more frequently without exceeding past experience regarding the share of DOD's procurement budget accounted for by MYP contracts  Supporters of using MYP and BBC less frequently in the future, or at least no more frequently than now, might argue the following: Using MYP and BBC more frequently would further reduce Congress's and DOD's flexibility for making changes in DOD procurement programs in future years in response to changing strategic or budgetary circumstances  The risks of reducing flexibility in this regard are increased now because of uncertainties in the current strategic environment and because efforts to reduce federal budget deficits could include reducing DOD spending, which could lead to a reassessment of U S  defense strategy and associated DOD acquisition programs  Since actual savings from using MYP and BBC rather than annual contracting can be difficult to observe or verify, it is not clear that the financial benefits of using MYP or BBC more frequently in the future would be worth the resulting further reduction in Congress's and DOD's flexibility for making changes in procurement programs in future years in response to changing strategic or budgetary circumstances  Should Congress create a permanent statute to govern the use of BBC, analogous to the permanent statute (10 U S C  2306b) that governs the use of MYP? Supporters of creating a permanent statute to govern the use of BBC might argue the following: Such a statute could encourage greater use of BBC, and thereby increase savings in DOD procurement programs by giving BBC contracting a formal legal standing and by establishing a clear process for DOD program managers to use in assessing whether their programs might be considered suitable for BBC  Such a statute could make BBC more advantageous by including a provision that automatically grants EOQ authority to programs using BBC, as well as provisions establishing qualifying criteria and other conditions intended to reduce the risks of using BBC  Opponents of creating a permanent statute to govern the use of BBC might argue the following: A key advantage of BBC is that it is not governed by a permanent statute  The lack of such a statute gives DOD and Congress full flexibility in determining when and how to use BBC for programs that may not qualify for MYP, but for which a multiyear contract of some kind might produce substantial savings  Such a statute could encourage DOD program managers to pursue their programs using BBC rather than MYP  This could reduce discipline in DOD multiyear contracting if the qualifying criteria in the BBC statute are less demanding than the qualifying criteria in 10 U S C  2306b  Should the Coast Guard should begin making use of MYP and BBC? Although the Coast Guard is part of the Department of Homeland Security (DHS), the Coast Guard is a military service and a branch of the U S  Armed Forces at all times (14 U S C  1), and 10 U S C  2306b provides authority for using MYP not only to DOD, but also to the Coast Guard (and the National Aeronautics and Space Administration as well)  In addition, Section 311 of the Frank LoBiondo Coast Guard Authorization Act of 2018 ( S  140 / P L  115-282 of December 4, 2018) provides permanent authority for the Coast Guard to use block buy contracting with EOQ purchases of components in its major acquisition programs  The authority is now codified at 14 U S C  1137  As discussed earlier in this report, the Navy in recent years has made extensive use of MYP and BBC in its ship and aircraft acquisition programs, reducing the collective costs of those programs, the Navy estimates, by billions of dollars  The Coast Guard, like the Navy, procures ships and aircraft  In contrast to the Navy, however, the Coast Guard has never used MYP or BBC in its ship or aircraft acquisition programs  Instead, the Coast has tended to use contracts with options  As discussed earlier, although a contract with options looks like a multiyear contract, it operates more like a series of annual contracts, and it cannot achieve the kinds of savings that are possible under MYP and BBC  CRS in recent years has testified and reported on the possibility of using BBC or MYP in Coast Guard ship acquisition programs, particularly the Coast Guard's 25-ship Offshore Patrol Cutter (OPC) program and the Coast Guard's three-ship polar icebreaker program  CRS estimates that using multiyear contracting rather than contracts with options for the entire 25-ship OPC program could reduce the cost of the OPC program by about $1 billion  The OPC program is the Coast Guard's top-priority acquisition program, and it represents a once-in-a-generation opportunity to reduce the acquisition cost of a Coast Guard acquisition program by an estimated $1 billion  CRS also estimates that using BBC for a three-ship polar icebreaker program could reduce the cost of that program by upwards of $150 million  The Coast Guard has expressed some interest in using BBC in the polar icebreaker program, but its baseline acquisition strategy for that program, like its current acquisition strategy for the OPC program, is to use a contract with options  As part of its FY2020 budget submission, the Department of Defense is proposing continued funding for implementing several MYP contracts initiated in fiscal years prior to FY2020, but it has not highlighted any requests for authority for new MYP or block buy contracts for major acquisition programs that would begin in FY2020  Appendix A  Text of 10 U S C  2306b The text of 10 U S C  2306b as of April 29, 2019, is as follows: §2306b  Multiyear contracts: acquisition of property (a) In General -To the extent that funds are otherwise available for obligation, the head of an agency may enter into multiyear contracts for the purchase of property whenever the head of that agency finds each of the following: (1) That the use of such a contract will result in significant savings of the total anticipated costs of carrying out the program through annual contracts  (2) That the minimum need for the property to be purchased is expected to remain substantially unchanged during the contemplated contract period in terms of production rate, procurement rate, and total quantities  (3) That there is a reasonable expectation that throughout the contemplated contract period the head of the agency will request funding for the contract at the level required to avoid contract cancellation  (4) That there is a stable design for the property to be acquired and that the technical risks associated with such property are not excessive  (5) That the estimates of both the cost of the contract and the anticipated cost avoidance through the use of a multiyear contract are realistic  (6) In the case of a purchase by the Department of Defense, that the use of such a contract will promote the national security of the United States  (7) In the case of a contract in an amount equal to or greater than $500,000,000, that the conditions required by subparagraphs (C) through (F) of subsection (i)(3) will be met, in accordance with the Secretary's certification and determination under such subsection, by such contract  (b) Regulations -(1) Each official named in paragraph (2) shall prescribe acquisition regulations for the agency or agencies under the jurisdiction of such official to promote the use of multiyear contracting as authorized by subsection (a) in a manner that will allow the most efficient use of multiyear contracting  (2)(A) The Secretary of Defense shall prescribe the regulations applicable to the Department of Defense  (B) The Secretary of Homeland Security shall prescribe the regulations applicable to the Coast Guard, except that the regulations prescribed by the Secretary of Defense shall apply to the Coast Guard when it is operating as a service in the Navy  (C) The Administrator of the National Aeronautics and Space Administration shall prescribe the regulations applicable to the National Aeronautics and Space Administration  (c) Contract Cancellations -The regulations may provide for cancellation provisions in multiyear contracts to the extent that such provisions are necessary and in the best interests of the United States  The cancellation provisions may include consideration of both recurring and nonrecurring costs of the contractor associated with the production of the items to be delivered under the contract  (d) Participation by Subcontractors, Vendors, and Suppliers -In order to broaden the defense industrial base, the regulations shall provide that, to the extent practicable- (1) multiyear contracting under subsection (a) shall be used in such a manner as to seek, retain, and promote the use under such contracts of companies that are subcontractors, vendors, or suppliers; and (2) upon accrual of any payment or other benefit under such a multiyear contract to any subcontractor, vendor, or supplier company participating in such contract, such payment or benefit shall be delivered to such company in the most expeditious manner practicable  (e) Protection of Existing Authority -The regulations shall provide that, to the extent practicable, the administration of this section, and of the regulations prescribed under this section, shall not be carried out in a manner to preclude or curtail the existing ability of an agency- (1) to provide for competition in the production of items to be delivered under such a contract; or (2) to provide for termination of a prime contract the performance of which is deficient with respect to cost, quality, or schedule  (f) Cancellation or Termination for Insufficient Funding -In the event funds are not made available for the continuation of a contract made under this section into a subsequent fiscal year, the contract shall be canceled or terminated  The costs of cancellation or termination may be paid from- (1) appropriations originally available for the performance of the contract concerned; (2) appropriations currently available for procurement of the type of property concerned, and not otherwise obligated; or (3) funds appropriated for those payments  (g) Contract Cancellation Ceilings Exceeding $100,000,000 -(1) Before any contract described in subsection (a) that contains a clause setting forth a cancellation ceiling in excess of $100,000,000 may be awarded, the head of the agency concerned shall give written notification of the proposed contract and of the proposed cancellation ceiling for that contract to the congressional defense committees, and such contract may not then be awarded until the end of a period of 30 days beginning on the date of such notification  (2) In the case of a contract described in subsection (a) with a cancellation ceiling described in paragraph (1), if the budget for the contract does not include proposed funding for the costs of contract cancellation up to the cancellation ceiling established in the contract, the head of the agency concerned shall, as part of the certification required by subsection (i)(1)(A),1 give written notification to the congressional defense committees of- (A) the cancellation ceiling amounts planned for each program year in the proposed multiyear procurement contract, together with the reasons for the amounts planned; (B) the extent to which costs of contract cancellation are not included in the budget for the contract; and (C) a financial risk assessment of not including budgeting for costs of contract cancellation  (h) Defense Acquisitions of Weapon Systems -In the case of the Department of Defense, the authority under subsection (a) includes authority to enter into the following multiyear contracts in accordance with this section: (1) A multiyear contract for the purchase of a weapon system, items and services associated with a weapon system, and logistics support for a weapon system  (2) A multiyear contract for advance procurement of components, parts, and materials necessary to the manufacture of a weapon system, including a multiyear contract for such advance procurement that is entered into in order to achieve economic-lot purchases and more efficient production rates  (i) Defense Acquisitions Specifically Authorized by Law -(1) In the case of the Department of Defense, a multiyear contract in an amount equal to or greater than $500,000,000 may not be entered into under this section unless the contract is specifically authorized by law in an Act other than an appropriations Act  (2) In submitting a request for a specific authorization by law to carry out a defense acquisition program using multiyear contract authority under this section, the Secretary of Defense shall include in the request the following: (A) A report containing preliminary findings of the agency head required in paragraphs (1) through (6) of subsection (a), together with the basis for such findings  (B) Confirmation that the preliminary findings of the agency head under subparagraph (A) were supported by a preliminary cost analysis performed by the Director of Cost Assessment and Program Evaluation  (3) A multiyear contract may not be entered into under this section for a defense acquisition program that has been specifically authorized by law to be carried out using multiyear contract authority unless the Secretary of Defense certifies in writing, not later than 30 days before entry into the contract, that each of the following conditions is satisfied: (A) The Secretary has determined that each of the requirements in paragraphs (1) through (6) of subsection (a) will be met by such contract and has provided the basis for such determination to the congressional defense committees  (B) The Secretary's determination under subparagraph (A) was made after completion of a cost analysis conducted on the basis of section 2334(e)(2) 1 of this title, and the analysis supports the determination  (C) The system being acquired pursuant to such contract has not been determined to have experienced cost growth in excess of the critical cost growth threshold pursuant to section 2433(d) of this title within 5 years prior to the date the Secretary anticipates such contract (or a contract for advance procurement entered into consistent with the authorization for such contract) will be awarded  (D) A sufficient number of end items of the system being acquired under such contract have been delivered at or within the most current estimates of the program acquisition unit cost or procurement unit cost for such system to determine that current estimates of such unit costs are realistic  (E) During the fiscal year in which such contract is to be awarded, sufficient funds will be available to perform the contract in such fiscal year, and the future-years defense program for such fiscal year will include the funding required to execute the program without cancellation  (F) The contract is a fixed price type contract  (G) The proposed multiyear contract provides for production at not less than minimum economic rates given the existing tooling and facilities  (4) If for any fiscal year a multiyear contract to be entered into under this section is authorized by law for a particular procurement program and that authorization is subject to certain conditions established by law (including a condition as to cost savings to be achieved under the multiyear contract in comparison to specified other contracts) and if it appears (after negotiations with contractors) that such savings cannot be achieved, but that significant savings could nevertheless be achieved through the use of a multiyear contract rather than specified other contracts, the President may submit to Congress a request for relief from the specified cost savings that must be achieved through multiyear contracting for that program  Any such request by the President shall include details about the request for a multiyear contract, including details about the negotiated contract terms and conditions  (5)(A) The Secretary may obligate funds for procurement of an end item under a multiyear contract for the purchase of property only for procurement of a complete and usable end item  (B) The Secretary may obligate funds appropriated for any fiscal year for advance procurement under a contract for the purchase of property only for the procurement of those long-lead items necessary in order to meet a planned delivery schedule for complete major end items that are programmed under the contract to be acquired with funds appropriated for a subsequent fiscal year (including an economic order quantity of such long-lead items when authorized by law)  (6) The Secretary may make the certification under paragraph (3) notwithstanding the fact that one or more of the conditions of such certification are not met, if the Secretary determines that, due to exceptional circumstances, proceeding with a multiyear contract under this section is in the best interest of the Department of Defense and the Secretary provides the basis for such determination with the certification  (7) The Secretary may not delegate the authority to make the certification under paragraph (3) or the determination under paragraph (6) to an official below the level of Under Secretary of Defense for Acquisition, Technology, and Logistics  (j) Defense Contract Options for Varying Quantities -The Secretary of Defense may instruct the Secretary of the military department concerned to incorporate into a proposed multiyear contract negotiated priced options for varying the quantities of end items to be procured over the period of the contract  (k) Multiyear Contract Defined -For the purposes of this section, a multiyear contract is a contract for the purchase of property for more than one, but not more than five, program years  Such a contract may provide that performance under the contract during the second and subsequent years of the contract is contingent upon the appropriation of funds and (if it does so provide) may provide for a cancellation payment to be made to the contractor if such appropriations are not made  (l) Various Additional Requirements With Respect to Multiyear Defense Contracts -(1)(A) The head of an agency may not initiate a contract described in subparagraph (B) unless the congressional defense committees are notified of the proposed contract at least 30 days in advance of the award of the proposed contract  (B) Subparagraph (A) applies to the following contracts: (i) A multiyear contract- (I) that employs economic order quantity procurement in excess of $20,000,000 in any one year of the contract; or (II) that includes an unfunded contingent liability in excess of $20,000,000  (ii) Any contract for advance procurement leading to a multiyear contract that employs economic order quantity procurement in excess of $20,000,000 in any one year  (2) The head of an agency may not initiate a multiyear contract for which the economic order quantity advance procurement is not funded at least to the limits of the Government's liability  (3) The head of an agency may not initiate a multiyear procurement contract for any system (or component thereof) if the value of the multiyear contract would exceed $500,000,000 unless authority for the contract is specifically provided in an appropriations Act  (4) Each report required by paragraph (5) with respect to a contract (or contract extension) shall contain the following: (A) The amount of total obligational authority under the contract (or contract extension) and the percentage that such amount represents of- (i) the applicable procurement account; and (ii) the agency procurement total  (B) The amount of total obligational authority under all multiyear procurements of the agency concerned (determined without regard to the amount of the multiyear contract (or contract extension)) under multiyear contracts in effect at the time the report is submitted and the percentage that such amount represents of- (i) the applicable procurement account; and (ii) the agency procurement total  (C) The amount equal to the sum of the amounts under subparagraphs (A) and (B), and the percentage that such amount represents of- (i) the applicable procurement account; and (ii) the agency procurement total  (D) The amount of total obligational authority under all Department of Defense multiyear procurements (determined without regard to the amount of the multiyear contract (or contract extension)), including any multiyear contract (or contract extension) that has been authorized by the Congress but not yet entered into, and the percentage that such amount represents of the procurement accounts of the Department of Defense treated in the aggregate  (5) The head of an agency may not enter into a multiyear contract (or extend an existing multiyear contract), the value of which would exceed $500,000,000 (when entered into or when extended, as the case may be), until the Secretary of Defense submits to the congressional defense committees a report containing the information described in paragraph (4) with respect to the contract (or contract extension)  (6) The head of an agency may not terminate a multiyear procurement contract until 10 days after the date on which notice of the proposed termination is provided to the congressional defense committees  (7) The execution of multiyear contracting authority shall require the use of a present value analysis to determine lowest cost compared to an annual procurement  (8) This subsection does not apply to the National Aeronautics and Space Administration or to the Coast Guard  (9) In this subsection: (A) The term "applicable procurement account" means, with respect to a multiyear procurement contract (or contract extension), the appropriation account from which payments to execute the contract will be made  (B) The term "agency procurement total" means the procurement accounts of the agency entering into a multiyear procurement contract (or contract extension) treated in the aggregate  (m) Increased Funding and Reprogramming Requests -Any request for increased funding for the procurement of a major system under a multiyear contract authorized under this section shall be accompanied by an explanation of how the request for increased funding affects the determinations made by the Secretary under subsection (i)  Appendix B  Programs Approved for MYP in Annual DOD Appropriations Acts Since FY1990 This appendix presents, in two tables, programs approved for MYP in annual DOD appropriations acts since FY1990  Table B-1 covers FY2011 to the present, and Table B-2 covers FY1990 through FY2010 
Report 2:  We previously found that federal programs should be reexamined if there have been significant changes in the country or the world that relate to the reason for initiating the program  In that report, we found that many federal programs and policies were designed decades ago to respond to trends and challenges that existed at the time of their creation  Moreover, the Office of Management and Budget Circular A-94 for benefit-cost analysis of federal programs includes guidelines that apply to any analysis used to support government decisions to initiate, renew, or expand programs or projects that would result in a series of measurable benefits or costs extending for 3 or more years into the future  Given changing market conditions and future projections, without conducting additional analysis to supplement its 2016 review and thereafter periodically reexamining the SPR to take into account changes in market conditions and include a thorough consideration of the costs and benefits of a wide range of SPR sizes, DOE cannot provide information to Congress to inform decisions about the appropriate size of the SPR and risks holding too much or too little in the SPR to meet the United States’ evolving energy security needs and IEA obligations  DOE has also not fully identified whether additional regional petroleum product reserves should be part of the SPR  Because the SPR stores oil nearly exclusively along the Gulf Coast, the SPR is configured primarily to respond to global oil supply disruptions  However, as we reported in November 2017, the SPR has primarily been used in response to domestic disruptions  The SPR is limited in its ability to respond to domestic disruptions because reserves are almost entirely composed of crude oil and not refined petroleum products, which may not be effective in responding to disruptions that affect the refining sector  For example, as we reported in November 2017, Hurricanes Harvey, Irma, and Maria damaged infrastructure and property, caused the loss of life, and disrupted the operations of refineries representing at least 15 percent of the nation’s refining capacity  DOE has identified regions subject to product supply vulnerabilities as shown in Figure 3  The Quadrennial Energy Review of 2015 recommended that the agency analyze the need for additional or expanded regional product reserves by undertaking updated cost-benefit analyses for all of the regions of the United States that have been identified as vulnerable to fuel supply disruptions  In response to this recommendation, DOE studied the costs and benefits of regional petroleum product reserves in the West Coast and Southeast Coast  According to DOE officials, weather events in the Southeast Coast are of higher probability but lower consequence, and events in the West Coast are of lower probability but higher consequence  DOE did not finalize its 2015 studies on regional petroleum product reserves and make them publicly available  However, the draft 2015 studies concluded that a product reserve in the Southeast would provide significant net economic benefits to the region and the United States, particularly in the event of a major hurricane, while further analyses are needed to determine the potential benefits of a reserve on the West Coast  A prior DOE study also suggests that petroleum product reserves merit consideration—in 2011, DOE carried out a cost-benefit study of the establishment of a refined product reserve in the Southeast and estimated that such a reserve would reduce the average gasoline price rise by 50 percent to 70 percent in the weeks immediately after a hurricane landfall, resulting in consumer cost savings, according to the Quadrennial Energy Review of 2015  According to DOE officials, the agency has no plans to conduct additional studies  DOE’s 2016 review of the SPR did not fully assess whether there is a need for additional regional product reserves in other U S  regions identified as vulnerable to fuel supply disruptions, as recommended by DOE’s studies and the 2015 Quadrennial Energy Review  Without completing studies on the costs and benefits of regional petroleum product reserves for all the vulnerable U S  regions and publicly releasing the results, DOE cannot ensure that it and Congress have the information they need to make decisions about whether additional regional product reserves are needed  DOE has taken steps to take into account the effects of congressionally mandated oil sales in its plans for modernizing the SPR, though DOE’s current plans are based on information largely developed prior to the most recent congressionally mandated oil sales  According to DOE, the SPR modernization program is focused on a life extension project to modernize aging infrastructure to ensure the SPR will be able to meet its mission requirements for the next several decades  The project’s scope of work has undergone several revisions since its inception in response to changing conditions and requirements, according to the agency  DOE has estimated the total cost for the SPR’s modernization at up to $1 4 billion  DOE raised about $323 million for modernization through the sale of SPR oil in fiscal year 2017, and the Consolidated Appropriations Act of 2018 provided that DOE is to draw down and sell an amount of crude oil not to exceed $350 million for modernization in fiscal year 2018  As of the end of February 2018, DOE has spent $22 million on modernization efforts and the additional funds will allow DOE to continue moving forward with the project, according to agency officials  According to DOE’s modernization plans, the first major construction is scheduled for fiscal year 2019  However, these plans are largely based on information DOE analyzed before recent congressionally mandated sales of an additional 117 million barrels of oil  Since the most recent mandated sales, DOE has taken steps to update its modernization plans and has changed its assumptions for SPR’s modernization  For example, DOE now assumes that the reserve will hold about 405 million barrels of oil and that one of the four SPR sites may close after congressionally mandated sales are completed at the end of fiscal year 2027, according to agency officials  However, DOE has not fully updated the SPR’s modernization plans based on these assumptions  According to DOE officials, in March 2018, DOE commenced a study—the SPR post-sale configuration study—to examine potential future reserve configurations  This study is to take into account the effects of congressionally mandated sales on the reserve and its modernization, and is targeted for completion in October 2018, according to agency officials  Information from the study will inform DOE’s updates to the SPR’s modernization plans, according to DOE officials  As part of its post-sale configuration study, DOE plans to examine how the agency may handle the potentially excess SPR facilities created by the mandated sales  In January 2017, the SPR had a design capacity to hold 713 5 million barrels of oil and actually held 695 million barrels  As shown in figure 4, without action by DOE to reduce the SPR’s design capacity or otherwise use SPR facilities, congressionally mandated sales will cause excess storage capacity to grow to 308 million barrels or more by the end of fiscal year 2027—meaning that about 43 percent of the SPR’s total design capacity to store oil would be unused  DOE plans to explore some options to use these potentially excess SPR assets in its ongoing post-sale configuration study  In withdrawing oil to meet congressionally mandated oil sales currently in place (290 million barrels through fiscal year 2027), DOE could close at least one SPR site based on our analysis of projected excess storage capacity  For example, if DOE were to close the smallest SPR site, Bayou Choctaw, the agency could also explore selling the connected pipeline and marine terminal, which are currently being leased to a private company  DOE could also consider leasing excess storage capacity to other countries so that they could store oil at the SPR  DOE has not entered into any such leases with other countries and has not considered such leases because, according to DOE, the SPR has historically lacked capacity to store additional oil  DOE has not proposed any of these options or explored the revenue the agency could generate by selling or leasing these assets  According to DOE officials, the agency will examine the feasibility of such options in the ongoing SPR post-sale configuration study  As DOE takes steps to plan for the SPR’s modernization, ongoing uncertainty regarding the SPR’s long-term size and configuration have complicated DOE’s efforts  According to DOE officials, this uncertainty makes it extremely difficult to effectively perform any mid-to long-range planning efforts for the SPR’s modernization project, including the execution of major maintenance projects  Congress has generally set the SPR’s size by mandating purchases or sales of oil, and has established and amended the minimum size of the SPR as it pertains to the release of oil for emergency protection  Since 2015, Congress has, across six pieces of legislation, mandated 290 million barrels in additional oil sales  However, DOE developed its modernization plans in 2016  DOE officials told us they do not know whether additional sales will be mandated over the next 10 years or whether other changes may be required to the configuration of the reserve  Any additional congressionally mandated sales or direction to pursue additional petroleum product reserves would require DOE to again revisit its modernization plans and assessments of the potential uses of any excess SPR assets  Oil market projections also have implications for the future of the SPR  Under current projections, the United States may fluctuate between being a net importer and net exporter over the next several decades  Specifically, the United States is projected to become a net exporter by the late 2020s and would then no longer have a 90-day reserve obligation, but it is projected to return to being a net importer between 2040 and 2050  These projected fluctuations could affect the desired size of the SPR in the future  This uncertainty creates risks for DOE’s modernization plans, as DOE may end up spending funds on facilities that later turn out to be unnecessary should Congress ultimately decide on a larger- or smaller-sized SPR than DOE anticipates  Having a long-term target for the size and configuration of reserves helps other IEA member countries manage their reserves  For example, as previously discussed, unlike the United States, some other IEA members have specified in dynamic terms the amount of reserves to be held, such as days of net import protection or days of consumption, rather than specifying a specific static volume amount  Under such approaches, the amount held varies over time as entities managing the reserve acquire or sell reserves in order to meet the target  Setting a long-term target for the size and configuration of the SPR—taking into account projections for oil production, consumption, and IEA obligations—could better position DOE to ensure that funds spent on the SPR’s modernization do not modernize a system that is no longer needed and that DOE is able to adequately plan for potentially excess SPR assets  In the course of our work, we also identified other options for handling potentially excess SPR assets that DOE is not planning on examining, largely because DOE does not currently have the authority to pursue them, according to agency officials  First, DOE could explore leasing storage capacity to private industry  U S  oil production has generally increased over the last decade  As a result, the private sector may want to lease excess SPR capacity, which may be cheaper than above-ground storage, according to a representative of a private company we spoke with  Fees for doing so could help defray public reserve storage costs  However, officials told us that the Energy Policy and Conservation Act gives DOE authority to lease underutilized storage to other countries, but not to the private sector  Second, if Congress determines that the SPR holds oil in excess of that needed domestically, DOE could explore selling contracts or tickets for the excess oil rather than selling the oil outright  Australian and New Zealand officials told us that if DOE were to sell tickets for SPR oil, tickets would help these countries meet their IEA 90- day reserve obligations  Australian officials told us they have discussed this option with DOE  Currently the United States and Australia have agreed, through an arrangement, to allow Australia to contract for petroleum stocks located in the United States and controlled by commercial entities  According to DOE officials, the arrangement would permit Australia to receive credit from the IEA for tickets it purchases from the U S  private sector  While the arrangement does not cover government-owned oil in the SPR, if it did, based on our analysis, DOE could generate up to approximately $15 million annually if Australia purchased the maximum allowable amount of oil specified in an arrangement through tickets for excess SPR oil  However, although the Energy Policy and Conservation Act allows DOE to lease underutilized storage to other countries, DOE lacks the authority to sell tickets and does not plan to seek this authority, according to DOE officials  DOE officials told us that they do not plan to examine these options  According to DOE’s real property asset management order, the agency is to identify real property assets that are no longer needed to meet the program’s mission needs and that may be candidates for reuse or disposal  Once identified, the agency is to undertake certain actions, including determining whether to dispose of these assets by sale or lease  As part of its SPR post-sale configuration study, DOE plans to determine whether it is appropriate to close SPR facilities, and the relative benefit of any closures would be informed by potential lease revenues from maintaining sites so they could be leased, according to officials  However, without examining a full range of options in the post-sale configuration study, DOE risks missing beneficial ways to modernize the SPR while saving taxpayer resources  Given changing crude oil and petroleum product market conditions and the constrained budget environment, it is important that DOE ensures the SPR is effective at meeting U S  energy security needs and IEA obligations while being managed and maintained in an efficient manner  In response to congressional direction and recommendations from GAO and DOE Inspector General, DOE conducted a long-term strategic review of the SPR in 2016 after its last comprehensive examination in 2005  In its review, DOE did not determine an optimal size for the SPR, and its analysis was limited in several ways  In particular, DOE did not fully consider recent and expected future changes in crude oil and petroleum market conditions such as the implications of projected fluctuations in U S  net imports or the role that increased levels of private reserves could play in responding to supply disruptions  DOE also did not perform a full cost-benefit analysis of holding different volumes of reserves  Without supplementing its 2016 strategic review by conducting additional analysis, and periodically conducting such analyses going forward, DOE cannot provide information to Congress to inform decisions about the appropriate amounts of crude oil and petroleum products to hold in the SPR and risks holding too much or too little in the SPR to meet the United States’ energy security needs and international obligations  Such information is needed on a timely basis, to reflect the pace of change in oil and petroleum markets and other relevant factors that affect the optimal size of the SPR  Though the SPR has primarily been used in response to domestic supply disruptions, such as hurricanes, the reserve is limited in this role because it is almost entirely composed of crude oil, and not petroleum products  In this regard, the Quadrennial Energy Review of 2015 recommended that DOE analyze the need for additional regional product reserves for U S  regions that have been identified as vulnerable to fuel supply disruptions  DOE has not identified whether additional regional product reserves should be part of the SPR or completed studies of all vulnerable U S  regions, and it has no plans to do so, according to DOE officials  Without conducting or completing studies for all the vulnerable U S  regions and releasing the results, DOE cannot ensure it and Congress have the information they need to make decisions about potential additional regional product reserves  In the face of declining net U S  imports, Congress has taken repeated steps to reduce the size of the reserve  Given that net imports are projected to continue to decline through the late 2020s and fluctuate in the future, there may be additional congressionally mandated SPR oil sales  This has created long-term uncertainty regarding the future size and configuration of the SPR  Congress could address this uncertainty by identifying a long-term target for the size of the SPR—either by volume or in terms tied to factors, such as consumption or net import protection, that affect the country’s energy security needs and IEA obligations  Setting such a long-term target could better position DOE to ensure the efficiency and efficacy of federal funds spent on the reserve  DOE has recently begun to study the potential effects of congressionally mandated sales on its modernization plans  As part of its SPR post-sale configuration study, DOE plans to determine whether it is appropriate to close SPR facilities, and the relative benefit of any closures would be informed by potential lease revenues from maintaining sites so they could be leased, according to officials  However, we identified other options for handling potentially excess SPR assets that DOE is not planning to examine in its study, inconsistent with the agency’s order on real property asset management  Although DOE does not currently have the authority to implement these options, according to officials, examining their potential use, including possible revenue enhancement, could inform Congress as it examines whether it should grant such authority  Without examining a full range of options in the post-sale configuration study for handling potentially excess SPR assets, DOE risks missing beneficial ways to modernize the SPR while saving taxpayer resources  We are making the following matter for congressional consideration: Congress may wish to consider setting a long-range target for the size and configuration of the SPR that takes into account projections for future oil production, oil consumption, the efficacy of the existing SPR to respond to domestic supply disruptions, and U S  IEA obligations  (Matter 1) We are making four recommendations to DOE: The Secretary of Energy should supplement the agency’s 2016 long-term strategic review by conducting an additional analysis that takes into account private-sector response, oil market projections, and costs and benefits of a wide range of different SPR sizes  (Recommendation 1) The Secretary of Energy should take actions to ensure that the agency periodically conducts and provides to Congress a strategic review of the SPR that, among other things, takes into account changes in crude oil and petroleum product market conditions and contains additional analysis, such as the costs and benefits of a wide range of different SPR sizes  (Recommendation 2) The Secretary of Energy should conduct or complete studies on the costs and benefits of regional petroleum product reserves for all U S  regions that have been identified as vulnerable to fuel supply disruptions, and the Secretary should report the results to Congress  (Recommendation 3) The Secretary of Energy, in completing DOE’s ongoing study on the effects of congressionally mandated sales, should consider a full range of options for handling potentially excess assets and, if needed, request congressional authority for the disposition of these assets  (Recommendation 4) We provided a draft of this report to DOE for review and comment  DOE provided written comments, which are reproduced in appendix I  Of the four recommendations, DOE agreed with two, partially agreed with one, and disagreed with one  Regarding our recommendation that DOE supplement its 2016 long- term strategic review with an additional analysis that takes into account private sector response, oil market projections, and costs and benefits of a wide range of different SPR sizes, the agency partially agreed with the recommendation  DOE agreed to conduct an additional analysis to assess the purpose, goals, and objectives of the SPR, taking into account private sector response, oil market projections, and any other relevant factors, that will lead to an evaluation of possible optimal sizes of the SPR in the future  In response to taking into account the costs and benefits of a wide range of different SPR sizes, DOE stated that the agency determined the projected benefits of a wide range of different SPR sizes ranging from 430 million barrels of oil to 695 million barrels of oil in its 2016 review  However, the minimum SPR size considered by DOE is greater than the projected SPR size after congressionally mandated sales have occurred  Further, the SPR size after congressionally mandated sales is projected to be far in excess of the IEA obligation to hold a minimum of 90 days of net imports  DOE must also consider the minimum size needed to meet its IEA obligations in the event of a collective action  In conducting additional analysis, DOE should consider a smaller lower bound, in line with congressionally mandated sales, for the size of the SPR, and more fully consider the size needed to meet the IEA 90-day net import and collective action obligations  Regarding our recommendation that DOE conduct periodic reviews of the SPR, the agency agreed with the recommendation  DOE stated that a 5-year time interval between reviews would strike an appropriate balance between the need to periodically conduct a strategic assessment and evaluation of the SPR and the limitations on resources to plan and conduct such a review  Regarding our recommendation that DOE conduct or complete studies on the costs and benefits of regional petroleum product reserves, the agency disagreed  DOE stated that it is the agency's position that government owned and operated regional petroleum product reserves are an inefficient and expensive solution to respond to regional fuel supply disruptions  DOE further stated, based on studies done in 2015 that DOE officials told us were pre-decisional and therefore could not be reported, that there are additional concerns associated with government-owned and operated regional refined petroleum product reserves, including little to no storage capacity for lease in commercial terminals and high costs for government owned and operated regional product reserves  However, these same studies took these concerns into account, and concluded that a product reserve in the Southeast would provide significant net economic benefits (benefits minus costs) to the region and the United States in the event of a major hurricane  These studies also concluded that additional analyses are required to inform decisions regarding the potential benefits of a similar reserve on the West Coast  Further, the Quadrennial Energy Review of 2015 recommended that similar analyses be completed for other areas deemed by DOE to be vulnerable to fuel supply disruptions  Therefore, we continue to believe that conducting these analyses, as recommended in the Quadrennial Energy Review of 2015, will provide Congress with information needed to make decisions about regional product reserves  Regarding our recommendation that DOE consider a full range of options for handling potentially excess assets, DOE agreed with the recommendation  DOE stated that in its ongoing study, the agency will include an assessment of disposition options for any potential excess or underutilized SPR assets, to include the need for new legislative authority, as necessary, for the disposition of assets  DOE expects this study to be completed in October 2018  DOE also provided technical comments, which we incorporated, as appropriate  As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date  At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, and other interested parties  In addition, the report will be available at no charge on the GAO website at http://www gao gov  If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix II  In addition to the individual named above, Quindi Franco (Assistant Director), Nkenge Gibson (Analyst-in-Charge), Philip Farah, Ellen Fried, Cindy Gilbert, Greg Marchand, Celia Mendive, Patricia Moye, Camille Pease, Oliver Richard, Dan Royer, Rachel Stoiko, and Marie Suding made key contributions to this report 

ground_truth: Multiyear procurement (MYP) and block buy contracting (BBC) are special contracting mechanisms that Congress permits the Department of Defense (DOD) to use for a limited number of defense acquisition programs. Compared to the standard or default approach of annual contracting, MYP and BBC have the potential for reducing weapon procurement costs by a few or several percent. Under annual contracting, DOD uses one or more contracts for each year's worth of procurement of a given kind of item. Under MYP, DOD instead uses a single contract for two to five years' worth of procurement of a given kind of item without having to exercise a contract option for each year after the first year. DOD needs congressional approval for each use of MYP. There is a permanent statute governing MYP contracting—10 U.S.C. 2306b. Under this statute, a program must meet several criteria to qualify for MYP. Compared with estimated costs under annual contracting, estimated savings for programs being proposed for MYP have ranged from less than 5% to more than 15%, depending on the particulars of the program in question, with many estimates falling in the range of 5% to 10%. In practice, actual savings from using MYP rather than annual contracting can be difficult to observe or verify because of cost growth during the execution of the contract due to changes in the program independent of the use of MYP rather than annual contracting. BBC is similar to MYP in that it permits DOD to use a single contract for more than one year's worth of procurement of a given kind of item without having to exercise a contract option for each year after the first year. BBC is also similar to MYP in that DOD needs congressional approval for each use of BBC. BBC differs from MYP in the following ways: There is no permanent statute governing the use of BBC. There is no requirement that BBC be approved in both a DOD appropriations act and an act other than a DOD appropriations act. Programs being considered for BBC do not need to meet any legal criteria to qualify for BBC, because there is no permanent statute governing the use of BBC that establishes such criteria. A BBC contract can cover more than five years of planned procurements. Economic order quantity (EOQ) authority—the authority to bring forward selected key components of the items to be procured under the contract and purchase the components in batch form during the first year or two of the contract—does not come automatically as part of BBC authority because there is no permanent statute governing the use of BBC that includes EOQ authority as an automatic feature. BBC contracts are less likely to include cancellation penalties. Potential issues for Congress concerning MYP and BBC include whether to use MYP and BBC in the future more frequently, less frequently, or about as frequently as they are currently used; whether to create a permanent statute to govern the use of BBC, analogous to the permanent statute that governs the use of MYP; and whether the Coast Guard should begin making use of MYP and BBC.