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



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

Report 1: Our simulations suggest that the sector will likely continue to face a difference between revenue and spending during the next 50 years  This long-term outlook is measured by the operating balance—a measure of the sector’s ability to cover its current expenditures out of current receipts  While both expenditures and revenues are projected to increase as a percentage of gross domestic product (GDP) during the simulation period, a difference between the two is projected to persist because expenditures are generally expected to grow at a faster rate than revenues  (see figure 1)  Absent any policy changes by state and local governments, revenues are likely to be insufficient to maintain the sector’s capacity to provide services at levels consistent with current policies during the next 50 years  Our simulations suggest that state and local governments will need to make policy changes to avoid fiscal imbalances before then and assure that revenues are at least equal to expenditures  We simulated the state and local government sector’s operating balance (the difference between the sector’s operating revenues and operating expenditures) in order to understand the sector’s long-term fiscal outlook  The sector’s operating expenditures were 15 1 percent of GDP in 2017  As shown in figure 2, these state and local government sector operating expenditures are comprised of employee compensation, social benefit payments, interest payments, capital outlays, and other expenditures  The sector’s operating revenues were 13 8 percent of GDP in 2017  As shown in figure 3, these state and local government sector operating revenues are comprised of taxes, transfer receipts, and other types of revenues  One way of measuring the long-term fiscal challenges faced by the state and local government sector is through an indicator known as the “fiscal gap ” The fiscal gap is an estimate of actions—such as revenue increases or expenditure reductions—that must be taken today and maintained for each year going forward to achieve fiscal balance during the simulation period  While we measured the gap as the amount of reductions in expenditures needed to prevent negative operating balances, increases in revenues, reductions in expenditures, or a combination of the two of sufficient magnitude would allow the sector to close the fiscal gap  Our simulations suggest that the fiscal gap is about 14 7 percent of total expenditures or about 2 4 percent of GDP  That is, assuming no change in projected total revenues, eliminating the difference between the sector’s expenditures and revenues during the 50-year simulation period would likely require action to be taken today, and maintained for each year equivalent to a 14 7 percent reduction in the sector’s total expenditures (see figure 4)  Alternatively, assuming no change in projected total expenditures, closing the fiscal gap by increasing revenue would also likely require actions of similar magnitude  More likely, eliminating the difference between expenditures and revenues would involve some combination of spending reductions and revenue increases  Our simulations suggest that growth in the sector’s overall spending is largely driven by health care expenditures  As shown in figure 5, these expenditures are projected to increase from about 4 1 percent of GDP in 2018 to 6 3 percent of GDP in 2067  Two types of health care expenditures—Medicaid spending and spending on health benefits for state and local government employees and retirees—will likely constitute a growing expenditure for state and local governments during the simulation period  Medicaid expenditures are expected to rise, on average, by 1 percentage point more than GDP each year  According to CBO, growth in Medicaid spending reflects growth in both the number of people receiving Medicaid benefits and the cost of Medicaid benefits each person receives  Specifically, CBO reported that between 2019 and 2028, Medicaid spending is projected to grow at an average rate of 5 5 percent per year—nearly 5 percentage points of this growth is due to an increase in per capita costs and about 1 percentage point of this growth is due to an increase in enrollment  Data from CBO and the Centers for Medicare & Medicaid Services (CMS) also suggest that growth in Medicaid spending per capita is generally expected to outpace GDP growth in the future—referred to as excess cost growth  Our estimates of Medicaid excess cost growth using CMS data suggest that Medicaid spending per capita will grow, on average, about 0 5 percent faster than GDP per capita for the period from 2018 through 2067  Our simulations also suggest that health benefits for state and local government employees and retirees—a type of employee compensation spending—are likely to rise, on average, by 0 9 percentage points more than GDP each year  Growth in these health benefits also reflects growth in the projected number of employees and retirees and growth in the projected amount of health benefits for each employee and retiree  Growth in spending by states and local governments on health care per capita, which includes spending on employee and retiree health benefits, is generally expected to outpace GDP per capita  Data from CMS suggest that national health expenditures per capita are likely to grow on average about 0 8 percent faster than GDP per capita each year during the simulation period from 2018 through 2067  If employee and retiree health benefits follow trends in overall national health spending, they will likely make up an increasingly large share of total employee compensation going forward (see figure 6)  While state and local government contributions to employee pension plans—another type of employee compensation spending—will likely decline as a percentage of GDP, as shown in figure 6, our simulations nonetheless suggest that state and local governments may need to take steps to manage their pension obligations in the future  From 1998 through 2007, state and local governments’ pension contributions amounted to about 8 percent of wages and salaries on average  In addition, for the period from 2008 through 2017, pension contributions amounted to about 12 3 percent of wages and salaries on average  Our simulations suggest that those pension contributions will need to be about 12 9 percent of wages and salaries for state and local governments to meet their long-term pension obligations  This is the case even though pension asset values have increased in recent years, from about $2 4 trillion in 2008 to about $4 2 trillion in 2017 (adjusted for inflation and measured in 2012 dollars)  This suggests that state and local governments may need to take additional steps to manage their pension obligations by reducing benefits or increasing employees’ contributions  Along with pension contributions, other types of state and local government expenditures are projected to grow more slowly than GDP  For example, in 2017, wages and salaries of state and local government employees constituted a large expenditure for the sector  However, these expenditures are projected to decline as a percentage of GDP during the simulation period  Our simulations also suggest that state and local governments’ capital outlays—which include spending on infrastructure, such as buildings, highways and streets, sewer systems, and water systems, as well as equipment and land— will grow more slowly than GDP if state and local governments continue to provide current levels of capital per resident  Our simulations suggest that federal grants overall will increase as a share of GDP, while Medicaid grants will likely grow more quickly than other types of federal grants (see figure 7)  Thus, Medicaid grants will likely make up an increasing share of revenues in the future  Since Medicaid is a matching formula grant program, the projected increase in federal Medicaid grants, therefore, reflects expected increased Medicaid expenditures that will be shared by state governments  Our simulations also suggest that federal investment grants (i e , grants intended to finance capital infrastructure investments) and other federal grants unrelated to Medicaid (i e , grants intended to finance education, social services, housing, and community investment) are likely to decline as a share of GDP  Further, our simulations suggest that if historical relationships between state and local governments’ tax revenues and tax bases persist, total tax revenues for the state and local government sector will increase from 8 8 percent of GDP in 2018 to 9 4 percent of GDP by the end of the simulation period  This increase is driven largely by the growth in personal income taxes, as shown in figure 8  Specifically, our simulations suggest that personal income tax revenues will increase as a share of GDP by about 1 percentage point during the simulation period  Sales taxes and property taxes, on the other hand, are projected to remain relatively constant as a share of GDP during the simulation period through 2067  While our long-term simulations do not account for pending or future federal policy changes that will result in changes to expenditures and revenues, an understanding of several recent federal policy changes related to taxes and health care are important to note because they present sources of uncertainty for the state and local government sector’s long-term fiscal outlook  In addition, as is the case in any model that is reliant on historical data to simulate a long-term outlook, other considerations, such as economic growth and rates of return on pension assets, could shift future fiscal outcomes  These policy changes and uncertainties are discussed below and may help federal policy makers and state and local governments consider how these changes could affect the long-term outlook  Recently enacted legislation, such as Public Law 115-97, commonly referred to by the President and administrative documents as the Tax Cuts and Jobs Act (TCJA), could affect the sector’s revenues over the long-term  Enacted in December 2017, TCJA included significant changes to corporate and individual tax law, with implications for state and local government tax collections  In particular, for individual taxpayers, for tax years 2018 through 2025, tax rates were lowered for nearly all income levels, some deductions from taxable income were changed (personal exemptions were eliminated, while the standard deduction was increased), and certain credits, such as the child tax credit, were expanded  The effect of TCJA on the long-term state and local fiscal outlook is still evolving, and will likely depend on how states incorporate the law’s changes into their state income tax rules  That is, because some states link their state income taxes to federal income tax rules, states must decide whether to let the changes from TCJA flow through to their state income tax systems, or establish new state income tax rules  For example, some states have adopted the federal definition of taxable income as a starting point for state tax calculations, while other states use the federal definition of adjusted gross income as a starting point  The choices states make to continue to link to these definitions could have long-term implications for their state tax revenues  In addition, under TCJA, the amount of the federal itemized deductions allowed for all state and local income, sales, and property taxes (commonly referred to as the state and local tax (SALT) deduction) is now capped at $10,000 for tax years 2018 to 2025  The magnitude or net effect of these changes is uncertain in that states are still working to understand the impact of the tax laws on their revenues  It remains to be seen whether and how states will see changes in their revenues in the future  Moreover, a recent U S  Supreme Court decision involving state sales taxes could have implications for states’ ability to collect revenue  Specifically, the court’s ruling in June 2018 in South Dakota v  Wayfair, Inc  held that states could require out-of-state sellers to collect and remit sales taxes on purchases made from those out-of-state sellers, even if the seller does not have a substantial physical presence in the taxing state  Prior to this ruling, a seller that did not have a substantial physical presence in a state could not be required to collect and remit a sales tax on goods sold into the state  Instead, a purchaser may have been required to pay a use tax (i e , a tax levied on the consumer for the privilege of use, ownership, or possession of taxable goods and services) in the same amount to his or her state government  In 2017, we reported that states could realize between an estimated $8 5 billion and $13 4 billion in additional state sales tax revenue across all states if all sellers were required to collect taxes on all remote sales at current rates  The extent to which states realize changes in sales tax revenue will likely depend on how they revise their state laws and enforcement efforts in response to this June 2018 ruling  Enacted health care legislation could also affect the long-term fiscal position of state and local governments  As we have reported in prior work, the effect of the Patient Protection and Affordable Care Act (PPACA) on the long-term state and local fiscal outlook could depend on how states implement PPACA, and on future rates of health care cost growth  For example, consider the states that have opted, under PPACA, to expand Medicaid program coverage to millions of lower income adults  While the federal government is expected to cover a large share of the costs of the Medicaid expansion, these states are ultimately expected to bear some of the costs  Specifically, the federal government reimbursed 100 percent of the costs of the expanded population beginning in 2014  This reimbursement rate will decline from the 2018 reimbursement rate of 94 percent to 90 percent by 2020  As such, the reduced federal reimbursement rate may affect those states that expanded their Medicaid populations in recent years  As discussed earlier in this report, our simulations suggest that Medicaid spending will make up an increasing share of the state and local government sector’s operating expenditures in the future  A weakening of the economy could add to the fiscal pressures states face in funding these Medicaid obligations  As our prior work has shown, past recessions in 2001 and 2007 hampered states’ ability to fund increased Medicaid enrollment and maintain their existing services  Specifically, Medicaid enrollment increased during these recessions, in part due to increased unemployment, which led more individuals to become eligible for the program  We have also reported on the use of Medicaid demonstrations, which allow states to test new approaches to coverage to improve quality and access, or generate savings or efficiencies  Specifically, CMS may waive certain Medicaid requirements and approve new types of expenditures that would not otherwise be eligible for federal Medicaid matching funds  For example, under demonstrations, states have extended coverage to certain populations, provided services not otherwise eligible for Medicaid, and made payments to providers to incentivize delivery system improvements  We previously reported that, as of November 2016, nearly three-quarters of states have CMS- approved demonstrations  In fiscal year 2015, federal spending under demonstrations represented a third of all Medicaid spending nationwide  We also reported that in 10 states, federal spending on demonstrations represented 75 percent or more of all federal spending on Medicaid  Joint financing of Medicaid is a fixture of this federal-state partnership  Demonstration waivers hold the potential for changing state Medicaid spending  However, as we have reported, these demonstrations are required, under HHS policy, to achieve budget neutrality and not raise costs for the federal government  In addition to federal tax- and health-related policy changes, a number of other factors could affect the state and local government sector’s long- term fiscal outlook  Specifically, we developed simulations using alternative assumptions of the growth of key model variables—which include economic growth, health care excess cost growth, and the rate of return on pension assets  We determined that changes in the growth projections of these key variables could affect the operating balance of state and local governments, thereby shifting future fiscal outcomes for the sector  Future trends in GDP growth could affect the state and local government sector’s fiscal outlook  Data from CBO and the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI Trustees) project real GDP to grow by 1 9 percent per year on average from 2018 through 2028, and by 2 1 percent per year on average after 2028, respectively  Using these projections, our simulations suggest that maintaining current policies would cause the sector’s expenditures to exceed its revenues and that the difference between revenues and expenditures would become increasingly negative during the next several decades  However, simulations we developed using the OASDI Trustees’ alternative projections of real GDP growth suggest that the difference between revenues and expenditures would expand before narrowing toward the end of the simulation period if real GDP were to grow at a faster rate—2 8 percent per year on average—as shown in figure 9  Our simulations also show that if GDP were to grow at a slower rate—1 5 percent per year on average—the difference between revenues and expenditures would expand  This would result in an increasingly negative operating balance during the simulation period  As discussed earlier in this report, excess cost growth in health care is another key determinant of the sector’s fiscal balance  Data from CBO project Medicaid spending per capita to grow about 1 5 percent faster than GDP per capita on average for the period from 2019 through 2028  Data from CMS project Medicaid spending per capita to grow about 0 6 percent faster on average for the period from 2029 through 2067  Data from CMS also project national health expenditures per capita to grow about 0 8 percent faster than GDP per capita for the period from 2018 through 2067  Using these projections, our simulations suggest that maintaining current policies will cause the sector’s expenditures to exceed its revenues, and that the difference between revenues and expenditures will become increasingly negative during the next several decades  However, simulations developed using alternative projections of excess cost growth in Medicaid and national health expenditures suggest that the difference between revenues and expenditures may be reduced but not eliminated within the simulation period if excess cost growth in health care is zero  In the scenario where excess cost growth rises faster—0 7 percent on average for Medicaid for the period from 2029 through 2067 and 1 percent for national health expenditures for the period from 2018 through 2067—our simulations show that the difference between revenues and expenditures will persist for the remainder of the simulation period (see figure 10)  The rate of return on pension assets could also affect the state and local government sector’s fiscal outlook  Based on an inflation-adjusted rate of return on pension assets of 5 percent, our simulations suggest that state and local governments will need to make pension contributions equivalent to about 12 9 percent of their wages and salaries to meet their long-term pension obligations  However, this estimate is sensitive to the rate of return on state and local governments’ pension assets  Simulations we developed using a higher rate of return—7 5 percent—suggest that pension contributions needed to meet pension obligations would be about 3 percent of state and local government employees’ wages and salaries  In addition, under this scenario, our simulations suggest that the difference between revenues and expenditures will be reduced, but not eliminated within the simulation period  Alternatively, we estimated that if the rate of return on pension assets is relatively low—at 2 5 percent— required pension contributions would need to be about 23 percent of state and local government employees’ wages and salaries during the simulation period  Under this scenario, our simulations show that the sector’s negative operating balance will continue to grow larger throughout the simulation period  It follows therefore, that high rates of return on pension assets are associated with an improved outlook for state and local governments, and vice versa (see figure 11)  This report was prepared under the direction of Michelle A  Sager, Director, Strategic Issues, who can be reached at (202) 512-6806 or sagerm@gao gov, and Oliver M  Richard, Director, Center for Economics, who can be reached at (202) 512-8424 or richardo@gao gov if there are any questions  GAO staff who made key contributions to this report are listed in appendix IV  To simulate measures of fiscal balance for the state and local government sector for the long term, we used aggregate data on the state and local government sector and national data on other variables from the following sources: Agency for Healthcare Research and Quality; Board of Governors of the Federal Reserve System; Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI Trustees); Bureau of Economic Analysis (BEA); Bureau of Labor Statistics; Centers for Medicare & Medicaid Services (CMS); Congressional Budget Office (CBO); and Federal Reserve Bank of St  Louis  Our approach generally follows the approach used in GAO-08-317 and in subsequent updates of that report  Specifically, we developed a model that projects the levels of receipts and expenditures of the state and local government sector (henceforth, the sector) in future years based on current and historical spending and revenue patterns  We use table 3 3 of the National Income and Product Accounts (NIPA)—State and Local Government Current Receipts and Expenditures—prepared by BEA at the U S  Department of Commerce as an organizing framework for developing our model of the sector’s revenues and expenditures (see table 1)  In this table, current revenues are grouped in five main categories  Current tax receipts  These receipts are tax payments made by persons or businesses to state and local governments  They include income taxes, general sales taxes, property taxes, and excise taxes  Current taxes also include fees for motor vehicle licenses, drivers’ licenses, and business licenses  Social insurance contributions  These contributions finance the provision of certain social benefits to qualified persons, and include contributions from employers and employees for temporary disability insurance, worker’s compensation insurance, and other programs  Income receipts from government assets  These receipts include interest, dividends, and rental income, such as royalties paid on drilling on the outer continental shelf  Also, state and local governments earn interest and dividend income on financial assets  Current transfer receipts  Transfer receipts are receipts for which state and local governments provide nothing of value in return  Current transfer receipts include federal grants, fines, fees, donations, and tobacco settlements  Also included are net insurance settlements, certain penalty taxes, court fees, and other miscellaneous transfers  Current surplus of government enterprises  This surplus is a profit- type measure for state and local government enterprises, such as water, sewer, gas, and electricity providers; toll providers; liquor stores; air and water terminals; public transit; and state lotteries  Some types of enterprises, such as state lotteries, consistently earn surpluses which are used to fund general government activities  In contrast, many enterprises run deficits, which, in turn, reduce receipts  State and local governments also receive income from the sale of goods and services, such as school tuition  In the NIPAs, this income is treated as an offset against expenditures, not revenue  This income comes from voluntary purchases that might have been made from a private sector provider of such services  In addition to current receipts, state and local governments receive capital transfer receipts  These receipts include estate and gift taxes, and federal government investment grants for capital such as highways, transit, air transportation, and water treatment plants  State and local government current expenditures are grouped into four main categories  Consumption expenditures  Generally, spending for which some value is provided in return  State and local government consumption spending is the sum of inputs used to provide goods and services, including compensation of general government employees, consumption of general government fixed capital (depreciation), and intermediate goods and services purchased, less sales to other sectors and own-account investment  Current transfer payments  Payments for which nothing of value is provided in return  For state and local governments, current transfer payments consist primarily of social benefits, which are payments to persons to provide for needs that arise from circumstances such as sickness, unemployment, retirement, and poverty  There are two kinds of social benefits—benefits from social insurance funds, such as temporary disability insurance and workers’ compensation, and other social benefits, such as medical benefits from Medicaid and the state Children’s Health Insurance Program (CHIP), family assistance from Temporary Assistance to Needy Families, education assistance, and other public assistance programs  While NIPA table 3 3 also includes other current transfer payments to the rest of the world as part of current transfer payments, these amounts are generally equal to zero  Interest payments  These include actual and imputed interest and represent the cost of borrowing by state and local governments to finance their capital and operational costs  Subsidies  State and local government subsidies are largely payments to railroads  State and local government spending also includes gross investment, capital transfer payments, and net purchases of nonproduced assets  Gross investment is spending on capital goods like structures, equipment, and intellectual property—items that are called fixed assets or capital because of their repeated or continuous use in providing government services for more than 1 year  Structures include residential and commercial buildings, highways and streets, sewer systems, and water systems  State and local government capital transfer payments include disaster-related insurance benefits paid to the U S  territories and the Commonwealths of Puerto Rico and Northern Mariana Islands  Net purchases of nonproduced assets are composed of net purchases of land less oil bonuses (payments to states for the long-term rights to extract oil)  Our main indicator of the sector’s fiscal balance is its operating balance net of funds for capital expenditures (henceforth, operating balance), which is a measure of the sector’s ability to cover its current expenditures out of current revenues  The operating balance is defined as total receipts minus (1) capital outlays not financed by medium- and long-term debt issuance, (2) total current expenditures less depreciation, (3) current surplus of state and local government enterprises, and (4) net social insurance fund balance  Alternative indicators of fiscal balance include net saving and net lending or borrowing  Net saving is the difference between current receipts and current expenditures  Since current expenditures exclude capital investment but include a depreciation measure, net saving can be thought of as a measure of the extent to which governments are covering their current operations from current receipts  Net lending or borrowing is the difference between total receipts and total expenditures, and is analogous to the federal unified surplus or deficit  Total receipts differ from current receipts because they include capital transfer receipts  Total expenditures differ from current expenditures because they include capital investment, capital transfer payments, and net purchases of nonproduced assets  However, they exclude fixed capital consumption  The former three categories are cash expenditures, while the latter is a noncash charge  Net lending or net borrowing represents the governments’ cash surplus or borrowing requirement  This measure is normally negative because governments borrow to finance their capital investment (and sometimes to finance current operations as well)  The following equations describe how we simulated state and local government receipts and expenditures, as well as the intermediate variables used in those simulations  For this update, we started with historical data for 2017, or the most recent year available, and then simulated each variable for each year from 2018 through 2092 (the simulation period)  To simulate state and local government receipts and expenditures, we use simulations of various national-level demographic, macroeconomic, and health care variables derived from projections produced by CBO, CMS, and the OASDI Trustees, and otherwise derived using our own assumptions (see table 2)  This approach is similar to the approach we have used in prior model updates  To simulate state and local government spending on defined benefit pensions, we first estimate the contribution rate (as a fraction of state and local government general government wages and salaries) that state and local governments would need to make each year going forward to ensure that their pension systems are fully funded on an ongoing basis  Our goal is to estimate the financial commitments to employees that have been and are likely to continue to be made by the state and local sector to better understand the full fiscal outlook for the sector  As such, our analysis projects the liabilities that the sector is likely to continue to incur in the future based on simulations of future numbers of retirees receiving pension benefits and their benefit amounts; future numbers of employees, their wages and salaries, and their pension contributions; and assets in state and local government defined benefit pension funds  Although we are only interested in applying contribution rates over the simulation time frame, we actually have to derive the contribution rate for a longer time frame in order to find the steady-state level of necessary contributions  This longer time frame is required because the estimated contribution rate increases as the projection horizon increases and eventually converges to a steady state  If the projection period is of insufficient length, the steady-state level of contribution is not attained, and the necessary contribution rate is understated  We simulated variables used to estimate the pension contribution rate using the approach summarized in table 3  This approach is similar to the approach we have used in prior model updates  Future growth in the number of state and local government retirees— many of whom will be entitled to pension and health care benefits—is largely driven by the size of the workforce in earlier years  We simulated the number of state and local government retirees by assuming that the growth rate in the number of retirees is a weighted average of the growth rates in lagged general government and government enterprise employment  We estimated the weights using a regression of the percent change in the number of retirees on the percent change in employment 1, 6, 11, 16, 21, 26, 31, 36, and 41 years in the past  The coefficients on the past percentage changes in employment were constrained to be non- negative and to sum to 1  For this regression, we removed cyclical swings in employment using the Hodrick-Prescott filter  Similarly, future changes in the real amount of pension benefits will be a function of past changes in real wages and salaries  As indicated in table 3, we used a weighted average of past values of the state and local government employment cost index to simulate the employment cost index for state and local government retirees  We chose the weights to reflect changes in the share and average real benefit level of three subsets of the retiree population over time: (1) new retirees entering the beneficiary pool, (2) deceased retirees leaving the pool, and (3) continuing retirees from the previous year  We simulated the weight for new retirees in a year as the number of retirees less the number of continuing retirees divided by the number of retirees  We simulated the weight for deceased retirees as the mortality rate multiplied by last year’s retirees divided by this year’s retirees  We simulated the weight for continuing retirees as last year’s retirees divided by this year’s retirees  Finally, we simulated the employment cost index for state and local government retirees as the sum of the weight on new retirees multiplied by the state and local government employment cost index and the weight on continuing retirees multiplied by the state and local government employment cost index 8 years prior, less the weight on deceased retirees multiplied by the state and local government employment cost index 21 years prior  As discussed above, we started with historical data for 2017, or the most recent year available, simulated all of the variables in table 3 over the long run, and then used the consumer price index (CPI) and the real return on pension assets to calculate the total present value of wages and salaries for state and local government general government and government enterprise employees, the total present value of real pension benefits paid to state and local government retirees, and the total present value of state and local government employees’ pension contributions  Then, we calculated the total present value of state and local governments’ pension liabilities as the total present value of real pension benefits paid to state and local government retirees less the total present value of state and local government employees’ pension contributions, and the value of assets in state and local government defined benefit pension funds in 2017  Finally, we estimated state and local governments’ pension contribution rate as the ratio of the total present value of their pension liabilities to the total present value of wages and salaries for state and local government employees  Table 4 summarizes the approach we used to simulate interest rates on state and local government financial assets and liabilities  This approach is similar to the approach we have used in prior model updates  Table 5 summarizes our approach to simulating state and local government receipts  This approach is similar to the approach we have used in prior model updates  These variables track state and local government receipts in table 1 above as follows: State and local government personal income tax revenue is the sum of state personal income tax revenue and local personal income tax revenue; State and local government personal tax revenue is the sum of personal income tax revenue and other personal tax revenue; State and local government revenue from taxes on production and imports is the sum of general sales tax revenue, excise tax revenue, property tax revenue, and revenue from other taxes on production and imports; State and local government current tax revenue is the sum of personal tax revenue, revenue from taxes on production and imports, and corporate income tax revenue; State and local government current transfer receipts are equal to federal Medicaid grants minus Medicare Part D payments to the federal government, plus other federal grants (excluding investment grants), transfer receipts from businesses, and transfer receipts from persons; State and local government current receipts are the sum of current tax revenue, current transfer receipts, income on assets, social insurance contributions, and government enterprise surplus; State and local government capital transfer receipts are the sum of federal investment grants and estate and gift tax revenue; and State and local government total receipts are the sum of current receipts and capital transfer receipts  Our general approach to simulating state and local government expenditures is to assume that state and local governments maintain the current level of public goods and services provision per capita (see table 6)  Thus, we generally assume that expenditures keep up with U S  population growth and some measure of inflation, where the relevant rate of inflation varies depending on the specific type of expenditure  However, we use alternative approaches—described below—to simulate depreciation, interest payments, and social benefits for health care  This approach is similar to the approach we have used in prior model updates  These variables correspond to state and local government expenditures in table 1 as follows: Employee compensation is the sum of wages and salaries, pension contributions, health benefits for current employees, health benefits for retirees, and other compensation, for state and local government general government employees  Consumption expenditures are the sum of employee compensation, general government fixed capital consumption, and other general government consumption expenditures  Social benefit payments are the sum of Medicaid benefits, non- Medicaid health benefits, and non-health social benefits  Current expenditures are the sum of consumption expenditures, social benefit payments, interest payments, and subsidy payments  Total expenditures are the sum of current expenditures, gross investment, capital transfer payments, and purchases of nonproduced assets, minus general government and government enterprise fixed capital consumption  Table 7 summarizes our approach for simulating state and local government financial assets and liabilities  This approach is similar to the approach we have used in prior model updates  Our method for simulating the sectors’ short-term debt outstanding leverages the fact that for any entity, there is a direct relationship between budget outcomes and changes in financial position  Specifically, if expenditures exceed receipts, the gap needs to be financed by some combination of changes in financial assets and changes in financial liabilities  If governments spend more than they take in, they must pay for it by issuing debt, cashing in assets, or some combination of the two  Conversely, if receipts exceed expenditures and the sector is a net lender, its net financial investment (the net change in financial assets minus the net change in financial liabilities) must equal the budget surplus  The relationship between budget outcomes and the sector’s financial position is shown in the following accounting identity: total receipts – total expenditures = change in financial assets – change in financial liabilities  The sector’s financial liabilities include short-, medium-, and long-term debt; trade payables; and loans from the federal government, so the accounting identity can be rewritten as follows: total receipts – total expenditures = change in financial assets – change in medium- and long-term debt – change in trade payables – change in federal government loans – change in short term debt  For a given difference between total receipts and total expenditures, various combinations of changes in financial assets and changes in financial liabilities can satisfy this identity  However, we assumed that financial assets grow at the same rate as U S  GDP, that medium- and long-term debt outstanding is determined using the historical relationship described in table 7, that federal government loans to state and local governments are determined using the historical relationship described in table 7, and that trade payables grow at the same rate as other state and local government consumption spending  If the first four terms on the right hand side of the identity are already determined, then only the fifth term— the change in short-term debt—is free to satisfy this identity  As discussed above, our indicators of fiscal balance are operating balance, net saving, and net lending or borrowing  This approach is similar to the approach we have used in prior model updates  Recall that we defined operating balance as follows: operating balance = total receipts – (gross investment + capital transfer payments + net purchases of nonproduced assets – medium- and long-term debt issuance) – (current expenditures – consumption of general government fixed assets) – current surplus of state and local government enterprises – net social insurance fund balance  By substituting for total receipts and current expenditures using the relationships described above and rearranging terms, we can also calculate operating balance using a formula that more easily identifies its revenue components—the items in the first set of parentheses—and expenditure components—the items in the second set of parentheses: operating balance = (current tax revenues + estate and gift tax revenues + social insurance fund contributions + income receipts from assets + current transfers + federal investment grants + medium- and long-term debt issuance) – (compensation of general government employees + social benefit payments + interest payments + gross investment + capital transfer payments + net purchases of nonproduced assets + other general government consumption expenditures + subsidy payments + net social insurance fund balance)  Some of our simulations are based on estimated historical relationships between pairs of variables: Elasticity of real personal consumption expenditures less food and services with respect to real wages and salaries; Elasticity of the real U S  market value of real estate with respect to Relationship between effective interest rates on financial assets and Relationship between state and local government bond yields and 10- year Treasury rates; Relationship between effective interest rates on long-term state and local government debt and federal government loans and state and local government bond yields; Elasticity of real state personal income tax revenue with respect to Elasticity of real state and local government excise tax revenue with respect to real wages and salaries; Relationship between long-term debt issuance as a fraction of gross investment and nonproduced asset purchases in excess of federal investment grants and the change in state and local government bond yields; and Relationship between real federal government lending to state and local governments and real U S  GDP  To estimate each of these historical relationships, we used the following approach: first, we assessed the order of integration of both variables using unit root tests of the levels and the first differences, where a variable is integrated of order 0 (I(0) or stationary) if we rejected the null hypothesis of a unit root in the levels at standard significance levels, and is integrated of order 1 (I(1) or first-order nonstationary) if we could not reject the null hypothesis of a unit root in the levels but we could do so for the first differences  For relationships between variables that were both stationary, we estimated an autoregressive distributed lag model, where y is the dependent variable, x is the independent variable, and ε is an independent, identically distributed error term  The long-run impact on y of a one unit change in x is given by ∑   We initially chose the number of lags based on the Bayesian Information Criteria and then added additional lags of the dependent variable, if needed, until the residuals were consistent with a white noise process at standard significance levels  For relationships between variables that were both first-order nonstationary, we used the same approach but also used the Pesaran, Shin, and Smith bounds test for the existence of a cointegrating (long-run equilibrium) relationship  We concluded that the variables were cointegrated if we rejected the null hypothesis of no relationship at standard significance levels  Tables 8 and 9 summarize the estimated regression models as well as the results of the unit root, white noise, and cointegration tests  We simulated the model for the 75-year period from 2018 through 2092, and we used the results to calculate the operating balance for the state and local government sector as a percentage of U S  GDP  Our results suggest that if the sector maintains current policy and continues to provide current per capita levels of public goods and services, then its operating balance will decline from about -1 percent of U S  GDP to about -3 percent of U S  GDP over the next 50 years  To shed light on how maintaining the operating balance at or above zero would affect the state and local government sector, we used the model to simulate the level of total expenditures that would keep the operating balance greater than or equal to zero  We then calculated the difference between the present value of total expenditures simulated assuming the sector maintains balance, and the present value of total expenditures simulated assuming the sector maintains current policies, both as a percentage of the present value of total expenditures assuming the sector maintains current policies, and as a percentage of the present value of U S  GDP  We calculated all of the present values for the 50-year period from 2018 through 2067, and we used a discount rate equal to the average of the 3-month Treasury rate and the 10-year Treasury rate for each year  Our results suggest that the difference between the present value of total expenditures that maintain balance and the present value of total expenditures that maintain current policies is about -14 7 percent of the present value of total expenditures that maintain current policies, or about -2 4 percent of the present value of U S  GDP  That is, our simulations suggest that maintaining balance would require the sector to spend about 14 7 percent less than it would spend each year to maintain current policies  We note that a similar exercise based on simulating total revenues required to maintain the operating balance at or above zero would generate a similar result  Our approach has a number of limitations and the results should be interpreted with caution: The state and local government fiscal model is not designed for certain types of analyses  The simulations are not intended to provide precise predictions  Even though we know that these governments regularly make changes to tax laws and expenditures, the model essentially holds current policy in place and analyzes the fiscal future for the sector as if those policies were maintained because it would be highly speculative to make any assumptions about future policy adjustments  Fiscal outcomes, as related to the state and local government sector’s financial position and solvency, may not reflect all aspects of the sector’s fiscal health  Other indicators include economic indicators that go beyond the sector’s financial position to include economic growth, income, or distributional equity, as well as indicators of the quality of services provided by the sector, including education, health care, infrastructure, and other public goods and services  Our unit of analysis is the state and local government sector as a whole, so our results provide an assessment of the sector’s fiscal outlook  However, individual state and local governments likely exhibit significant heterogeneity in their expenditure and revenue patterns, so their fiscal outlooks will likely differ from that for the sector  Nevertheless, it is informative to assess the overall fiscal outlook of the sector because doing so reveals the outlook for the average state or local government  In addition, aggregate data on the sector are available on a more timely basis than data for individual state and local governments  This allows for a better assessment of the sector’s current fiscal outlook  Our results for the sector also provide a baseline from which to view the experiences of individual state and local governments  Finally, assessing the fiscal outlook of the sector as a whole can help mitigate the tendency to extrapolate from the most visible, but potentially not representative, experiences of individual states or localities  Our baseline approach to simulating the fiscal outlook for the state and local government sector is described in appendix I  As part of our simulation approach, we used five variables with values for the simulation period—the period from 2018 through 2092—that are projected outside the model and that do not rely on maintaining historical relationships: U S  population, real U S  gross domestic product (GDP) growth, national health care excess cost growth, Medicaid excess cost growth, and the real rate of return on pension assets  U S  population  For our baseline simulations, we used the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds’ (OASDI Trustees) intermediate population projections  Real U S  GDP  For our baseline simulations, we projected real U S  GDP to grow at the same rate as Congressional Budget Office (CBO) projections for the period from 2018 through 2028 and to grow at the same rate as the OASDI Trustees’ intermediate projections of real U S  GDP growth for the period from 2029 through 2092  National health expenditures excess cost growth  For our baseline simulations, we used Centers for Medicare & Medicaid Services’ (CMS) baseline projection of national health expenditures excess cost growth  Medicaid excess cost growth  For our baseline simulations, for the period from 2029 through 2092, we used Medicaid excess cost growth derived from CMS’s baseline projections  Real rate of return on state and local government pension assets  For our baseline simulations, we assumed a 5 percent real rate of return on state and local government pension assets  To assess the sensitivity of our results to changes in these baseline projections, we selected two alternative projections of each of these variables, one associated with a faster growth rate or rate of return and one associated with a slower growth rate or rate of return  U S  population  For our alternative simulations, we used the OASDI Trustees’ high cost and low cost population projections  Real U S  GDP  For our alternative simulations, we used the OASDI Trustees’ high cost and low cost projections of real U S  GDP growth  National health expenditures excess cost growth  For our alternative simulations, we used CMS’s alternative projection of national health expenditures excess cost growth  As another alternative, we simulated the model assuming excess cost growth for national health expenditures is zero  Medicaid excess cost growth  For our alternative simulations, for the period from 2029 through 2092, we used Medicaid excess cost growth derived from CMS’s alternative projections for the period from 2029 through 2092  As another alternative, we simulated the model assuming Medicaid excess cost growth is zero for the period from 2029 through 2092  Real rate of return on state and local government pension assets  For our sensitivity analysis, we used real rates of return of 2 5 percent and 7 5 percent  Table 10 shows the average annual growth rate or rate of return associated with the baseline and alternative projections of each variable for the simulation period  For our simulations based on alternative assumptions about U S  population growth and real U S  GDP growth, as well as simulations based on alternative assumptions about real pension asset returns, we simulated the model changing one variable at a time and leaving the others fixed at their baseline values  For example, for one simulation we used the slower assumption for real U S  GDP growth and the baseline assumptions for all other variables  For our simulations based on alternative assumptions about excess cost growth for national health expenditures and for Medicaid, we changed both variables in the same direction and left the others fixed at their baseline values  For example, for one simulation we used zero excess cost growth for both national health expenditures and for Medicaid, and made the baseline assumption for the other variables  Thus, our sensitivity analysis is in the spirit of a partial equilibrium comparative statics analysis that sheds light on how each of the individual variables may affect the state and local government sector’s fiscal outlook  However, these variables are likely to be correlated so future changes in one would likely be associated with changes in others  State and Local Governments’ Fiscal Outlook: December 2016 Update, GAO-17-213SP  Washington, D C : Dec  8, 2016  State and Local Governments’ Fiscal Outlook: December 2015 Update, GAO-16-260SP  Washington, D C : Dec  16, 2015  State and Local Governments’ Fiscal Outlook: December 2014 Update, GAO-15-224SP  Washington, D C : Dec  17, 2014  State and Local Governments’ Fiscal Outlook: April 2013 Update, GAO-13-546SP  Washington, D C : Apr  29, 2013  State and Local Governments’ Fiscal Outlook: April 2012 Update, GAO-12-523SP  Washington, D C : Apr  5, 2012  State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability, GAO-12-322  Washington, D C : Mar  2, 2012  State and Local Governments’ Fiscal Outlook: April 2011 Update, GAO-11-495SP  Washington, D C : Apr  6, 2011  State and Local Governments: Knowledge of Past Recessions Can Inform Future Federal Fiscal Assistance, GAO-11-401  Washington, D C : Mar  31, 2011  State and Local Governments: Fiscal Pressures Could Have Implications for Future Delivery of Intergovernmental Programs, GAO-10-899  Washington, D C : July 30, 2010  State and Local Governments’ Fiscal Outlook: March 2010 Update, GAO-10-358  Washington, D C : Mar  2, 2010  Update of State and Local Government Fiscal Pressures, GAO-09-320R  Washington, D C : Jan  26, 2009  State and Local Fiscal Challenges: Rising Health Care Costs Drive Long- term and Immediate Pressures, GAO-09-210T  Washington, D C : Nov  19, 2008  State and Local Governments: Growing Fiscal Challenges Will Emerge during the Next 10 Years, GAO-08-317  Washington, D C : Jan  22, 2008  Our Nation’s Long-Term Fiscal Challenge: State and Local Governments Will Likely Face Persistent Fiscal Challenges in the Next Decade, GAO-07-1113CG  Washington, D C : July 18, 2007  State and Local Governments: Persistent Fiscal Challenges Will Likely Emerge within the Next Decade, GAO-07-1080SP  Washington, D C : July 18, 2007  In addition to the contacts listed above, Brenda Rabinowitz and Courtney LaFountain (Assistant Directors), David Aja, Brett Caloia, Ann Czapiewski, Joe Silvestri, Stewart Small, Andrew J  Stephens, Frank Todisco, Walter Vance, and Chris Woika made significant contributions to this report 


Report 2: " It added that its reliance on an ad hoc approach "scrutinizing the limited number of specific industries during a year, while worthwhile, leaves unexamined many deserving industries for updating and may create over time a set of illogical size standards " The SBA announced that it would begin its analysis of its size standards by assuming that "$6 5 million [later increased to $7 5 million] is an appropriate size standard for those industries with receipts size standards and 500 employees for those industries with employee size standards " It would then analyze the following industry characteristics: "average firm size; average asset size (a proxy for startup costs); competition, as measured by the market share of the four largest firms in the industry; and, the distribution of market share by firm size—that is, are firms in the industry generally very small firms, or dominated by very large firms " Then, before making its final determination on the size standard, it would "examine the participation of small businesses in federal contracting and SBA's guaranteed loan program at the current size standard level  Depending on the level of small business participation, additional consideration may be given to the level of the current size standard and the analysis of industry factors " In April 2009, the SBA announced that was simplifying the administration and use of its size standards by reducing the number of receipts based size standards from 31 to 8 when establishing a new size standard or reviewing an existing size standard: For many years, SBA has been concerned about the complexity of determining small business status caused by a large number of varying receipts based size standards (see 69 FR 13130 (March 4, 2004) and 57 FR 62515 (December 31, 1992))  At the start of current comprehensive size standards review, there were 31 different levels of receipts based size standards  They ranged from $0 75 million to $35 5 million, and many of them applied to one or only a few industries  The SBA believes that to have so many different size standards with small variations among them is unnecessary and difficult to justify analytically  To simplify managing and using size standards, SBA proposes that there be fewer size standard levels  This will produce more common size standards for businesses operating in related industries  This will also result in greater consistency among the size standards for industries that have similar economic characteristics  Under the current comprehensive size standards review, SBA is proposing to establish eight "fixed-level" receipts based size standards: $5 0 million, $7 0 million, $10 0 million, $14 0 million, $19 0 million, $25 5 million, $30 0 million, and $35 5 million  These levels are established by taking into consideration the minimum, maximum and the most commonly used current receipts based size standards  These eight receipts based size standards were increased to $5 5 million, $7 5 million, $11 0 million, $15 0 million, $20 5 million, $27 5 million, $32 5 million, and $38 5 million in 2014 to account for inflation  The SBA also announced that it would use eight employee based size standards when establishing a new size standard or reviewing an existing size standard (no more than 50, 100, 150, 200, 250, 500, 750, and 1,000 employees) instead of seven (no more than 50, 100, 150, 500, 750, 1,000, and 1,500 employees); and continue to use one asset based size standard, one megawatt hours size standard (based on electrical output over the preceding fiscal year), and one size standard based on a combination of the number of employees and barrel per day refining capacity  The SBA also announced that "to simplify size standards further" it "may propose a common size standard for closely related industries " The SBA argued although the size standard analysis may support a separate size standard for each industry, SBA believes that establishing different size standards for closely related industries may not always be appropriate  For example, in cases where many of the same businesses operate in the same multiple industries, a common size standard for those industries might better reflect the Federal marketplace  This might also make size standards among related industries more consistent than separate size standards for each of those industries  Because SBA size standards remain in force until after they are reviewed, the number of size standards did not immediately drop from 41 to 19 in 2009  Instead, the number of size standards began to decline gradually as new size standard final rules were issued  In addition, from 2010 through 2016, the SBA decided, in most instances, not to lower size standards (which would have made it more difficult for businesses to qualify) even if the data supported lowering them because unemployment at that time was relatively high and doing so would "run counter to numerous Congressional and Administration's initiatives and programs to create jobs and boost economic growth " As a result of this policy decision, several size standards that would have otherwise been eliminated remained in place  Also, in 2016, the SBA added a new employee based size standard (no more than 1,250 employees) and reinstated the use of another (no more than 1,500 employees) when establishing a new, or revising an existing, size standard  The SBA's decisions in 2009 to reduce the number of receipts based size standards and to propose a common size standard for closely related industries were opposed by some industry groups  They argued that these policies could lead to the SBA to classify an industry "for the sake of convenience" into a size standard that the agency's own economic analysis indicates should be in a different (easier to qualify) size standard  Congress adopted legislation in 2013 ( P L  112-239 , National Defense Authorization Act for Fiscal Year 2013) that included provisions directing the SBA not to limit the number of size standards and to assign the appropriate size standard to each NAICS industrial classification  The SBA currently has 27 SBA industry size standards in effect (16 receipts based size standards, 9 employee based sized standards, 1 asset based size standard, and 1 size standard based on a combination of the number of employees and barrel per day refining capacity)  That number is expected to increase given the SBA's directive not to limit the number of size standards  As mentioned previously, P L  111-240 requires the SBA to conduct a detailed review of not less than one-third of the SBA's industry size standards during the 18-month period beginning on the date of enactment (September 27, 2010) and during every 18-month period thereafter  The act directs the SBA to "make appropriate adjustments to the size standards" to reflect market conditions, and to report to the House Committee on Small Business and the Senate Committee on Small Business and Entrepreneurship and make publicly available "not later than 30 days" after the completion of each review information regarding the factors evaluated as part of each review, the criteria used for any revised size standard, and why the SBA did, or did not, adjust each size standard that was reviewed  The act also requires the SBA to ensure that each industry size standard is reviewed at least once every five years  On July 7, 2011, the SBA announced that its "comprehensive review of all small business size standards" would begin with the following six industries: Educational Services (final rule was issued on September 24, 2012); Health Care and Social Assistance Services (final rule was issued on September 24, 2012); Real Estate Rental and Leasing (final rule was issued on September 24, 2012); Administrative and Support, Waste Management and Remediation Services (final rule was issued on December 6, 2012); Information (final rule was issued on December 6, 2012); and Utilities (final rule was issued on December 23, 2013)  The SBA subsequently completed size standard reviews for all industries in January 2016 (listed by when the final rule was issued): Professional, Scientific and Technical Services (final rule was issued on February 24, 2012); Transportation and Warehousing (final rule was issued on February 24, 2012); Agriculture, Forestry, Fishing and Hunting (final rule was issued on June 20, 2013); Arts, Entertainment, and Recreation (final rule was issued on June 20, 2013); Finance and Insurance (final rule was issued on June 20, 2013); Management of Companies (final rule was issued on June 20, 2013); Support Activities for Mining (final rule was issued on June 20, 2013); Construction (final rule was issued on December 23, 2013); Wholesale Trade (final rule was issued on January 25, 2016); Industries with Employee Based Size Standards not Part of Manufacturing, Wholesale Trade, or Retail Trade (final rule was issued on January 26, 2016); and Manufacturing (final rule was issued on January 26, 2016)  A summary of the final rules issued for each industry is provided in Table A-1   During the first five-year review cycle, the SBA increased 621 size standards, decreased 3 (to exclude potentially dominant firms from being considered small), and retained 388 at their pre-existing levels  Of the 388 retained size standards, 214 were retained based on the results of the SBA's economic analysis and 174 were retained based on the SBA's policy of generally not lowering any size standard, even though the results of the economic analysis supported lowering them, due to national economic conditions  The SBA has started its second five-year review of its size standards and anticipates issuing its first final rules in the second five-year review cycle in 2019, using new size standard methodology announced in April 2018 (discussed in the next section)  The SBA also announced in April 2018 that its policy of generally not lowering size standards when the analysis indicates that a lower standard is justified would no longer be in force, at least initially, during the second five-year review cycle: the decision to raise, lower, or retain a size standard will primarily be driven by analytical results, with due considerations of public comments, impacts of changes on the affected businesses, and other factors SBA considers important  All of these decisions will be detailed in individual rulemakings  It will take several years to complete the five-year review of all size standards … during which the state of the economy may change  It is, therefore, not possible to state now … what impact, if any, the future economic environment would have on the SBA's policy decision regarding size standards  As mentioned earlier, the SBA, relying on statutory language, defines a small business as a concern that is organized for profit; has a place of business in the United States; operates primarily within the United States or makes a significant contribution to the economy through payment of taxes or use of American products, materials, or labor; is independently owned and operated; and is not dominant in its field on a national basis  The business may be a sole proprietorship, partnership, corporation, or any other legal form  The SBA uses two measures to determine if a business is small: industry specific size standards or a combination of the business's net worth and net income  For example, the SBA's Small Business Investment Company (SBIC) program allows businesses to qualify as small if they meet the SBA's size standard for the industry in which the applicant is primarily engaged, or an alternative net worth and net income based size standard which has been established for the SBIC program  The SBIC's alternative size standard is currently set as a maximum net worth of not more than $19 5 million and average after-tax net income for the preceding two years of not more than $6 5 million  All of the company's subsidiaries, parent companies, and affiliates are considered in determining if it meets the size standard  The SBA decided to apply the net worth and net income measures to the SBIC program "because investment companies evaluate businesses using these measures to decide whether or not to make an investment in them " Businesses participating in the SBA's 504/Certified Development Company (504/CDC) loan guaranty program are to be deemed small if they did not have a tangible net worth in excess of $8 5 million and did not have an average net income in excess of $3 million after taxes for the preceding two years  As discussed below, P L  111-240 increased these threshold amounts on an interim basis to not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes for the two full fiscal years before the date of the application  All of the company's subsidiaries, parent companies, and affiliates are considered in determining if it meets the size standard  Also, before May 5, 2009, businesses participating in the SBA's 7(a) loan guaranty program, including its express programs, were deemed small if they met the SBA's size standards for firms in the industries described in NAICS  Using authority provided under P L  111-5 , the American Recovery and Reinvestment Act of 2009, the SBA temporarily applied the 504/CDC program's size standards as an alternative for 7(a) loans approved from May 5, 2009, through September 30, 2010  Firms applying for a 7(a) loan during that time period qualified as small using either the SBA's industry size standards or the 504/CDC program's size standard  The provision's intent was to enhance the ability of small businesses to access the capital necessary to create and retain jobs during the economic recovery  P L  111-240 made the use of alternative size standards for the 7(a) program permanent  The act directs the SBA to establish an alternative size standard for both the 7(a) and 504/CDC programs that uses maximum tangible net worth and average net income as an alternative to the use of industry standards  The act also establishes, until the date on which the alternative size standard is established, an interim alternative size standard for the 7(a) and 504/CDC programs of not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application  The SBA Administrator has the authority to establish and modify size standards for particular industries  Overall, about 97% of all employer firms qualify as small under the SBA's size standards  These firms account for about 30% of industry receipts  The SBA generally "prefers to use average annual receipts as a size measure because it measures the value of output of a business and can be easily verified by business tax returns and financial records " However, historically, the SBA has used the number of employees to determine if manufacturing and mining companies are small  Before a proposed change to the size standards can take effect, the SBA's Office of Size Standards (OSS) undertakes an analysis of the change's likely impact on the affected industry, focusing on the industry's overall degree of competition and the competitiveness of the firms within the industry  The analysis includes an assessment of the following four economic factors: "average firm size, average assets size as a proxy of start-up costs and entry barriers, the 4-firm concentration ratio as a measure of industry competition, and size distribution of firms " The SBA also considers the ability of small businesses to compete for federal contracting opportunities and, when necessary, several secondary factors "as they are relevant to the industries and the interests of small businesses, including technological change, competition among industries, industry growth trends, and impacts of size standard revisions on small businesses " The specifics of SBA's size standards methodology have evolved over the years with the availability of new industry and federal procurement data and staff research  For example, the SBA previously presumed less than $7 0 million (increased to less than $7 5 million in 2014 to account for inflation) as an appropriate "anchor" size standard for the services, retail trade, construction, and other industries with receipts based size standards; 500 or fewer employees as an appropriate anchor size standard for the manufacturing, mining and other industries with employee based size standards; and 100 or fewer employees as an appropriate anchor size standard for the wholesale trade industries  These three anchor size standards were used as benchmarks or starting points for the SBA's economic analysis  To the extent an industry displayed "differing industry characteristics," a size standard higher, or in some cases lower, than an anchor size standard was used  In April 2018, the SBA replaced the "anchor" approach with a "percentile" approach, primarily because the anchors were no longer representative of the size standards being used (just 24% of industries with receipt-based size standards and 22% of those with employee based size standards have the anchor size standards) and the anchor approach entails "grouping industries from different NAICS sectors thereby making it inconsistent with section 3(a)(7) of the [Small Business] Act," which limits the SBA's ability to create common size standards by grouping industries below the 4-digit NAICS level  Specifically, when assessing the appropriateness of the current size standards, the SBA now evaluates the structure of each industry in terms of four economic characteristics or factors, namely average firm size, average assets size as a proxy of start-up costs and entry barriers, the 4-firm concentration ratio as a measure of industry competition, and size distribution of firms using the Gini coefficient  For each size standard type     SBA ranks industries both in terms each of the four industry factors and in terms of the existing size standard and computes the 20 th percentile and 80 th percentile values for both  SBA then evaluates each industry by comparing its value for each industry factor to the 20 th percentile and 80 th percentile values for the corresponding factor for industries under a particular type of size standard  If the characteristics of an industry under review within a particular size standard type are similar to the average characteristics of industries within the same size standard type in the 20 th percentile, SBA will consider adopting as an appropriate size standard for that industry the 20 th percentile value of size standards for those industries  For each size standard type, if the industry's characteristics are similar to the average characteristics of industries in the 80 th percentile, SBA will assign a size standard that corresponds to the 80 th percentile in the size standard rankings of industries  A separate size standard is established for each factor based on the amount of differences between the factor value for an industry under a particular size standard type and 20 th percentile and 80 th percentile values for the corresponding factor for all industries in the same type  Specifically, the actual level of the new size standard for each industry factor is derived by a linear interpolation using the 20 th percentile and 80 th percentile values of that factor and corresponding percentiles of size standards  Each calculated size standard will be bounded between the minimum and maximum size standards levels [see Table 2 ]     the calculated value for a receipts based size standard for each industry factor is rounded to the nearest $500,000 and the calculated value for an employee based size standard is rounded to the nearest 50 employees for Manufacturing and industries in other sectors (except Wholesale and Retail Trade) and to the nearest 25 employees for employee based size standards for Wholesale Trade and Retail Trade  The SBA anticipates that its shift from using the anchor approach to the percentile approach will have minimal impact, both in terms of the direction and magnitude of changes, to its industry size standards  Any changes to size standards must follow the rulemaking procedures of the Administrative Procedure Act  A proposed rule changing a size standard is first published in the Federal Register , allowing for public comment  It must include documentation establishing that a significant problem exists that requires a revision of the size standard, plus an economic analysis of the change  Comments from the public, plus any other new information, are reviewed and evaluated before a final rule is promulgated establishing a new size standard  The SBA currently uses employment size to determine eligibility for 505 of 1,036 industries (48 6%), including all 360 manufacturing industries, 24 mining industries, and 71 wholesale trade industries  As of October 1, 2017, 98 manufacturing industries have an upper limit of 500 employees (27 2%); 91 have an upper limit of 750 employees (25 2%); 89 have an upper limit of 1,000 employees (24 7%); 56 have an upper limit of 1,250 employees (15 6%); and 26 have an upper limit of 1,500 employees (7 2%)  3 of the 24 mining industries have an upper limit of 250 employees (12 5%), 7 have an upper limit of 500 employees (29 2%), 7 have an upper limit of 750 employees (29 2%), 2 have an upper limit of 1,000 employees (8 3%), 3 have an upper limit of 1,250 employees (12 5%), and 2 have an upper limit of 1,500 employees (8 3%)  25 of the 71 wholesale trades industries have an upper limit of 100 employees (35 2%), 16 have an upper limit of 150 employees (22 5%), 21 have an upper limit of 200 employees (29 6%), and 9 have an upper limit of 250 employees (12 7%)  The SBA currently has nine employee based industry size standards in effect (no more than 100, 150, 200, 250, 500, 750, 1,000, 1,250, and 1,500 employees)  The SBA uses average annual receipts over the three (soon to be five) most recently completed fiscal years to determine program eligibility for most other industries (526 of 1,036 industries, or 50 8%)  The SBA also uses average asset size as reported in the firm's four quarterly financial statements for the preceding year to determine eligibility for five finance industries, and a combination of number of employees and barrel per day refining capacity for petroleum refineries  The SBA currently has 16 receipts based industry size standards in effect  In some instances, there is considerable variation in the size standards used within each industrial sector  For example, the SBA uses 11 different size standards to determine eligibility for 66 industries in the retail trade sector  In general, most administrative and support service industries have an upper limit of either $15 0 million or $20 5 million in average annual sales or receipts; most agricultural industries have an upper limit of $0 75 million in average annual sales or receipts; most construction of buildings and civil engineering construction industries have an upper limit of $36 5 million in average annual sales or receipts, and most construction specialty trade contractors have an upper limit of $15 0 million in average annual sales or receipts; most educational services industries have an upper limit of either $7 5 million or $11 0 million in average annual sales or receipts; most health care industries have an upper limit of either $7 5 million or $15 0 million in average annual sales or receipts; most social assistance industries have an upper limit of $11 0 million in average annual sales or receipts; there is considerable variation within the professional, scientific, and technical service industries, ranging from an upper limit of $7 5 million in average annual sales or receipts to $38 5 million; there is considerable variation within the transportation and warehousing industrial sector, ranging from an upper limit of $7 5 million in average annual sales or receipts to $38 5 million for 43 industries and from an upper limit of 500 employees to 1,500 employees for 15 industries); and most finance and insurance industries have an upper limit of $38 5 million in average annual sales or receipts  The SBA also applies a $550 million average asset limit (as reported in the firm's four quarterly financial statements for the preceding year) to determine eligibility in five finance industries: commercial banks, saving institutions, credit unions, other depository credit intermediation, and credit card issuing  Many federal statutes provide special considerations for small businesses  For example, small businesses are provided preferences through set-asides and sole source awards in federal contracting and pay lower fees to apply for patents and trademarks  In most instances, businesses are required to meet the SBA's size standards to be considered a small business  However, in some cases, the underlying statute defines the eligibility criteria for defining a small business  In other cases, the statute authorizes the implementing agency to make those determinations  Under current law, a federal agency that decides that it would like to exercise its authority to establish its own size standard through the federal rulemaking process is required to, among other things, (1) undertake an initial regulatory flexibility analysis to determine the potential impact of the proposed rule on small businesses, (2) transmit a copy of the initial regulatory flexibility analysis to the SBA's Chief Counsel for Advocacy for comment, and (3) publish the agency's response to any comments filed by the SBA's Chief Counsel for Advocacy in response to the proposed rule and a detailed statement of any change made to the proposed rule in the final rule as a result of those comments  In addition, the federal agency must provide public notice of the proposed rule and an opportunity for the public to comment on the proposed rule, typically through the publication of an advanced notice of proposed rulemaking in the Federal Register and notification of interested small businesses and related organizations  Also, prior to issuing the final rule, the federal agency must have the approval of the SBA's Administrator  Under current practice, the SBA's Administrator, through the SBA's Office of Size Standards, consults with the SBA's Office of Advocacy prior to making a final decision concerning such requests  The Office of Advocacy is an independent office within the SBA  During the 112 th Congress, H R  585 , the Small Business Size Standard Flexibility Act of 2011, was reported by the House Committee on Small Business on November 16, 2011, by a vote of 13 to 8  The bill would have retained the SBA's Administrator's authority to approve or disapprove size standards for programs under the Small Business Act of 1953 (as amended) and the Small Business Investment Act of 1958 (as amended)  The Office of Chief Counsel for Advocacy would have assumed the SBA Administrator's authority to approve or disapprove size standards for purposes of any other act  Similar legislative provisions have been introduced during the 113 th Congress ( H R  2542 , the Regulatory Flexibility Improvements Act of 2013, and included in H R  4 , the Jobs for America Act), 114 th Congress ( H R  527 , the Small Business Regulatory Flexibility Improvements Act of 2015, and its Senate companion bill, S  1536 ), and 115 th Congress ( H R  33 , the Small Business Regulatory Flexibility Improvements Act of 2017, and its Senate companion bill, S  584 , and included in H R  5 , the Regulatory Accountability Act of 2017)  Advocates of splitting the SBA Administrator's small business size standards' authority between the Office of Chief Counsel for Advocacy and the SBA's Administrator have argued that Should an agency wish to draft a regulation that adopts a size standard different from the one already adopted by the Administrator in regulations implementing the Small Business Act, the agency must obtain approval of the Administrator  However, that requires the Administrator to have a complete understanding of the regulatory regime of that other act—knowledge usually outside the expertise of the SBA  However, the Office of the Chief Counsel for Advocacy, an independent office within the SBA, represents the interests of small businesses in rulemaking proceedings (as part of its responsibility to monitor agency compliance with the Regulatory Flexibility Act, 5 U S C  601-12, (RFA)) does have such expertise  Therefore, it is logical to transfer the limited function on determining size standards of small businesses for purposes other than the Small Business Act and Small Business Investment Act of 1958 to the Office of the Chief Counsel for Advocacy…  the Administrator is not the proper official to determine size standards for purposes of other agencies' regulatory activities  The Administrator is not fluent with the vast array of federal regulatory programs, is not in constant communication with small entities that might be affected by another federal agency's regulatory regime, and does not have the analytical expertise to assess the regulatory impact of a particular size standard on small entities  Furthermore, the Administrator's standards are: very inclusive, not developed to comport with other agencies' regulatory regimes, and lack sufficient granularity to examine the impact of a proposed rule on a spectrum of small businesses  Opponents have argued that When an agency is seeking to use a size standard other than those approved by the SBA, the agency may consult with the Office of Advocacy  Such consultation is sensible, as the Office of Advocacy has significant knowledge of the regulatory environment outside of the canon of SBA law  However, the SBA's Office of Size Standards, with its historical involvement, expertise, and staff resources in this area, remains the appropriate entity to approve such size standards…  While the legislation permits the SBA to continue to approve size standards for its enabling statutes, it removes SBA's authority to do so for other statutes  The result would be to create a duplicate size standard authority in both the SBA and the Office of Advocacy  Both the SBA and the Office of Advocacy would have personnel who would analyze and evaluate size standards  Through the bifurcation of these responsibilities, taxpayers would effectively be forgoing the economies of scale that are currently enjoyed by the operation of a single Office of Size Standards in the SBA…  Having two such entities that have the same mission is not a transfer of function, but an inefficient and duplicative reorganization … Instead of having one central office, there will now be two—further muddling small businesses' relationship with the federal government  Two bills were introduced during the 114 th Congress ( H R  3714 , the Small Agriculture Producer Size Standards Improvements Act of 2015, and H R  4341 , the Defending America's Small Contractors Act of 2016) to authorize the SBA to establish size standards for agricultural enterprises not later than 18 months after the date of enactment  The size standard for agricultural enterprises was, at that time, set in statute as having annual receipts not in excess of $750,000  H R  4341 , among other provisions, would have also limited an industry category to a greater extent than provided under the North American Industry Classification codes for small business procurement purposes if further segmentation of the industry category is warranted  H R  4341 was introduced on January 7, 2016, and ordered to be reported with amendment by the House Committee on Small Business on January 13, 2016  H R  3714 was introduced on October 8, 2015, considered by the House under suspension of the rules on April 19, 2016, and agreed to by voice vote  P L  114-328 , the National Defense Authorization Act for Fiscal Year 2017, includes a provision which authorizes the SBA to establish different size standards for agricultural enterprises using existing methods and appeal processes  Also, as mentioned previously, P L  115-324 , the Small Business Runway Extension Act of 2018, directs federal agencies proposing a size standard (and, based on report language accompanying the act, presumably the SBA as well) to use the average annual gross receipts from at least the previous five years, instead of the previous three years, when seeking SBA approval to establish a size standard based on annual gross receipts  The SBA has not announced if it will continue to use the average annual gross receipts over three years to determine receipts-based size standards or if it will use the average annual gross receipts from the previous five years  Historically, the SBA has relied on economic analysis of market conditions within each industry to define eligibility for small business assistance  On several occasions in its history, the SBA attempted to revise its small business size standards in a comprehensive manner  However, because (1) the Small Business Act provides leeway in how the SBA is to define small business; (2) there is no consensus on the economic factors that should be used in defining small business; (3) federal agencies have generally opposed size standards that might adversely affect their pool of available small business contractors; and (4) the SBA's initial size standards provided program eligibility to nearly all businesses, the SBA's efforts to undertake a comprehensive reassessment of its size standards met with resistance  Firms that might lose eligibility objected  Federal agencies also objected  As a result, in each instance, the SBA's comprehensive revisions were not fully implemented  The SBA's congressionally mandated requirement to conduct a detailed review of at least one-third of the SBA's industry size standards every 18 months was imposed by P L  111-240 , the Small Business Jobs Act of 2010, to prevent small business size standards from becoming outdated  More frequent reviews of the size standards were expected to increase their accuracy and, generally speaking, result in (1) increased numbers of small businesses found to be eligible for SBA assistance and (2) an increase in the number and amount of federal contracts awarded to small businesses (primarily by preventing large businesses from being misclassified as small and by increasing the number of small businesses eligible to compete for federal contracts)  As expected, the SBA's economic analyses during the recent five-year review cycle often supported an increase in the size standards for many industries  However, the SBA's economic analyses also occasionally supported a decrease in the size standards for some industries  Despite the SBA's decision to, in most circumstances, make no changes when their economic analyses indicated that a decrease was warranted, it could be argued that the increased frequency of the reviews has generally prevented the SBA's size standards from becoming outdated  This, in turn, has, at least to a certain extent, improved the accuracy of the size standards (as measured by the extent to which the size standard is in alignment with the SBA's economic analyses)  In a related matter, the SBA continues to adjust its receipts based size standards for inflation at least once every five years, or more frequently if inflationary circumstances warrant, to prevent firms from losing their small business eligibility solely due to the effects of inflation  The most recent adjustment for inflation took place on July 14, 2014  Prior to that, the last adjustment for inflation took place in 2008  The SBA also continues to review size standards within specific industries whenever it determines that market conditions within that industry have changed  Congress has several options related to the SBA's ongoing review of its size standards  For example, as part of its oversight of the SBA, Congress can wait for the agency to issue its proposed rule before providing input or establish a dialogue with the agency, either at the staff level or with Members involved directly, prior to the issuance of its proposed rule  Historically, Congress has tended to wait for the SBA to issue proposed rules concerning its size standards before providing input, essentially deferring to the agency's expertise in the technical and methodological issues involved in determining where to draw the line between small and large firms  Congress has then tended to respond to the SBA's proposed rules concerning its size standards after taking into consideration current economic conditions and input received from the SBA and affected industries  Waiting for the SBA to issue its proposed rule concerning its size standards before providing congressional input has both advantages and disadvantages  It provides the advantage of insulating the proposed rule from charges that it is influenced by political factors  It also has the advantage of respecting the separation of powers and responsibilities of the executive and legislative branches  However, it has the disadvantage of heightening the prospects for miscommunication, false expectations, and wasted effort, as evidenced by past proposed rules concerning the SBA's size standards that were either rejected outright, or withdrawn, after facing congressional opposition  Another policy option that has not received much congressional attention in recent years, but which Congress may choose to address, is the targeting of the SBA's resources  When the SBA reviews its size standards, it focuses on the competitive nature of the industry under review, with the goal of removing eligibility of firms that are considered large, or dominant, in that industry  There has been relatively little discussion of the costs and benefits of undertaking those reviews with the goal of targeting SBA resources to small businesses in industries that are struggling to remain competitive  GAO recommended this approach in 1978 and Roger Rosenberger, then SBA's associate administrator for policy, planning, and budgeting, testified at a congressional hearing in 1979 that it was debatable whether the SBA should provide any assistance to any of the businesses within industries where "smaller firms are flourishing " Revising the SBA's size standards using this more targeted approach would likely reduce the number of firms eligible for assistance  It would also present the possibility of increasing available benefits to eligible small firms in those industries deemed "mixed" or "concentrated" by the SBA without necessarily increasing overall program costs  Perhaps because previous proposals that would result in a reduction in the number of firms eligible for assistance have met with resistance, this alternative approach to determining program eligibility has not received serious consideration in recent years  Nonetheless, it remains an option available to Congress should it decide to change current policy 

ground_truth: Fiscal sustainability presents a national challenge shared by all levels of government. Since 2007, GAO has published simulations of long-term fiscal trends in the state and local government sector, which have consistently shown that the sector faces long-term fiscal pressures. While most states have requirements related to balancing their budgets, deficits can arise because the planned annual revenues are not generated at the expected rate, demand for services exceeds planned expenditures, or both, resulting in a near-term operating deficit. This report updates GAO's state and local fiscal model to simulate the fiscal outlook for the state and local government sector. This includes identifying the components of state and local expenditures likely to contribute to the sector's fiscal pressures. In addition, this report identifies considerations related to federal policy and other factors that could contribute to uncertainties in the state and local government sector's long-term fiscal outlook. GAO's model uses the Bureau of Economic Analysis's National Income and Product Accounts as the primary data source and presents the results in the aggregate for the state and local sector as a whole. The model shows the level of receipts and expenditures for the sector until 2067, based on current and historical spending and revenue patterns. In addition, the model assumes that the current set of policies in place across state and local government remains constant to show a simulated long-term outlook. GAO's simulations suggest that the state and local government sector will likely face an increasing difference between revenues and expenditures during the next 50 years as reflected by the operating balance--a measure of the sector's ability to cover its current expenditures out of its current receipts. While both expenditures and revenues are projected to increase as a percentage of gross domestic product (GDP), a difference between the two is projected to persist because expenditures are expected to grow faster than revenues throughout the simulation period. GAO's simulations also suggest that growth in the sector's overall spending is largely driven by health care expenditures--in particular, Medicaid spending and spending on health benefits for state and local government employees and retirees. These expenditures are projected to grow as a share of GDP during the simulation period. GAO's simulations also suggest that revenues from personal income taxes and federal grants to states and localities will increase during the simulation period. However, revenues will grow more slowly than expenditures such that the sector faces a declining fiscal outlook. GAO also identified federal policy changes that could affect the state and local government sector's fiscal outlook. For example, the effects of the recently-enacted Tax Cuts and Jobs Act will likely depend on how states incorporate the Act into their state income tax rules. In addition, other factors, such as economic growth and rates of return on pension assets, could shift future fiscal outcomes for the sector.

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



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



Report 2: The Rehabilitation Act of 1973 (Rehabilitation Act), as amended by WIOA, authorizes a number of grant programs to support employment and independent living for persons with disabilities, including the State Vocational Rehabilitation Services program  This program is the primary federal government effort to help individuals with disabilities prepare for and obtain employment  An individual who is deemed eligible works with state VR agency staff to prepare an individualized plan for employment, which describes the employment goal and the specific services needed to achieve that goal  Education’s Rehabilitation Services Administration (RSA) awards funds to state VR agencies through the program to help individuals with disabilities engage in gainful employment  States must provide a 21 3 percent nonfederal match of these funds  In fiscal year 2016, total program funds for VR—including state match funds—were $3 81 billion  States, territories, and the District of Columbia generally designate a single agency to administer the program, although, depending on state law, states may designate more than one agency  Twenty-three states have two separate agencies, one that exclusively serves blind and visually impaired individuals (known as agencies for the blind) and another that serves individuals who are not blind or visually impaired (known as general agencies)  Twenty-seven states, the District of Columbia, and the five territories have a single combined agency that serves both blind and visually impaired individuals and individuals with other types of impairments (known as combined agencies)  In total, there are 79 state VR agencies  In 2014, WIOA amended the Rehabilitation Act to require state VR agencies to provide students with disabilities with pre-employment transition services  According to information Education provided with its regulations, WIOA emphasized the provision of services to students with disabilities to ensure that they have meaningful opportunities to receive training and other supports and services they need to achieve employment outcomes  WIOA requires states to make pre-employment transition services available statewide to all students with disabilities in need of such services, who are eligible or potentially eligible, regardless of whether a student has submitted an application for services from a state VR agency  In this context, students with disabilities include those with an individualized education program (IEP) for special education services through the school system, those receiving an accommodation for their disability, and others  In information provided with the regulations, Education stated that state VR agencies should work closely with school systems and others to identify these students  WIOA requires each state to reserve at least 15 percent of a state’s VR allotment for a fiscal year for pre-employment transition services for students with disabilities  If a state cannot use or match all of its VR funding, it relinquishes funds to the federal government and the state’s total award amount is then reduced  However, the state must still reserve 15 percent of what it did not relinquish for the provision of pre- employment transition services  WIOA established required activities under pre-employment transition services that states must make available to students with disabilities  Education has provided states with additional information about each of the activities (see table 1)  After making the required pre-employment transition services available, if a state has funding remaining, WIOA lists nine other “authorized” activities that a state may implement  For example, in providing the authorized activities, states may, among other things, provide training to local VR and educational service providers; coordinate transition services with local educational agencies; and disseminate information about innovative, effective, and efficient approaches to achieve the goals (see appendix II for a full listing of authorized activities)  Education’s guidance indicates that such authorized activities should improve the transition of students with disabilities from school to postsecondary education or an employment outcome and support the arrangement or provision of the required activities  WIOA also requires local offices of state VR agencies to conduct coordination responsibilities, which includes coordinating with state and local educational agencies to ensure the provision of pre-employment transition services  These can be conducted concurrently with the “required” activities, and states can use the reserved funds for them  Examples of coordination responsibilities that local offices of state VR agencies must undertake are attending meetings, when invited, about IEPs; and working with the local public workforce system and employers to develop work opportunities for students with disabilities  In support of this coordination and in recognition that VR and educational agencies both offer transition services to students, WIOA requires that VR agencies establish or update their interagency agreements with states educational agencies  Interagency agreements between the state VR and educational agencies are intended to describe the steps each agency will take to implement pre-employment transition services and determine the roles and responsibilities of each agency, including financial responsibilities and procedures for identifying students in need of pre- employment transition services  Following the passage of WIOA, Education, through its Rehabilitation Services Administration (RSA), issued regulations and guidance to implement pre-employment transition services requirements (see fig  1)  Education also provided technical assistance to state VR agencies through webinars, conference calls, and presentations at conferences  For example, Education presented information to state officials in a series of webinars about the new programmatic and financial processes and procedures related to pre-employment transition services just after the final regulations were issued in 2016  In addition, Education funded technical assistance centers to help state VR agencies and their partners answer questions and provide training about WIOA  Two of these centers are the Workforce Innovation Technical Assistance Center (WINTAC) and the National Technical Assistance Center on Transition (NTACT)  Each center focuses its efforts on a specific set of issues: WINTAC on helping state VR agencies implement WIOA requirements, including pre- employment transition services; and NTACT on helping state VR and educational agencies improve outcomes for students receiving transition services  RSA is to conduct periodic monitoring visits to assess state VR agencies’ implementation of the VR program, including pre-employment transition services  RSA is to monitor states for compliance with the administrative, financial, and performance requirements of the program, as well as identify technical assistance needs at individual state VR agencies  According to Education officials, RSA plans to follow a 5-year monitoring cycle that began in fiscal year 2017 and will generally include monitoring visits to 10 states per year through fiscal year 2021  In fiscal year 2017, Education visited 14 VR agencies in 10 states, and in fiscal year 2018, Education plans to visit 15 VR agencies in 12 states  Most state VR agencies that responded to our survey reported expanding services for students with disabilities since WIOA’s enactment in July 2014 by either serving more students through pre-employment transition services or by initiating new or additional services  Most state VR agencies that responded to our survey reported that they provided the five required activities to more students with disabilities since WIOA’s enactment (see fig  2)  State VR agencies indicated in their survey responses that they had previously provided and continue to provide transition services to students who apply and are eligible for the VR program, and many of the activities were not entirely new to state VR agencies  Most agencies that responded to our survey reported providing each of the required activities to students with disabilities before the enactment of WIOA, while fewer reported initiating these services since enactment (see fig  3)  Of the five required activities, instruction in self-advocacy saw the biggest expansion during this time  In information provided with the regulations, Education described instruction in self-advocacy as, for example, classroom lessons in which students learn about their rights, responsibilities, and how to request accommodations or services and supports needed during transition  In written comments on our survey, 10 state VR agencies reported partnering with other organizations, such as universities or centers for independent living, to provide instruction in self- advocacy  One agency reported on our survey that it offers peer mentoring as an additional component of self-advocacy services, and another reported providing self-advocacy and mentoring for deaf-blind students by deaf-blind adults  In October 2016, based on views of an expert panel that we convened on autism spectrum disorders and transitioning youth, we reported that it is critically important that all transitioning youth, regardless of their level of disability, be given the opportunity to state their own preferences to the extent of their capabilities to reach their maximum independence  State VR agencies reported developing additional programming as a result of WIOA’s enactment, including expanding programs for more students, adding new opportunities and experiences, and creating new partnerships  Officials from all four of the state VR agencies we interviewed said they had programs in place prior to WIOA that offered activities similar to pre-employment transition services, but they have since expanded these services or created additional programs for students with disabilities  For example, an official we interviewed from the Idaho Division of Vocational Rehabilitation said the agency had previously worked to enroll students in the VR program prior to graduation, but has since begun developing new programming and instruction aimed at serving larger groups and providing other services, such as a paid work experience  An official from Maryland’s Division of Rehabilitation Services said many of the services they previously offered were during school hours, and students had limited access to these services if they wanted to stay in class  The agency has since added services after school and during the summer, such as opportunities for students to meet with employers, according to Maryland officials  Officials from the Illinois Department of Human Services, Division of Rehabilitation Services, said that while the agency had previously provided work-based learning experiences, it has since expanded the number of spots available for students in an existing program and created a new work-based learning program that is a collaboration between school districts, a community rehabilitation partner, and businesses  Providing new services with specific requirements to an expanded population has been a significant change, according to officials in one of the state VR agencies we interviewed and in all three of our discussion groups  For example, officials from Maryland’s Division of Rehabilitation Services said that, while they provided all five required activities before WIOA, they now provide the activities to a younger population and make the activities available statewide  State VR officials in all three of our discussion groups said that providing pre-employment transition services allows them to provide these services to more students with disabilities or at an earlier age, which will likely have positive effects on students’ transition from school to work  For example, officials in one discussion group noted that the provision of pre-employment transition services is increasing awareness, enhancing services, and increasing the likelihood that VR program outcomes will improve  In another discussion group, officials said their agencies had already seen benefits from pre- employment transition services and the services have raised students’ expectations for the types of jobs they might obtain  While 32 of the state VR agencies responding to our survey reported that they had identified all potentially eligible students, another 37 reported that they were currently in the process of identifying these students  State VR officials in all three of our discussion groups and who we interviewed in two of four state VR agencies said they have had challenges finding the population eligible for services  In written comments on our survey, one agency reported that while statewide information on students was not readily available, officials worked with the state educational agency to identify potentially eligible students, including more than 137,000 students with an IEP and an estimated 13,000 additional students that do not have an IEP  We previously reported on the difficulties state VR officials faced in obtaining data they could use to identify other youth with disabilities  Compared to combined and general agencies, more agencies for the blind reported in our survey that they did not provide the five required activities to more students with disabilities, and officials in some of these agencies said they can serve a much smaller population  For example, 57 percent (12 of 21) of agencies for the blind reported providing job exploration counseling to more students, compared to 83 percent (25 of 30) of combined agencies and 91 percent (20 of 22) of general agencies since WIOA enactment  Similarly, 67 percent (14 of 21) of agencies for the blind reported providing work-based learning experiences to more students, compared to 83 percent (25 of 30) for combined agencies and 86 percent (19 of 22) for general agencies  Officials in some of these agencies for the blind and from the National Council of State Agencies for the Blind (NCSAB) told us in interviews that agencies for the blind have far fewer potentially eligible students they could serve compared to other types of agencies  For example, officials we interviewed with Idaho’s Commission for the Blind and Visually Impaired said that Idaho has only 40 students being provided pre-employment transition services  In contrast, the Idaho Division of Vocational Rehabilitation reportedly provided at least one pre-employment transition service to approximately 700 students in a one-year period  The ability of agencies for the blind to serve more students may also be restricted because they are not able to provide pre-employment transition services to younger students in some cases, according to officials with NCSAB and Idaho’s Commission for the Blind and Visually Impaired  NCSAB officials told us that state VR agencies have traditionally provided VR services to youth who are blind or visually impaired at younger ages compared to general agencies that serve youth with other types of disabilities  The ages at which students may be provided pre-employment transition services varied by agency, based on responses to our survey, but the most common age range reported across all types of agencies was 14 to 21 years old  According to Education officials, as a result of WIOA, two agencies in the same state must agree on a common age range during which students can be provided pre-employment transition services  Most agencies in states with two VR agencies responding to our survey (35 of 44) reported agreeing on an age range for receiving pre- employment transition services  NCSAB officials said that in some cases agencies for the blind have had to raise the minimum age at which they would begin providing services to students  Officials with Idaho’s Commission for the Blind and Visually Impaired, for example, said they would prefer to begin services at younger ages because their agency has the resources to do so  However, officials with Idaho’s Division of Vocational Rehabilitation said they do not have the resources to provide pre-employment transition services to the relatively large number of students with disabilities at a younger age  State VR agencies reported taking a range of actions to build their administrative capacity to implement pre-employment transition services  These actions included building staff capacity and expanding contracts with services providers  Building staff capacity  Most state VR agencies reported building staff capacity to facilitate and carry out the requirements of pre- employment transition services by: Establishing a new specialist position  More than half (45 of 74) of VR agencies reported in our survey establishing at least one new transition specialist position specifically for pre-employment transition services  For example, the Idaho Division of Vocational Rehabilitation reported establishing this position and officials told us that they hired a specialist who was previously the transition coordinator for the state’s educational agency  In written comments on our survey, a respondent from another state commented that their agency has hired 20 pre-employment transition services specialists to provide the five required activities  Officials we interviewed from Maryland’s Division of Rehabilitation Services said they added six salaried positions dedicated to providing pre-employment transition services  Another agency responding to our survey reported dedicating a supervisor and 15 percent of their counselors exclusively to this purpose  Training staff  All 74 state VR agencies reported providing training on pre-employment transition services to their staff  For example, in written comments, one agency reported developing training tools for its counselors, such as answers to frequently asked questions, posting guidance on its intranet, and having WINTAC provide training  Expanding contracts and agreements with service providers  In addition to being provided by state VR agency staff, pre-employment services can be offered through a variety of methods and service providers, and many state VR agencies reported entering into new or additional contracts with service providers or expanding contracts with existing providers  Pre-employment transition services can be provided directly by state VR agency staff or through agreements with third parties, such as community rehabilitation programs, independent living agencies, public colleges and universities, and school districts  In our survey, 62 of 74 agencies reported entering into new or additional contracts with third-party providers to provide pre- employment transition services  Officials we interviewed from three of four state VR agencies said they either established or expanded existing contracts and agreements  For example, officials from the Illinois Department of Human Service, Division of Rehabilitation Services told us that after the enactment of WIOA, they expanded arrangements with independent living centers and initiated a new program that provides students with work experiences  Agencies reported several examples of approaches using third parties: establishing contracts with community rehabilitation programs to partnering with independent living agencies to work with youth on entering into provider agreements with local workforce centers to assist with providing job preparation and a paid work experience, developing programs with public colleges and universities focused on financial literacy and self-advocacy, and contracting with individual school districts to deliver services in the school environment  Twenty-one of 56 states (50 states, 5 territories, and the District of Columbia) reported using the full amount of grant funds they reserved for pre-employment transition services for students with disabilities for fiscal year 2016, according to the most recent full year of data available from Education (see fig  4)  In aggregate, states reportedly expended approximately $357 million out of the approximately $465 million reserved (about $108 million less than the target) for fiscal year 2016  For fiscal year 2015, states reportedly expended approximately $324 million on pre-employment transition services out of the approximately $453 million reserved for that purpose (about $130 million less than the target)  Results from our 2017 survey of state VR agencies revealed similar trends: Fewer than half the 74 agencies reported that they used at least 15 percent of their VR grant allotment each year  Thirty-two of the 74 agencies responding to our survey reported using the minimum required 15 percent of federal VR grant funds reserved for the provision of pre- employment transition services for fiscal years 2016 and 2017  For fiscal year 2015, 25 agencies reported using the required 15 percent minimum reserved funds  Officials we interviewed in two of four state VR agencies and officials in all three discussion groups explained that some of the services they generally provided to participants in the VR program are not allowable for the funds reserved for pre-employment transition services  These expenditures included transportation, tuition, and others associated with individualized services  For example, officials in Maryland’s Division of Rehabilitation Services told us that transportation costs for students to get to the place where the services are provided are not covered  VR agency officials in two of our discussion groups told us that assistive technology, such as hearing aids, could not be paid for with the 15 percent of funds reserved for pre-employment transition services  In another group, participants said that some expenditures, such as tuition or for the services of a job coach to help students with the most significant disabilities, could not be paid with reserved funds  In information provided with the regulations, Education stated that it does not have the statutory authority to allow these expenditures to be paid for with the funds reserved for pre-employment transition services and these services must be paid with other VR funds  When it promulgated its final regulations, Education noted that state VR agencies would experience challenges in using their funds because many of the services provided to students with disabilities prior to WIOA’s enactment would not qualify as pre-employment transition services  Education reviewed past expenditures for a subset of students and estimated that 82 percent of state VR agencies’ reported purchases for those students would not meet the statutory definition of pre-employment services under WIOA  Education concluded that states would have to reach a larger number of students with disabilities in order to meet the spending requirement and that state VR agencies would need to develop and implement aggressive strategies to expend these funds in these initial years of implementation  According to WINTAC officials, state VR agency officials are commonly unclear about what kinds of activities they can provide using the funds reserved for pre-employment transition services  For instance, they said that states must make required activities (e g  work-based learning experiences and self-advocacy) available to all students with disabilities before providing authorized activities (e g  model projects, partnerships), in accordance with WIOA  However, state officials have commonly interpreted that to mean that all students must actually receive the required activities before the agency can begin providing other activities, according to WINTAC officials  WINTAC officials explained that states may have been conducting authorized or coordination activities without knowing these activities could be paid for with the reserved funds  None of the state VR agency officials we interviewed said they had yet moved beyond providing required activities to providing authorized activities  Officials from two of the agencies we interviewed told us they were in the process of planning authorized activities  For example, officials with the Idaho Division of Vocational Rehabilitation said they were completing an assessment of their needs, which would help them plan authorized activities  Officials we interviewed from the other two agencies—the Idaho Commission for the Blind and Visually Impaired and the Illinois Division of Rehabilitation Services—said they did not have the resources to provide authorized activities or were unsure about how to properly transition from required to authorized activities under the current guidance  Education communicated with states on broad requirements but provided little detailed information directly to states on the allowable use of funds reserved for pre-employment transition services  Education provided information when it promulgated final regulations, in grant award notifications, on its website, and in presentations at conferences  In each of these formats, Education described activities on which states could not spend funds, but provided little detailed information on what expenditures are allowed  Regulations: Education’s final regulations restate many provisions in WIOA, including the prohibition on using any of the reserved funds for administrative costs  In responding to comments it received on its proposed regulations, Education provided examples of services that commenters requested would be considered pre-employment transition services, such as, postsecondary education, on-the-job supports, job coaching, travel expenses, and uniforms  In information provided with the regulations, Education explained that it had no statutory authority to expand or limit the pre-employment transition services listed in WIOA  Education stated that a state VR agency can allocate costs associated with staff time spent providing pre- employment transition services, including an employee’s salary and fringe benefits, to the funds reserved for pre-employment transition services  However, Education did not provide additional information on what specific types of expenditures states were permitted to spend funds on in providing pre-employment transition services as required by WIOA  Grant award notification: The notification that accompanies each state’s VR grant award lists the three sets of activities for which the reserved money can be used: required, authorized, and coordination; it lists each of the activities as they are listed in WIOA  It also discusses the prohibition on using any of the reserved funds for administrative costs  It does not list or describe what specific expenditures the reserved funds can be used for to undertake each of the listed activities  Education’s website: A list of frequently asked questions on Education’s website outlines the requirements of WIOA and explains that the reserved funds must only be used to provide pre-employment transition services as listed in WIOA  Similar to the regulations, the website explains that the total costs of an employee’s salary and fringe benefits may be allocated to the reserved funds if that employee is providing only pre-employment transition services to students with disabilities but does not include additional detail for any other expenditures  Presentation materials: In one set of presentation materials, Education provided an example of a potential allowable expenditure for one of the required activities, work-based learning  It did not include information on allowable expenditures for the other four required activities, or any of the nine authorized activities  In another set of presentation materials, Education provided examples of services for each of the five required pre-employment transition services activities  According to Education officials, these examples would be allowable expenditures  Education, however, provided the most detailed information through WINTAC  WINTAC’s website provided answers to some specific questions on the use of funds reserved for pre-employment transition services  In one set of frequently asked questions, WINTAC included a list of 28 questions with detailed answers, including what specific expenditures may be charged to the reserved funds  For example, based upon guidance issued by RSA, the website explains that reserved funds may be used to pay for auxiliary aids and services, such as interpreters, if they are directly related to one of the five required pre-employment transition services activities  However, the reserved funds may not be used to pay for the costs of foreign language interpreters because they are not an auxiliary aid or serve that is required due to the individual’s disability  WINTAC’s website also included answers provided by Education on 13 other frequently asked questions  Information included that reserved funds cannot be used to pay for the cost of an assessment to determine whether a student met the definition of a student with a disability; they can be used to pay for items required by an employer for work-based learning activities  Some state VR agencies we surveyed and those that participated in one of our three discussion groups said they would like more detailed information directly from Education  Seven survey respondents reported that they would like Education to provide answers to their specific questions  In one discussion group, participants noted that when states approach WINTAC with a new question, the technical assistance center sometimes needs to obtain the answer from Education  This process can be inefficient at times  In addition, the answer may not be broadly shared with all the states, limiting its benefit, whereas information issued directly from Education could help communicate the answer more efficiently and broadly  One survey respondent reported, for example, that guidance varied by source—training, Education’s RSA staff, or technical assistance center websites—and said that Education should provide all state VR agencies with the same information at the same time  According to standards for federal internal control, management should communicate externally through reporting lines so that external parties can help the entity achieve its objectives and address related risks  Management should also periodically evaluate its methods of communication so it has the appropriate tools to communicate quality information throughout and outside of the entity on a timely basis  Education officials said that during fiscal years 2015 and 2016, states were unclear about allowable expenditures using reserved funds, and that they plan to clarify guidance as they learn about the issues from states during their monitoring  According to Education officials, they respond to issues that need clarification and provide answers to questions as part of formal monitoring visits or through other communications with state agencies  Education officials said they expect to complete a round of monitoring visits to all states by the end of fiscal year 2021  However, an Education official said they have no timeframe for providing further information on allowable costs to states  With better information on timeframes for when this information will be provided, states would be able to better plan their use of the remaining funds reserved for pre- employment transition services  Most state VR agencies (61 of 74) that responded to our survey reported providing training on pre-employment transition services along with their state’s educational agency since WIOA’s enactment in 2014  Joint training may help coordination between state VR and educational agencies, as state VR officials participating in our discussion groups said that some educators were not familiar with pre-employment transition services  Similarly, an official we interviewed from Idaho’s state educational agency said it was common in the past for teachers and VR counselors not to know one another  Joint trainings provided to VR staff and teachers have improved these relationships, and teachers can invite VR counselors to students’ IEP meetings, the official said  Joint training includes staff presentations at conferences and participation in other training sessions  For example, officials we interviewed from the Idaho Division of Vocational Rehabilitation said their transition coordinator has given presentations to education directors around the state about changes resulting from WIOA and how the inclusion of pre-employment transition services can affect special education for the school districts  In written comments on our survey, one agency reported that it co-sponsors an annual conference with VR, special education, developmental services, and other public and private entities  During this conference, they plan how to improve services for students with disabilities  About one-third of state VR agencies (23 of 74) reported issuing joint guidance with their state’s educational agency, a recommended practice according to WINTAC  The other two-thirds of survey respondents reported that joint guidance was either in progress (27 of 74) or that they had not issued such guidance (23 of 74)  Joint guidance can include written policies and procedures that are created by and provided to state VR and educational agency staff  For example, in written comments on our survey, one agency reported developing written policies and guidance for transition counselors that the state educational agency endorses and provides to special education staff  In Maryland, VR and special education officials told us that they issued guidance through jointly created materials on pre-employment transition services  Less than half the state VR agencies that responded to our survey (34 of 74) reported updating their interagency agreement with their state’s educational agency, which is intended to facilitate collaboration and coordination on delivery of pre-employment transition services  The majority of agencies reported that their agreement is either in progress (37 of 74) or not yet updated (3 of 74)  These required agreements outline how VR agencies and schools will plan and coordinate service provision, provide for each agency’s responsibilities, including financial responsibilities, and provide for student outreach procedures, among other things  Discussion group participants and CSAVR representatives emphasized the value of completing their interagency agreements with the state educational agency  In one group, officials whose agencies had completed their agreements said they are essential for state VR agencies to provide services in schools  Participants in another discussion group explained that once they have a state-level agreement in place, they can discuss what services school districts need for students and then determine how to provide those services  According to state educational agency officials we interviewed, Individuals with Disabilities Education Act (IDEA) requirements are similar to requirements for pre-employment transition services, and they need to coordinate with VR officials at both the state and local levels to agree on each agency’s assigned tasks and expectations  These officials said state VR and educational agencies should coordinate funding to make services available where they are needed and to complement each other’s transition efforts  Illinois’s agreement, for example, specifies that the state educational agency is responsible for providing outreach, guidance, and coordination to local educational agencies regarding the provision of pre-employment transition services  According to the agreement, Illinois’s VR agency is responsible for providing pre-employment transition services, both directly and through cooperative agreements with local educational agencies, and for providing written information to the state educational agency regarding services available to students with disabilities  Officials we interviewed with CSAVR said state VR agencies that have made progress in developing their interagency agreements with state educational agencies tend to be more successful in implementing pre-employment transition services  According to Education officials, Education provides guidance and technical assistance on interagency agreements to states as part of Education’s monitoring or when asked by states  Education officials said they provide technical assistance during periodic monitoring visits, which are currently limited to about 10 states per year from fiscal years 2017- 2021; by helping state VR agencies develop policies and procedures; and by making sure pre-employment transition services are coordinated with the state educational agency and through interagency agreements  According to Education officials, there is no statutory provision authorizing Education to identify states that have not updated their interagency agreement  Education officials said they do not collect information from state VR agencies on the status of these agreements except when they conduct monitoring visits in specific states  In addition, Education officials said that when monitoring, they may meet with state educational agency partners to help them understand the new components of pre- employment transition services in an agreement, or they may refer the state agencies to WINTAC or NTACT resources  Providing assistance during monitoring may be helpful for some states  However, given that less than half of state VR agencies we surveyed reported updating and finalizing their agreements and Education officials say they will take another three years to complete this round of monitoring, additional action by Education may be needed to raise awareness among the remaining states about the importance of these agreements to help states coordinate services to students with disabilities  Additional action could include, for example, conducting earlier state outreach or monitoring to assess state progress on finalizing the interagency agreements and offering technical assistance when appropriate  However, Education officials said there is no requirement that state educational agencies provide pre-employment transition services to meet their obligations to IDEA-eligible students with disabilities under part B of the Individuals with Disabilities Education Act  As a result, WINTAC and participants in our discussion groups explained that it can be difficult to get state educational agencies to work with state VR agencies to update interagency agreements  Education officials said that WIOA requires state VR agencies to update these interagency agreements to include pre- employment transition services but they do not track their completion because states are not required to report when the agreements are finalized  Moreover, Education officials said they have heard from states that some reasons that interagency agreements are not specifically updated are that the agreements are written broadly enough so that they can remain in effect when there are additional changes to the law, the details of actual practices are rarely reflected in the high level of an interagency agreement, and that modifications to agreements are time- consuming and would not result in changes to the interagency coordination practice  Without an updated agreement between the state VR and educational agencies, efforts to collaborate on pre-employment transition services may be hindered  Officials with the National Technical Assistance Center on Transition (NTACT) told us that some of the state agencies for which they provided in-depth technical assistance were not working closely together  Officials from two of the three state educational agencies we interviewed said they viewed pre-employment transition services as primarily the responsibility of the VR agency  State VR officials in all three of our discussion groups said they have experienced coordination challenges, including difficulty determining each agency’s responsibilities for providing pre-employment transition services, obtaining data needed to identify and provide services to students, and determining which agency will pay for which services, among other challenges  Interagency agreements can help to address these types of issues  Federal internal controls recommend that management communicate with and obtain information to identify, analyze, and respond to risks related to achieving defined objectives, such as those that can arise from new laws and regulations  Moreover, we found in prior work that it is important to establish ways to operate across agency boundaries, with measures such as developing common terminology and fostering open lines of communication  A lack of collaboration between state VR and educational agencies increases the risk that some students will not successfully transition from school to post-school activities  In addition, our prior work has identified lack of collaboration among and between federal agencies and state and local governments as a challenge to effective grant implementation  Interagency agreements are intended to serve as a mechanism related to collaboration practices, which include defining a common outcome, establishing joint strategies, and agreeing on roles and responsibilities of each agency  By taking additional steps, such as discussing the benefits of finalizing interagency agreements, and reminding states of existing technical assistance resources pertaining to updating and finalizing interagency agreements, Education would help raise awareness about the importance of the agreements and be better positioned to help states efficiently and effectively coordinate services to students with disabilities  Most state VR agencies (63 of 74) that responded to our survey reported that additional assistance with identifying best practices would be useful to their agencies  Similarly, state VR officials in all three of our discussion groups spoke to the need for Education to develop and disseminate best practices to help states, for example, comply with program requirements  WIOA requires Education to highlight best state practices on pre-employment transition services  Best practices may also help states address the challenges they reported facing in implementing and administering pre-employment transition services for students with disabilities, such as (1) coordinating with state educational agencies, (2) using VR resources more efficiently and effectively to help states balance providing pre-employment services with the full VR program, and (3) collecting data on services provided, and (4) updating data tracking systems  Coordinating service delivery with state educational agencies  Over half (41 of 74) of state VR agencies reported in our survey that additional assistance on coordinating with state educational agencies would be useful for them  Similarly, officials from all three state educational agencies we interviewed said they would like additional assistance on interagency collaboration  Officials with NTACT told us that some of the state agencies for which they provided in-depth technical assistance were not working closely together  Officials from two of the three state educational agencies we interviewed said they viewed pre-employment transition services as primarily the responsibility of the VR agency  State VR officials in all three of our discussion groups said they have experienced coordination challenges, including difficulty determining each agency’s responsibilities for providing pre-employment transition services, obtaining data needed to identify and provide services to students, and determining which agency will pay for which services, among other challenges  An official we interviewed from the Idaho Department of Education said it would be helpful to have more clearly defined roles, obligations, and means of sharing data between the state-level agencies  In written responses to our survey, one respondent said having examples of highly successful collaborations between a state educational agency and state VR agencies would be helpful  According to Education’s guidance, a student’s transition from school to post-school activities is a shared responsibility and coordination and collaboration between the state VR and educational agencies is essential  However, according to information Education provided with the regulations, while some have sought clarification and additional guidance in this area, Education determined that decisions on agencies’ responsibilities must be made at the state level to allow states maximum flexibility allowed under the law  In the absence of more specific guidelines for how state agencies should collaborate, best practices from other states could provide helpful examples  Balancing pre-employment transition services with VR services  Several state VR agencies in both our written survey responses and in discussion groups noted that by increasing services mandated for pre-employment transition services for students, they have had to reduce VR services to adults, which has made it difficult to balance the two programs  In issuing its final regulations, Education acknowledged that reserving funds would decrease amounts available for the full VR program, resulting in a transfer of benefits from individuals historically served by VR to students with disabilities in need of transition services  According to state VR directors with the National Council of State Agencies for the Blind (NCSAB), agencies for the blind have had to restrict VR services while also not being able to use all of the funds reserved for pre-employment transition services for students with disabilities because VR services cannot be paid with reserved funds  Most state VR agencies that completed our survey (50 of 74) reported that balancing pre-employment transition services with other vocational rehabilitation services was moderately difficult, very difficult, or extremely difficult during federal fiscal year 2017  Collecting data  Data collection was one of the top challenges identified by state VR agencies in our survey, with 48 of 74 reporting that collecting data on the provision of pre-employment transition services was moderately difficult, very difficult, or extremely difficult during fiscal year 2017  Prior to WIOA, agencies collected and reported data only on individuals who had applied and enrolled in the VR program  For pre-employment transition services, agencies now collect data on who provided and received each of the five required activities, including for individuals who have not submitted a VR application  State VR officials in two of our three discussion groups said that they have experienced challenges collecting sensitive information (such as social security numbers) for minors and collecting data on individuals for group services  Officials in one of the three discussion groups also said that these problems are particularly significant when trying to collect information on potentially eligible students for whom they do not have open VR cases  These students could include all those with an IEP and those that receive accommodations in school based on their disability, among others  Updating data tracking systems  Updating data systems was also one of the top challenges reported in our survey, and was cited as an additional administrative burden by state VR officials in our discussion groups  Specifically, 53 of 74 state VR agencies reported that it was moderately difficult, very difficult, or extremely difficult to update tracking systems to collect and report financial and service data on pre-employment transition services during fiscal year 2017  According to a state VR agency official we interviewed, updating that state’s tracking system is difficult because data collected on pre-employment transition services—such as the type of service provider and how the service was provided—do not fit well into a case management system designed for the full VR program  Updating these tracking systems also created an additional administrative burden for VR agency staff, according to officials from all three discussion groups and three of the four state agencies that we interviewed  Officials in two of our three discussion groups said that they have one or more full-time staff members doing only administrative tasks or that they have had to hire additional staff to handle data tracking  Education officials said that they plan to document and share best practices with states; however, they said the agency does not have a final written plan for managing these efforts because plans are still under discussion in light of inquiries received  Education officials said they are collecting information on state VR agencies’ practices through monitoring and they are sharing this information with WINTAC—information that could be useful for sharing best practices across states—but a comprehensive summary of states’ efforts will not be available until after Education officials conduct monitoring visits of all states by the end of fiscal year 2021  In addition, in a 2015 technical assistance circular, Education recommended that state VR agencies consult with other federal, state, and local agencies to identify best practices for providing pre-employment transition services to students and youth with a variety of disabilities  Education officials also said that they are looking for opportunities, such as webinars and conferences, to share information with states  However, Education does not have set timeframes and has not detailed the specific steps and activities for fully leveraging knowledge to address common challenges, or for finalizing and disseminating best practices  By doing so, Education would be better positioned to provide best practices information to state VR agencies to better serve students with disabilities who are transitioning from high school  Pre-employment transition services are designed to help students with disabilities begin to identify career interests and move from high school to post-secondary education or employment  Using federal funding, state VR agencies reported that they have generally enhanced their services and staff capacity and begun to coordinate with state educational agencies  As a result, state VR agencies generally reported serving an increased number of students  However, most states reported they have not used all the funds reserved for pre-employment transition services or updated interagency agreements between state VR and educational agencies  Education has developed multiple forms of guidance and made presentations, either directly or through its technical assistance centers  Education officials said they plan to issue additional guidance as needed  However, without clear timeframes for the issuance of this guidance, states do not know when information will become available to help them make decisions on allowable expenditures for pre-employment transition services  As a result, opportunities may be missed to identify and serve all students who might be eligible, and unserved students could continue to face difficulties preparing for a future of meaningful post-secondary education or employment  In addition, agreements between state VR and educational agencies can help facilitate the effective coordination of and financial responsibility for services  Finally, WIOA requires Education to highlight best state practices for implementing pre-employment transition services  Developing a written plan with specific timeframes would help Education provide states with information on best practices, such as balancing service delivery between pre-employment transition services and other VR services and collecting data that other states may have successfully addressed  We are making the following three recommendations to Education: The Secretary of Education should establish timeframes for providing states with additional information on allowable expenditures of funds reserved for pre-employment transition services  (Recommendation 1) The Secretary of Education should take additional steps to provide states assistance on updating and finalizing their interagency agreements with state educational agencies to include pre-employment transition services  These steps could include, for example, accelerating their efforts to discuss the benefits of finalizing interagency agreements, and reminding states of existing technical assistance resources pertaining to updating and finalizing interagency agreements  (Recommendation 2) The Secretary of Education should develop a written plan with specific timeframes and activities for identifying and disseminating best practices that address, as appropriate, implementation challenges for pre- employment transition services, such as those identified in this report  (Recommendation 3) We provided a draft of this report to Education for review and comment  Education’s written comments are reproduced in appendix III  Education also provided technical comments, which we incorporated into our report where appropriate  Education concurred with recommendation 1 and disagreed with recommendations 2 and 3 in the draft report  With regard to recommendation 1, Education stated that it agreed and will establish projected timeframes for providing states with additional information on allowable expenditures for the provision of pre- employment transition services  Education also stated that it intends to provide states with additional information in at least two forums before the end of calendar year 2018 and to review and analyze previous guidance provided to states on allowable expenditures  With regard to the draft report’s recommendation 2, which called for Education to identify states that have not updated and finalized their interagency agreements to include pre-employment transition services, Education stated that it disagreed, in large part, because there is no statutory provision authorizing the agency to identify such states  However, Education is taking some steps as part of its ongoing monitoring of the VR program to provide assistance to states that have not updated their interagency agreements, which is consistent with the intention of our recommendation, but more could be done  Education stated that it will continue to offer and provide technical assistance if it becomes known through the onsite monitoring of the VR program or through other means that states have not updated their interagency agreements between VR agencies and state educational agencies  It also noted that the Rehabilitation Services Administration (RSA) and its Office of Special Education Programs will provide information related to sources of technical assistance, as appropriate, to VR agencies and state educational agencies  While these steps may be helpful, given the number of states that have not updated and finalized their agreements and the length of time Education officials say they will take to complete this round of monitoring where Education asks state VR agencies about these agreements, additional action by Education may be needed to help states more efficiently and effectively coordinate services to students with disabilities  Education also wrote that while the Rehabilitation Act requires an interagency agreement, the Individuals with Disabilities Education Act does not contain a parallel requirement for state and local educational agencies with respect to the provision of pre-employment transition services or the incorporation of such discussion into the interagency agreement  In light of these differing requirements, as we state in our report, stakeholders with whom we spoke indicated it can be difficult to get state educational agencies to work with state VR agencies to update interagency agreements  Therefore, it is all the more important for Education to take additional action to engage with VR agencies regarding interagency agreements and to work closely with VR agencies as Education becomes aware of states that have not updated their agreements  Education suggested a modified recommendation that removed reference to Education identifying states that have not updated and finalized their agreements  We modified the recommendation and the report to address Education’s concerns about its authority to identify states  By taking additional steps, such as discussing the benefits of finalizing interagency agreements, and reminding states of existing technical assistance resources pertaining to updating and finalizing interagency agreements, Education would help raise awareness about the importance of the interagency agreements and be better positioned to help states efficiently and effectively coordinate services to students with disabilities  With regard to recommendation 3, Education stated that it disagreed because it is premature to develop a timeline for the dissemination of best practices  Education stated that the identification of “best” practices, meaning those that are clearly supported by a body of evidence derived from valid and reliable research findings, is still emerging as states implement the requirements  Education suggested a modified recommendation that included planning for the dissemination of best practices identified by states as they become available  Education stated in its comments that as RSA identifies best practices through its monitoring and technical assistance activities, it will, in collaboration with its Office of Special Education Programs, consider when and how best to disseminate this information to state VR and educational agencies  With regard to including specific timeframes and activities in a written plan, by detailing the specific steps Education is taking and plans to take along with the amount of time it expects them to take, Education would be better positioned to complete those steps in a timely manner and meet the statutory requirement that Education highlight best state practices and support state agencies  As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date  At that time, we will send copies to the appropriate congressional committees and the Secretary of Education  In addition, the report will be available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact Elizabeth H  Curda at (202) 512-7215 or curdae@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix IV  The objectives of this report are to examine (1) the steps states have reported taking to implement pre-employment transition services, and (2) the implementation challenges, if any, states reported facing, and how the Department of Education (Education) has addressed them  To address these objectives, we reviewed federal laws and regulations, and Education’s guidance and technical assistance documents, including circulars, policy directives, and transition guides  We also reviewed expenditure data reported by state vocational rehabilitation (VR) agencies to Education for fiscal years 2015 and 2016, the most recent full years of data available  To assess the reliability of the data, we interviewed Education officials about their collection of the data and their opinion of the data’s quality, completeness, and accuracy  We also electronically tested the data for any obvious errors  We determined that the data were reliable for the purposes of our review  We interviewed representatives from the Council of State Administrators of Vocational Rehabilitation (CSAVR) and the National Council of State Agencies for the Blind  In addition, we interviewed officials from Education’s Office of Special Education and Rehabilitation Services, Rehabilitation Services Administration, Office of Special Education Programs, and the Workforce Innovation Technical Assistance Center and National Technical Assistance Center on Transition—two technical assistance centers funded by Education  To address both of the objectives, we conducted a survey of all 79 state VR agencies from October through December 2017  Seventy-four of the 79 agencies (94 percent) responded  The survey questionnaire included open-ended and closed-ended questions about agencies’ efforts to train staff, update interagency agreements, expand services to students with disabilities, and other issues  We took steps to minimize the potential errors that may be introduced by the practical difficulties of conducting any survey  Because we selected the entire population of VR agencies for our survey, our estimates are not subject to sampling error  We conducted pretests of the draft questionnaire with three agencies in the population and made revisions to reduce the possibility of measurement error from differences in how questions were interpreted and the sources of information available to respondents  We reviewed state officials’ submitted survey responses and conducted follow-up, as necessary, to determine that their responses were complete, reasonable, and sufficiently reliable for the purposes of this report  A second independent analyst checked the accuracy of all computer analyses we performed to minimize the likelihood of errors in data processing  We made multiple follow-up attempts during the survey with agencies that had not yet responded  The five agencies that did not respond had smaller values, on average, on three characteristics related to size, than those that did respond  The nonrespondents tended to be smaller than respondent agencies  The sums totals for each of these three characteristics across the five nonresponding agencies comprised less than 1 percent of the totals for the population, suggesting a lower possibility of material error in our results from nonresponse  For more in-depth information on both of the objectives, we conducted interviews and held discussion groups  We conducted interviews with officials in Idaho, Illinois, and Maryland  For each state, we interviewed state VR officials and state educational agency officials  We selected these states for variety using the following criteria: size of the special education population (large, medium, and small); state agency organization, for example, whether the VR agency was organized under the state’s educational or other department; and whether the state had a second agency for serving individuals who are blind or visually impaired  We convened three discussion groups with state VR agency directors or their designated officials, with a total of 39 participants from 29 separate agencies (10 to 12 agencies represented per discussion group)  These discussion groups took place during a conference of state VR directors in November 2017 in Greenville, South Carolina  To select participants, we worked with the conference organizer, CSAVR, to send invitations for our discussion groups to all conference attendees  We additionally included a question in our survey asking respondents whether they would like to participate in discussion groups at the conference, and contacted those who responded affirmatively via phone and email  We moderated each discussion to keep participants focused on the specified issues within discussion timeframes  To assess Education’s efforts to address state VR agencies’ challenges in providing pre-employment transition services, we applied standards for internal control in the federal government  Specifically, we applied principle 15 related to communicating with external parties  In addition, regarding Education’s assistance to state VR agencies’ efforts to update interagency agreements with state educational agencies, we also applied key considerations for implementing interagency collaborative mechanisms that we have previously identified  We conducted this performance audit from February 2017 to September 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  Elizabeth H  Curda, (202) 512-7215 or curdae@gao gov  In addition to the contact named above, Sara Schibanoff Kelly (Assistant Director), Paul Schearf (Analyst-In-Charge), Matthew Rabe, and Paul Wright made key contributions to this report  Also contributing to this report were James Bennett, Kristy Kennedy, Sheila R  McCoy, Thomas James, Jessica Orr, Sam Portnow, Carl Ramirez, Monica Savoy, Kate Van Gelder, Adam Wendel, and James Whitcomb  Workforce Innovation and Opportunity Act: States and Local Areas Report Progress in Meeting Youth Program Requirements  GAO-18-475  Washington, D C : June 15, 2018  Supplemental Security Income: SSA Could Strengthen Its Efforts to Encourage Employment for Transition-Age Youth  GAO-17-485  Washington, D C : May 17, 2017  Youth with Autism: Federal Agencies Should Take Additional Action to Support Transition-Age Youth  GAO-17-352  Washington, D C : May 4, 2017  Youth with Autism: Roundtable Views of Services Needed During the Transition into Adulthood  GAO-17-109  Washington, D C : October 18, 2016  Students with Disabilities: Better Federal Coordination Could Lessen Challenges in the Transition from High School  GAO-12-594  Washington, D C : July 12, 2012 
Report 2: " It added that its reliance on an ad hoc approach "scrutinizing the limited number of specific industries during a year, while worthwhile, leaves unexamined many deserving industries for updating and may create over time a set of illogical size standards " The SBA announced that it would begin its analysis of its size standards by assuming that "$6 5 million [later increased to $7 5 million] is an appropriate size standard for those industries with receipts size standards and 500 employees for those industries with employee size standards " It would then analyze the following industry characteristics: "average firm size; average asset size (a proxy for startup costs); competition, as measured by the market share of the four largest firms in the industry; and, the distribution of market share by firm size—that is, are firms in the industry generally very small firms, or dominated by very large firms " Then, before making its final determination on the size standard, it would "examine the participation of small businesses in federal contracting and SBA's guaranteed loan program at the current size standard level  Depending on the level of small business participation, additional consideration may be given to the level of the current size standard and the analysis of industry factors " In April 2009, the SBA announced that was simplifying the administration and use of its size standards by reducing the number of receipts based size standards from 31 to 8 when establishing a new size standard or reviewing an existing size standard: For many years, SBA has been concerned about the complexity of determining small business status caused by a large number of varying receipts based size standards (see 69 FR 13130 (March 4, 2004) and 57 FR 62515 (December 31, 1992))  At the start of current comprehensive size standards review, there were 31 different levels of receipts based size standards  They ranged from $0 75 million to $35 5 million, and many of them applied to one or only a few industries  The SBA believes that to have so many different size standards with small variations among them is unnecessary and difficult to justify analytically  To simplify managing and using size standards, SBA proposes that there be fewer size standard levels  This will produce more common size standards for businesses operating in related industries  This will also result in greater consistency among the size standards for industries that have similar economic characteristics  Under the current comprehensive size standards review, SBA is proposing to establish eight "fixed-level" receipts based size standards: $5 0 million, $7 0 million, $10 0 million, $14 0 million, $19 0 million, $25 5 million, $30 0 million, and $35 5 million  These levels are established by taking into consideration the minimum, maximum and the most commonly used current receipts based size standards  These eight receipts based size standards were increased to $5 5 million, $7 5 million, $11 0 million, $15 0 million, $20 5 million, $27 5 million, $32 5 million, and $38 5 million in 2014 to account for inflation  The SBA also announced that it would use eight employee based size standards when establishing a new size standard or reviewing an existing size standard (no more than 50, 100, 150, 200, 250, 500, 750, and 1,000 employees) instead of seven (no more than 50, 100, 150, 500, 750, 1,000, and 1,500 employees); and continue to use one asset based size standard, one megawatt hours size standard (based on electrical output over the preceding fiscal year), and one size standard based on a combination of the number of employees and barrel per day refining capacity  The SBA also announced that "to simplify size standards further" it "may propose a common size standard for closely related industries " The SBA argued although the size standard analysis may support a separate size standard for each industry, SBA believes that establishing different size standards for closely related industries may not always be appropriate  For example, in cases where many of the same businesses operate in the same multiple industries, a common size standard for those industries might better reflect the Federal marketplace  This might also make size standards among related industries more consistent than separate size standards for each of those industries  Because SBA size standards remain in force until after they are reviewed, the number of size standards did not immediately drop from 41 to 19 in 2009  Instead, the number of size standards began to decline gradually as new size standard final rules were issued  In addition, from 2010 through 2016, the SBA decided, in most instances, not to lower size standards (which would have made it more difficult for businesses to qualify) even if the data supported lowering them because unemployment at that time was relatively high and doing so would "run counter to numerous Congressional and Administration's initiatives and programs to create jobs and boost economic growth " As a result of this policy decision, several size standards that would have otherwise been eliminated remained in place  Also, in 2016, the SBA added a new employee based size standard (no more than 1,250 employees) and reinstated the use of another (no more than 1,500 employees) when establishing a new, or revising an existing, size standard  The SBA's decisions in 2009 to reduce the number of receipts based size standards and to propose a common size standard for closely related industries were opposed by some industry groups  They argued that these policies could lead to the SBA to classify an industry "for the sake of convenience" into a size standard that the agency's own economic analysis indicates should be in a different (easier to qualify) size standard  Congress adopted legislation in 2013 ( P L  112-239 , National Defense Authorization Act for Fiscal Year 2013) that included provisions directing the SBA not to limit the number of size standards and to assign the appropriate size standard to each NAICS industrial classification  The SBA currently has 27 SBA industry size standards in effect (16 receipts based size standards, 9 employee based sized standards, 1 asset based size standard, and 1 size standard based on a combination of the number of employees and barrel per day refining capacity)  That number is expected to increase given the SBA's directive not to limit the number of size standards  As mentioned previously, P L  111-240 requires the SBA to conduct a detailed review of not less than one-third of the SBA's industry size standards during the 18-month period beginning on the date of enactment (September 27, 2010) and during every 18-month period thereafter  The act directs the SBA to "make appropriate adjustments to the size standards" to reflect market conditions, and to report to the House Committee on Small Business and the Senate Committee on Small Business and Entrepreneurship and make publicly available "not later than 30 days" after the completion of each review information regarding the factors evaluated as part of each review, the criteria used for any revised size standard, and why the SBA did, or did not, adjust each size standard that was reviewed  The act also requires the SBA to ensure that each industry size standard is reviewed at least once every five years  On July 7, 2011, the SBA announced that its "comprehensive review of all small business size standards" would begin with the following six industries: Educational Services (final rule was issued on September 24, 2012); Health Care and Social Assistance Services (final rule was issued on September 24, 2012); Real Estate Rental and Leasing (final rule was issued on September 24, 2012); Administrative and Support, Waste Management and Remediation Services (final rule was issued on December 6, 2012); Information (final rule was issued on December 6, 2012); and Utilities (final rule was issued on December 23, 2013)  The SBA subsequently completed size standard reviews for all industries in January 2016 (listed by when the final rule was issued): Professional, Scientific and Technical Services (final rule was issued on February 24, 2012); Transportation and Warehousing (final rule was issued on February 24, 2012); Agriculture, Forestry, Fishing and Hunting (final rule was issued on June 20, 2013); Arts, Entertainment, and Recreation (final rule was issued on June 20, 2013); Finance and Insurance (final rule was issued on June 20, 2013); Management of Companies (final rule was issued on June 20, 2013); Support Activities for Mining (final rule was issued on June 20, 2013); Construction (final rule was issued on December 23, 2013); Wholesale Trade (final rule was issued on January 25, 2016); Industries with Employee Based Size Standards not Part of Manufacturing, Wholesale Trade, or Retail Trade (final rule was issued on January 26, 2016); and Manufacturing (final rule was issued on January 26, 2016)  A summary of the final rules issued for each industry is provided in Table A-1   During the first five-year review cycle, the SBA increased 621 size standards, decreased 3 (to exclude potentially dominant firms from being considered small), and retained 388 at their pre-existing levels  Of the 388 retained size standards, 214 were retained based on the results of the SBA's economic analysis and 174 were retained based on the SBA's policy of generally not lowering any size standard, even though the results of the economic analysis supported lowering them, due to national economic conditions  The SBA has started its second five-year review of its size standards and anticipates issuing its first final rules in the second five-year review cycle in 2019, using new size standard methodology announced in April 2018 (discussed in the next section)  The SBA also announced in April 2018 that its policy of generally not lowering size standards when the analysis indicates that a lower standard is justified would no longer be in force, at least initially, during the second five-year review cycle: the decision to raise, lower, or retain a size standard will primarily be driven by analytical results, with due considerations of public comments, impacts of changes on the affected businesses, and other factors SBA considers important  All of these decisions will be detailed in individual rulemakings  It will take several years to complete the five-year review of all size standards … during which the state of the economy may change  It is, therefore, not possible to state now … what impact, if any, the future economic environment would have on the SBA's policy decision regarding size standards  As mentioned earlier, the SBA, relying on statutory language, defines a small business as a concern that is organized for profit; has a place of business in the United States; operates primarily within the United States or makes a significant contribution to the economy through payment of taxes or use of American products, materials, or labor; is independently owned and operated; and is not dominant in its field on a national basis  The business may be a sole proprietorship, partnership, corporation, or any other legal form  The SBA uses two measures to determine if a business is small: industry specific size standards or a combination of the business's net worth and net income  For example, the SBA's Small Business Investment Company (SBIC) program allows businesses to qualify as small if they meet the SBA's size standard for the industry in which the applicant is primarily engaged, or an alternative net worth and net income based size standard which has been established for the SBIC program  The SBIC's alternative size standard is currently set as a maximum net worth of not more than $19 5 million and average after-tax net income for the preceding two years of not more than $6 5 million  All of the company's subsidiaries, parent companies, and affiliates are considered in determining if it meets the size standard  The SBA decided to apply the net worth and net income measures to the SBIC program "because investment companies evaluate businesses using these measures to decide whether or not to make an investment in them " Businesses participating in the SBA's 504/Certified Development Company (504/CDC) loan guaranty program are to be deemed small if they did not have a tangible net worth in excess of $8 5 million and did not have an average net income in excess of $3 million after taxes for the preceding two years  As discussed below, P L  111-240 increased these threshold amounts on an interim basis to not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes for the two full fiscal years before the date of the application  All of the company's subsidiaries, parent companies, and affiliates are considered in determining if it meets the size standard  Also, before May 5, 2009, businesses participating in the SBA's 7(a) loan guaranty program, including its express programs, were deemed small if they met the SBA's size standards for firms in the industries described in NAICS  Using authority provided under P L  111-5 , the American Recovery and Reinvestment Act of 2009, the SBA temporarily applied the 504/CDC program's size standards as an alternative for 7(a) loans approved from May 5, 2009, through September 30, 2010  Firms applying for a 7(a) loan during that time period qualified as small using either the SBA's industry size standards or the 504/CDC program's size standard  The provision's intent was to enhance the ability of small businesses to access the capital necessary to create and retain jobs during the economic recovery  P L  111-240 made the use of alternative size standards for the 7(a) program permanent  The act directs the SBA to establish an alternative size standard for both the 7(a) and 504/CDC programs that uses maximum tangible net worth and average net income as an alternative to the use of industry standards  The act also establishes, until the date on which the alternative size standard is established, an interim alternative size standard for the 7(a) and 504/CDC programs of not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application  The SBA Administrator has the authority to establish and modify size standards for particular industries  Overall, about 97% of all employer firms qualify as small under the SBA's size standards  These firms account for about 30% of industry receipts  The SBA generally "prefers to use average annual receipts as a size measure because it measures the value of output of a business and can be easily verified by business tax returns and financial records " However, historically, the SBA has used the number of employees to determine if manufacturing and mining companies are small  Before a proposed change to the size standards can take effect, the SBA's Office of Size Standards (OSS) undertakes an analysis of the change's likely impact on the affected industry, focusing on the industry's overall degree of competition and the competitiveness of the firms within the industry  The analysis includes an assessment of the following four economic factors: "average firm size, average assets size as a proxy of start-up costs and entry barriers, the 4-firm concentration ratio as a measure of industry competition, and size distribution of firms " The SBA also considers the ability of small businesses to compete for federal contracting opportunities and, when necessary, several secondary factors "as they are relevant to the industries and the interests of small businesses, including technological change, competition among industries, industry growth trends, and impacts of size standard revisions on small businesses " The specifics of SBA's size standards methodology have evolved over the years with the availability of new industry and federal procurement data and staff research  For example, the SBA previously presumed less than $7 0 million (increased to less than $7 5 million in 2014 to account for inflation) as an appropriate "anchor" size standard for the services, retail trade, construction, and other industries with receipts based size standards; 500 or fewer employees as an appropriate anchor size standard for the manufacturing, mining and other industries with employee based size standards; and 100 or fewer employees as an appropriate anchor size standard for the wholesale trade industries  These three anchor size standards were used as benchmarks or starting points for the SBA's economic analysis  To the extent an industry displayed "differing industry characteristics," a size standard higher, or in some cases lower, than an anchor size standard was used  In April 2018, the SBA replaced the "anchor" approach with a "percentile" approach, primarily because the anchors were no longer representative of the size standards being used (just 24% of industries with receipt-based size standards and 22% of those with employee based size standards have the anchor size standards) and the anchor approach entails "grouping industries from different NAICS sectors thereby making it inconsistent with section 3(a)(7) of the [Small Business] Act," which limits the SBA's ability to create common size standards by grouping industries below the 4-digit NAICS level  Specifically, when assessing the appropriateness of the current size standards, the SBA now evaluates the structure of each industry in terms of four economic characteristics or factors, namely average firm size, average assets size as a proxy of start-up costs and entry barriers, the 4-firm concentration ratio as a measure of industry competition, and size distribution of firms using the Gini coefficient  For each size standard type     SBA ranks industries both in terms each of the four industry factors and in terms of the existing size standard and computes the 20 th percentile and 80 th percentile values for both  SBA then evaluates each industry by comparing its value for each industry factor to the 20 th percentile and 80 th percentile values for the corresponding factor for industries under a particular type of size standard  If the characteristics of an industry under review within a particular size standard type are similar to the average characteristics of industries within the same size standard type in the 20 th percentile, SBA will consider adopting as an appropriate size standard for that industry the 20 th percentile value of size standards for those industries  For each size standard type, if the industry's characteristics are similar to the average characteristics of industries in the 80 th percentile, SBA will assign a size standard that corresponds to the 80 th percentile in the size standard rankings of industries  A separate size standard is established for each factor based on the amount of differences between the factor value for an industry under a particular size standard type and 20 th percentile and 80 th percentile values for the corresponding factor for all industries in the same type  Specifically, the actual level of the new size standard for each industry factor is derived by a linear interpolation using the 20 th percentile and 80 th percentile values of that factor and corresponding percentiles of size standards  Each calculated size standard will be bounded between the minimum and maximum size standards levels [see Table 2 ]     the calculated value for a receipts based size standard for each industry factor is rounded to the nearest $500,000 and the calculated value for an employee based size standard is rounded to the nearest 50 employees for Manufacturing and industries in other sectors (except Wholesale and Retail Trade) and to the nearest 25 employees for employee based size standards for Wholesale Trade and Retail Trade  The SBA anticipates that its shift from using the anchor approach to the percentile approach will have minimal impact, both in terms of the direction and magnitude of changes, to its industry size standards  Any changes to size standards must follow the rulemaking procedures of the Administrative Procedure Act  A proposed rule changing a size standard is first published in the Federal Register , allowing for public comment  It must include documentation establishing that a significant problem exists that requires a revision of the size standard, plus an economic analysis of the change  Comments from the public, plus any other new information, are reviewed and evaluated before a final rule is promulgated establishing a new size standard  The SBA currently uses employment size to determine eligibility for 505 of 1,036 industries (48 6%), including all 360 manufacturing industries, 24 mining industries, and 71 wholesale trade industries  As of October 1, 2017, 98 manufacturing industries have an upper limit of 500 employees (27 2%); 91 have an upper limit of 750 employees (25 2%); 89 have an upper limit of 1,000 employees (24 7%); 56 have an upper limit of 1,250 employees (15 6%); and 26 have an upper limit of 1,500 employees (7 2%)  3 of the 24 mining industries have an upper limit of 250 employees (12 5%), 7 have an upper limit of 500 employees (29 2%), 7 have an upper limit of 750 employees (29 2%), 2 have an upper limit of 1,000 employees (8 3%), 3 have an upper limit of 1,250 employees (12 5%), and 2 have an upper limit of 1,500 employees (8 3%)  25 of the 71 wholesale trades industries have an upper limit of 100 employees (35 2%), 16 have an upper limit of 150 employees (22 5%), 21 have an upper limit of 200 employees (29 6%), and 9 have an upper limit of 250 employees (12 7%)  The SBA currently has nine employee based industry size standards in effect (no more than 100, 150, 200, 250, 500, 750, 1,000, 1,250, and 1,500 employees)  The SBA uses average annual receipts over the three (soon to be five) most recently completed fiscal years to determine program eligibility for most other industries (526 of 1,036 industries, or 50 8%)  The SBA also uses average asset size as reported in the firm's four quarterly financial statements for the preceding year to determine eligibility for five finance industries, and a combination of number of employees and barrel per day refining capacity for petroleum refineries  The SBA currently has 16 receipts based industry size standards in effect  In some instances, there is considerable variation in the size standards used within each industrial sector  For example, the SBA uses 11 different size standards to determine eligibility for 66 industries in the retail trade sector  In general, most administrative and support service industries have an upper limit of either $15 0 million or $20 5 million in average annual sales or receipts; most agricultural industries have an upper limit of $0 75 million in average annual sales or receipts; most construction of buildings and civil engineering construction industries have an upper limit of $36 5 million in average annual sales or receipts, and most construction specialty trade contractors have an upper limit of $15 0 million in average annual sales or receipts; most educational services industries have an upper limit of either $7 5 million or $11 0 million in average annual sales or receipts; most health care industries have an upper limit of either $7 5 million or $15 0 million in average annual sales or receipts; most social assistance industries have an upper limit of $11 0 million in average annual sales or receipts; there is considerable variation within the professional, scientific, and technical service industries, ranging from an upper limit of $7 5 million in average annual sales or receipts to $38 5 million; there is considerable variation within the transportation and warehousing industrial sector, ranging from an upper limit of $7 5 million in average annual sales or receipts to $38 5 million for 43 industries and from an upper limit of 500 employees to 1,500 employees for 15 industries); and most finance and insurance industries have an upper limit of $38 5 million in average annual sales or receipts  The SBA also applies a $550 million average asset limit (as reported in the firm's four quarterly financial statements for the preceding year) to determine eligibility in five finance industries: commercial banks, saving institutions, credit unions, other depository credit intermediation, and credit card issuing  Many federal statutes provide special considerations for small businesses  For example, small businesses are provided preferences through set-asides and sole source awards in federal contracting and pay lower fees to apply for patents and trademarks  In most instances, businesses are required to meet the SBA's size standards to be considered a small business  However, in some cases, the underlying statute defines the eligibility criteria for defining a small business  In other cases, the statute authorizes the implementing agency to make those determinations  Under current law, a federal agency that decides that it would like to exercise its authority to establish its own size standard through the federal rulemaking process is required to, among other things, (1) undertake an initial regulatory flexibility analysis to determine the potential impact of the proposed rule on small businesses, (2) transmit a copy of the initial regulatory flexibility analysis to the SBA's Chief Counsel for Advocacy for comment, and (3) publish the agency's response to any comments filed by the SBA's Chief Counsel for Advocacy in response to the proposed rule and a detailed statement of any change made to the proposed rule in the final rule as a result of those comments  In addition, the federal agency must provide public notice of the proposed rule and an opportunity for the public to comment on the proposed rule, typically through the publication of an advanced notice of proposed rulemaking in the Federal Register and notification of interested small businesses and related organizations  Also, prior to issuing the final rule, the federal agency must have the approval of the SBA's Administrator  Under current practice, the SBA's Administrator, through the SBA's Office of Size Standards, consults with the SBA's Office of Advocacy prior to making a final decision concerning such requests  The Office of Advocacy is an independent office within the SBA  During the 112 th Congress, H R  585 , the Small Business Size Standard Flexibility Act of 2011, was reported by the House Committee on Small Business on November 16, 2011, by a vote of 13 to 8  The bill would have retained the SBA's Administrator's authority to approve or disapprove size standards for programs under the Small Business Act of 1953 (as amended) and the Small Business Investment Act of 1958 (as amended)  The Office of Chief Counsel for Advocacy would have assumed the SBA Administrator's authority to approve or disapprove size standards for purposes of any other act  Similar legislative provisions have been introduced during the 113 th Congress ( H R  2542 , the Regulatory Flexibility Improvements Act of 2013, and included in H R  4 , the Jobs for America Act), 114 th Congress ( H R  527 , the Small Business Regulatory Flexibility Improvements Act of 2015, and its Senate companion bill, S  1536 ), and 115 th Congress ( H R  33 , the Small Business Regulatory Flexibility Improvements Act of 2017, and its Senate companion bill, S  584 , and included in H R  5 , the Regulatory Accountability Act of 2017)  Advocates of splitting the SBA Administrator's small business size standards' authority between the Office of Chief Counsel for Advocacy and the SBA's Administrator have argued that Should an agency wish to draft a regulation that adopts a size standard different from the one already adopted by the Administrator in regulations implementing the Small Business Act, the agency must obtain approval of the Administrator  However, that requires the Administrator to have a complete understanding of the regulatory regime of that other act—knowledge usually outside the expertise of the SBA  However, the Office of the Chief Counsel for Advocacy, an independent office within the SBA, represents the interests of small businesses in rulemaking proceedings (as part of its responsibility to monitor agency compliance with the Regulatory Flexibility Act, 5 U S C  601-12, (RFA)) does have such expertise  Therefore, it is logical to transfer the limited function on determining size standards of small businesses for purposes other than the Small Business Act and Small Business Investment Act of 1958 to the Office of the Chief Counsel for Advocacy…  the Administrator is not the proper official to determine size standards for purposes of other agencies' regulatory activities  The Administrator is not fluent with the vast array of federal regulatory programs, is not in constant communication with small entities that might be affected by another federal agency's regulatory regime, and does not have the analytical expertise to assess the regulatory impact of a particular size standard on small entities  Furthermore, the Administrator's standards are: very inclusive, not developed to comport with other agencies' regulatory regimes, and lack sufficient granularity to examine the impact of a proposed rule on a spectrum of small businesses  Opponents have argued that When an agency is seeking to use a size standard other than those approved by the SBA, the agency may consult with the Office of Advocacy  Such consultation is sensible, as the Office of Advocacy has significant knowledge of the regulatory environment outside of the canon of SBA law  However, the SBA's Office of Size Standards, with its historical involvement, expertise, and staff resources in this area, remains the appropriate entity to approve such size standards…  While the legislation permits the SBA to continue to approve size standards for its enabling statutes, it removes SBA's authority to do so for other statutes  The result would be to create a duplicate size standard authority in both the SBA and the Office of Advocacy  Both the SBA and the Office of Advocacy would have personnel who would analyze and evaluate size standards  Through the bifurcation of these responsibilities, taxpayers would effectively be forgoing the economies of scale that are currently enjoyed by the operation of a single Office of Size Standards in the SBA…  Having two such entities that have the same mission is not a transfer of function, but an inefficient and duplicative reorganization … Instead of having one central office, there will now be two—further muddling small businesses' relationship with the federal government  Two bills were introduced during the 114 th Congress ( H R  3714 , the Small Agriculture Producer Size Standards Improvements Act of 2015, and H R  4341 , the Defending America's Small Contractors Act of 2016) to authorize the SBA to establish size standards for agricultural enterprises not later than 18 months after the date of enactment  The size standard for agricultural enterprises was, at that time, set in statute as having annual receipts not in excess of $750,000  H R  4341 , among other provisions, would have also limited an industry category to a greater extent than provided under the North American Industry Classification codes for small business procurement purposes if further segmentation of the industry category is warranted  H R  4341 was introduced on January 7, 2016, and ordered to be reported with amendment by the House Committee on Small Business on January 13, 2016  H R  3714 was introduced on October 8, 2015, considered by the House under suspension of the rules on April 19, 2016, and agreed to by voice vote  P L  114-328 , the National Defense Authorization Act for Fiscal Year 2017, includes a provision which authorizes the SBA to establish different size standards for agricultural enterprises using existing methods and appeal processes  Also, as mentioned previously, P L  115-324 , the Small Business Runway Extension Act of 2018, directs federal agencies proposing a size standard (and, based on report language accompanying the act, presumably the SBA as well) to use the average annual gross receipts from at least the previous five years, instead of the previous three years, when seeking SBA approval to establish a size standard based on annual gross receipts  The SBA has not announced if it will continue to use the average annual gross receipts over three years to determine receipts-based size standards or if it will use the average annual gross receipts from the previous five years  Historically, the SBA has relied on economic analysis of market conditions within each industry to define eligibility for small business assistance  On several occasions in its history, the SBA attempted to revise its small business size standards in a comprehensive manner  However, because (1) the Small Business Act provides leeway in how the SBA is to define small business; (2) there is no consensus on the economic factors that should be used in defining small business; (3) federal agencies have generally opposed size standards that might adversely affect their pool of available small business contractors; and (4) the SBA's initial size standards provided program eligibility to nearly all businesses, the SBA's efforts to undertake a comprehensive reassessment of its size standards met with resistance  Firms that might lose eligibility objected  Federal agencies also objected  As a result, in each instance, the SBA's comprehensive revisions were not fully implemented  The SBA's congressionally mandated requirement to conduct a detailed review of at least one-third of the SBA's industry size standards every 18 months was imposed by P L  111-240 , the Small Business Jobs Act of 2010, to prevent small business size standards from becoming outdated  More frequent reviews of the size standards were expected to increase their accuracy and, generally speaking, result in (1) increased numbers of small businesses found to be eligible for SBA assistance and (2) an increase in the number and amount of federal contracts awarded to small businesses (primarily by preventing large businesses from being misclassified as small and by increasing the number of small businesses eligible to compete for federal contracts)  As expected, the SBA's economic analyses during the recent five-year review cycle often supported an increase in the size standards for many industries  However, the SBA's economic analyses also occasionally supported a decrease in the size standards for some industries  Despite the SBA's decision to, in most circumstances, make no changes when their economic analyses indicated that a decrease was warranted, it could be argued that the increased frequency of the reviews has generally prevented the SBA's size standards from becoming outdated  This, in turn, has, at least to a certain extent, improved the accuracy of the size standards (as measured by the extent to which the size standard is in alignment with the SBA's economic analyses)  In a related matter, the SBA continues to adjust its receipts based size standards for inflation at least once every five years, or more frequently if inflationary circumstances warrant, to prevent firms from losing their small business eligibility solely due to the effects of inflation  The most recent adjustment for inflation took place on July 14, 2014  Prior to that, the last adjustment for inflation took place in 2008  The SBA also continues to review size standards within specific industries whenever it determines that market conditions within that industry have changed  Congress has several options related to the SBA's ongoing review of its size standards  For example, as part of its oversight of the SBA, Congress can wait for the agency to issue its proposed rule before providing input or establish a dialogue with the agency, either at the staff level or with Members involved directly, prior to the issuance of its proposed rule  Historically, Congress has tended to wait for the SBA to issue proposed rules concerning its size standards before providing input, essentially deferring to the agency's expertise in the technical and methodological issues involved in determining where to draw the line between small and large firms  Congress has then tended to respond to the SBA's proposed rules concerning its size standards after taking into consideration current economic conditions and input received from the SBA and affected industries  Waiting for the SBA to issue its proposed rule concerning its size standards before providing congressional input has both advantages and disadvantages  It provides the advantage of insulating the proposed rule from charges that it is influenced by political factors  It also has the advantage of respecting the separation of powers and responsibilities of the executive and legislative branches  However, it has the disadvantage of heightening the prospects for miscommunication, false expectations, and wasted effort, as evidenced by past proposed rules concerning the SBA's size standards that were either rejected outright, or withdrawn, after facing congressional opposition  Another policy option that has not received much congressional attention in recent years, but which Congress may choose to address, is the targeting of the SBA's resources  When the SBA reviews its size standards, it focuses on the competitive nature of the industry under review, with the goal of removing eligibility of firms that are considered large, or dominant, in that industry  There has been relatively little discussion of the costs and benefits of undertaking those reviews with the goal of targeting SBA resources to small businesses in industries that are struggling to remain competitive  GAO recommended this approach in 1978 and Roger Rosenberger, then SBA's associate administrator for policy, planning, and budgeting, testified at a congressional hearing in 1979 that it was debatable whether the SBA should provide any assistance to any of the businesses within industries where "smaller firms are flourishing " Revising the SBA's size standards using this more targeted approach would likely reduce the number of firms eligible for assistance  It would also present the possibility of increasing available benefits to eligible small firms in those industries deemed "mixed" or "concentrated" by the SBA without necessarily increasing overall program costs  Perhaps because previous proposals that would result in a reduction in the number of firms eligible for assistance have met with resistance, this alternative approach to determining program eligibility has not received serious consideration in recent years  Nonetheless, it remains an option available to Congress should it decide to change current policy 

ground_truth: WIOA requires states to reserve at least 15 percent of their total State Vocational Rehabilitation Services program funds to provide pre-employment transition services to help students with disabilities transition from school to work. GAO was asked to review how states were implementing these services. This report examines (1) steps states reported taking to implement pre-employment transition services, and (2) implementation challenges states reported and how Education has addressed them. GAO reviewed documents and funding data from Education, and federal laws and regulations; surveyed all 79 state VR agencies (74 responded); held discussion groups with representatives of 29 state VR agencies; and interviewed officials from Education and three states (Idaho, Illinois, and Maryland) GAO selected for variety in size and type of agencies, among other factors. Of the 74 state vocational rehabilitation (VR) agencies that responded to GAO's survey, most reported expanding services to help students with disabilities transition from school to work as required under the Workforce Innovation and Opportunity Act (WIOA), enacted in July 2014. Most state agencies reported serving more students and providing work-based learning experiences and other activities, referred to as pre-employment transition services (see figure). State VR agencies reported two key challenges with implementing pre-employment transition services for students as required by WIOA. Spending reserved funds : States reported spending about $357 million out of the $465 million reserved for these services in fiscal year 2016. Education officials said that states had difficulty determining what expenditures were allowable, and some state officials said they would like more detailed information from Education. Education officials said they plan to clarify guidance but have no timeframe for providing further information, which would help states to better plan their use of reserved funds. Finalizing interagency agreements : Fewer than half the state VR agencies that responded to GAO's survey (34 of 74) reported updating their interagency agreement with their state's educational agency. Interagency agreements can help promote collaboration by, for example, establishing roles and responsibilities of each agency. Although Education offers technical assistance on interagency agreements, without increased efforts to raise awareness about the importance of these agreements and provide assistance to states where needed, Education may miss opportunities to help state VR and educational agencies efficiently and effectively coordinate services. In addition, WIOA requires Education to highlight best state practices, and most VR agencies responding to GAO's survey (63 of 74) reported this would be useful. Education does not have a written plan or timeframe for identifying and disseminating best practices. As a result, Education may miss opportunities to help more students with disabilities successfully transition from school to work. GAO is recommending that Education (1) establish timeframes for providing additional information on allowable expenditures, (2) take additional steps to assist states that have not updated and finalized their interagency agreements, and (3) develop a written plan with specific timeframes and activities for identifying and disseminating best practices. Education agreed with the first recommendation and disagreed with the other two. GAO revised the second recommendation and maintains that specific information is needed for the third, as discussed in the report.