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



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

Report 1: Because of technological advances in digitization and data processing, electronic forms of payment have become increasingly available, convenient, and cost efficient  Established technologies, such as credit and debit cards, have long been a popular payment option  In addition, new payment methods (e g , PayPal's Venmo app and Square's point-of-sale hardware, among others) use underlying traditional banking and payments systems to make electronic payments less expensive and more available to individuals and small businesses  Newer digital currencies, such as cryptocurrencies, offer alternative (though not yet widely adopted) options that have a high degree of independence from traditional systems  Although cash remains an important method of payment in the United States (see Figure 1 ), anecdotal reporting suggests that various electronic payment systems have become so effective and inexpensive relative to cash payments that some U S  businesses—even those at which sales generally have a low dollar value—are increasingly choosing not to accept cash  In some developed countries, such as Sweden, cash payments are becoming relatively scarce  In addition, a number of central banks worldwide are examining the possibility of issuing government-backed digital currencies that exist only electronically  These trends suggest that due to buyer or seller preference or government policy, the role of cash in the payment system may continue to decline, perhaps significantly, in coming years  Some observers have examined the consequences of an evolution away from cash  Proponents of reducing the use of physical currency (or even eliminating it all together and becoming a cashless society ) argue that it will generate important benefits, including potentially improved efficiency of the payment system, a reduction of crime, and less constrained monetary policy  Proponents of maintaining cash as a payment option argue that significant reductions in cash usage and acceptance would further marginalize people with limited access to the financial system, increase the financial system's vulnerability to cyberattack, and reduce personal privacy  Given developments and debate in this area, Congress may consider policy issues related to the declining use of cash relative to electronic forms of payment  This report is divided into two parts  The first part analyzes cash and noncash payment systems, and the second analyzes potential outcomes if cash were to be significantly displaced as a commonly accepted form of payment  Part I describes the characteristics of cash and the various electronic payment systems that could potentially supplant cash  The noncash payment systems include traditional electronic payment systems (such as credit cards or payment apps) and alternative electronic payment systems, focusing on private systems using distributed ledger technology (such as cryptocurrencies) and central bank digital currencies (which are only under consideration by central banks at this time)  Part I also examines the advantages and costs specific to each payment system and the potential obstacles to the adoption of alternative electronic payment systems  Part II of this report analyzes the potential implications of a reduced role of cash payments in the economy, including potential benefits, costs, and risks  The report also includes an Appendix that presents two international case studies of economies in which noncash payment systems rapidly expanded  This section provides analysis of cash, traditional noncash payment systems, and potential alternative payment systems  It describes the characteristics, presents usage data, and analyzes the advantages and costs of each system  It also includes a discussion on the potential decline in cash usage and a short inset on the legality of businesses' refusing to accept cash  How well something serves as money in a payment system depends on how well it serves as (1) a medium of exchange, (2) a unit of account, and (3) a store of value  To function as a medium of exchange , the thing must be tradable and agreed to have value  To function as a unit of account , the thing must act as a good measurement system  To function as a store of value , the thing must be able to purchase approximately the same value of goods and services at some future date as it can purchase now  Currently, cash continues to serve the three functions of money well as part of a robust, physical payment system  Physical currency can be carried easily in a pocket and thus is tradeable  Each unit of currency (e g , a dollar) is identical and can be divided into fractions (e g , cents) of the whole, making dollars effective units of account  A bill or coin, when well cared for, will not degrade substantively for years, meaning it can function as a store of value  In the United States, paper currency and coins are produced by the Bureau of Engraving and Printing (BEP) and the United States Mint, respectively, both of which are units within the Department of the Treasury (Treasury)  The Federal Reserve (the Fed) distributes the currency and coin to banks, savings associations, and credit unions upon request, and the banks in turn make the cash available to their customers  When a bank orders cash, the Fed deducts the amount from the bank's Fed account  The revenues and costs to the government from this system are examined in the " Cash Effects on Government " section below  Data suggests that the demand for cash in the United States has continued to grow despite the introduction of new payment services and systems  Fed data indicates that the amount of currency in circulation has increased steadily over at least the past 20 years (see Figure 2 )  As of December 31, 2018, there were more than 43 billion notes (more commonly called bills ) worth over $1 67 trillion in circulation  The Fed determines how many new notes "are needed to meet the public's demand [, which]…reflects the Board's assessment of the expected growth rates for payments of currency to and receipts of currency from circulation " This growth in demand is not wholly surprising, because demand for cash would be expected to grow as does the economy, the population, and price levels  In addition, the demand for cash is growing because certain people may be increasingly using it solely as a store of value or safe investment (imagine the proverbial risk-averse saver keeping money under the mattress), rather than to make purchases  In addition, there remains a high demand for U S  currency abroad, both as a store of value and medium of exchange  Some evidence suggests people are using cash for payments less often  For example, according to preliminary findings of a Fed survey, cash transactions in the United States fell from 40 7% of all transactions in 2012 to 32 5% in 2015  Taken together with data from the triennial Federal Reserve Payment S tudy , these survey results suggest the number of cash transactions during that time fell from roughly 84 8 billion per year to 69 4 billion  However, Fed economists have subsequently noted that significant changes in the survey methodology and unaccounted for effects from economic conditions means the eight-point decline in the share of transactions "almost surely does not accurately reflect actual changes in consumer preferences for cash " After making adjustments to account for these factors, those economists estimated the decline in the percentage of transactions that were in cash was roughly half of the initially estimated decline in the share of cash transactions  The most recent data indicates that Americans used cash for 31% of their transactions in 2016, with stronger cash preference for small, in-person transactions (60% of in-person transactions under $10)  One of the main benefits of cash is that it is a simple, easy, robust payment mechanism that requires no ancillary technologies  Payers and payees validate and settle transactions simply by physically exchanging the currency; the consumer needs no magnetic-stripe card or mobile device, and the seller does not need a card-reading machine or other payment-receiving device  Relatedly, some observers assert cash provides a security against potential disruptions to electronic payment systems  For example, in the event of a significant cyberattack or extended power outage, cash could continue to serve the functions of money while electronic payment systems could not  Cash also acts as a safe asset in which to invest savings and its usage can involve a high degree of privacy, features that will be examined in more detail in the " Potential Costs and Risks of a Reduced Role for Cash " section below  In addition, holding cash might impart other psychological benefits to a consumer, such as feelings of greater control over budgeting and associations with wealth  Using and accepting cash involves certain costs to consumers and businesses  For example, consumers may have to pay fees to withdraw cash from automatic teller machines (ATMs)  Banks with more than $1 billion in assets are required to report their revenue from ATM fees, and a Congressional Research Service (CRS) analysis indicates those banks collected at least $1 9 billion in ATM fees in 2018  Other costs—including consumer losses through theft, misplacement, or accidental destruction of cash—are more difficult to estimate  Businesses must pay for cash management services, such as cash delivery with armored trucks (an industry with estimated annual U S  revenues of $2 8 billion) and security systems to dissuade thieves or robbers from attempting to steal cash kept on the retailer's premises  Despite these efforts, U S  businesses lose about $40 billion in employee cash thefts per year  Similar to consumer's costs, quantifying all the costs of cash to businesses presents challenges, as certain costs are not straightforward and easily measurable  For example, some portion of retail staff and managers' paid time is spent counting cash and reconciling tills  In addition to its impacts on consumers and businesses, cash directly affects government revenues through three main mechanisms: (1) seigniorage (i e , the "profit" the government makes by producing cash), (2) Federal Reserve remittances to the Treasury, and (3) tax evasion  Two of these mechanisms—seigniorage and remittances—increase government revenues  The third mechanism—tax evasion, facilitated by the anonymous and difficult-to-trace nature of cash transactions—decreases government revenue  Revenue Generating: Seignoriage   In general, the value of the physical currency produced by the government exceeds the cost incurred to produce it  For example, a $100 bill costs about 14 cents to print, generating revenues $99 86 greater than cost  The profit generated by this difference is called seigniorage, and this income would decrease if demand for cash were to fall  In FY2017, the U S  Mint generated $391 5 million in net income from circulating coins and the U S  Bureau of Engraving and Printing generated revenues $693 million greater than expenses  Revenue Generating: Fed Remittances   The second source of cash-generating revenue is remittances, which are transferred from the Fed to the U S  Treasury  Any income the Fed earns after expenses and dividends paid to member banks, it remits to the Treasury (in 2017, the amount was $80 6 billion), and hence becomes a source of revenue for the federal government  A significant expense for the Fed is the interest it pays on depository institutions' deposits held in their Fed accounts  Such payments accounted for $28 9 billion of the Fed's $35 4 billion total expenses in 2017  However, currency is a Fed liability on which it pays no interest  Recall that when a bank orders cash from the Fed, the Fed deducts the amount from the bank's account  Thus, the more cash that is in circulation, the less interest the Fed must pay, and the greater its remittances to Treasury  In January 2019, there was approximately $1 7 trillion of currency in circulation, and the Fed (as of this publication) paid an annual interest rate of 2 4% on reserve balances  By these measures, if all currency were instead bank reserve balances held at the Fed, it could increase Fed expenses (and thus reduce government revenues) by more than $40 billion a year  If interest rates on reserves (which change when the Fed alters monetary policy) rose or fell, then expenses would increase or decrease, respectively, in this scenario  Revenue Reducing: Tax Evasion   Because cash leaves no electronic record, wage earners and businesses are able to underreport (in general, illegally) how much cash they receive in order to reduce their tax payments  Thus, cash contributes to the tax gap —the difference between what the government is owed and what is actually paid  The most recent Internal Revenue Service estimate released in 2016 examined the tax gap for the years 2008-2010, and found that the gap due to underreporting averaged $387 billion a year  This estimate does not directly measure how much underreporting is facilitated by cash payments, and the figure for recent years is likely to be different  However, it provides a general context for how much tax revenue the government does not collect due to underreporting that is at least in part made possible by cash transactions  Businesses have long set conditions under which they would not accept cash  For example, certain businesses refuse to accept high-denomination bills  However, according to anecdotal reporting, retail businesses are increasingly deciding that the costs of transacting in cash are high enough that they would rather not accept it at all  Notably, this is occurring at businesses at which transactions are typically in-person for small dollar amounts—traditionally viewed as the type of transactions for which cash is the least costly option  If these stories are in fact indicative of a sustained trend, widespread non-acceptance of cash could have a variety of effects on consumers, businesses, as well as society and the economy at large  One particular effect that has drawn significant attention, as well as litigation, is that non-acceptance of cash could potentially marginalize those that have limited access to the financial system or mobile technological devices  This issue is examined in the " Lack of Financial Access for Certain Groups " section later in the report  Were cash to decline as a payment system, the most likely replacement—at least at the current time—would appear to be traditional noncash, electronic payment systems, such as debit cards, credit cards, or payment mobile apps  In traditional noncash payment systems like those that are prevalent today, participants hold their money in an account at a bank or other financial intermediary that maintains accurate ledgers of how much money each customer has available  To make a payment, the payer instructs (using a physical check or an electronic message) the intermediary to transfer money to the recipient's account  If the recipient holds an account at a different intermediary, those intermediaries will send messages to each other via messaging networks connecting them, instructing each to make the necessary changes to their ledgers  The intermediaries validate the transaction, ensure the payer has sufficient funds for the payment, deduct the appropriate amount from the payer's account, and add that amount to the payee's account  For example, in the United States, a retail consumer may initiate an electronic payment by swiping a debit card, at which time an electronic message is sent over a network instructing the purchaser's bank to send payment to the seller's bank  Those banks then make the appropriate changes to their account ledgers (possibly using the Fed's payment system) reflecting that value has been transferred from the purchaser's account to the seller's account  As with physical currency, digital entries in account ledgers can serve the three functions of money well for use in payments  Instructions to change entries in a ledger can easily be sent, making the values in the ledger easily tradable  Numerical entries can be denominated in identical and divisible units, making them good units of account  Because numbers in a ledger can remain unchanged during periods when no transactions are made, they can serve as a store of value  According to the most recent complete Federal Reserve Payment S tudy on noncash payments, the number of traditional noncash payments made in the U S  totaled more than 144 billion transactions with a value of almost $178 trillion in 2015  These included payments via debit cards (69 5 billion transactions worth $2 56 trillion), credit cards (33 8 billion transactions worth $3 16 trillion), automated clearing house payments (ACH; 23 5 billion transactions worth $26 83 trillion), and check payments (17 3 billion payments worth $26 83 trillion)  Between 2012 and 2015, the number of transactions of the three electronic systems, debit, credit, and ACH, grew at annual rates of 7 1%, 8 0%, and 4 9%, respectively  Their values grew by 6 8%, 7 4%, and 4 0%, respectively  Check payments declined by an annual rate of 4 4% by number and 0 5% by value  According to a recent supplement to that study, both the growth of electronic payments and the decline of check payments accelerated in 2017  Payment based on physically exchanging currency has some notable shortcomings that can be addressed by a payment system based on maintaining account ledgers  One is that physical currency requires both the payer and the payee to either (1) be physically near each other, allowing the physical currency to pass from the possession of the former into the possession of the latter; or (2) have a sufficient trust in each other that the payee believes an assurance that he or she will receive the currency later  Another shortcoming is that holders of physical currency may have little recourse if it is lost, stolen, or accidentally destroyed  If, instead, money is exchanged by making valid changes in ledgers maintained by trusted intermediaries, the exchange can be accomplished without the risk of lost, stolen, or damaged currency  In addition, noncash systems can make payments fast, easy, and convenient  Using them decreases the need for people to make regular estimations of how much cash they need to have on a particular day, the frequency of trips to the bank or ATM to get cash, and the amount of time waiting for cashiers to make change  Instead, a plastic card or an app on a mobile device can replace those activities with a card swipe or button push  As information technology has progressed, the convenience has increased and the option to use electronic payments has become nearly ubiquitous  Until fairly recently, it was not uncommon for a retail establishment to reject card payments  Now, services such as Venmo, Apple Pay, and Google Pay, and card-reading devices, such as those made by Square, have made electronic payment options increasingly available, even for individuals to accept electronic payments from other individuals  The previously mentioned anecdotal reporting suggests there is a growing number of establishments that only accept electronic payments  For these systems to work well, participants must trust that banks and other intermediaries are keeping accurate ledgers that are changed only for valid transfers  Otherwise, an individual's money could be lost or stolen if a bank records the account as having an inaccurately low amount or transfers value without his or her permission  Another advantage of systems using traditional intermediaries is that they have a number of features that generate a high degree of trust and accuracy  Banks and other intermediaries have both a market and governmental incentive to be accurate  A bank or financial intermediary that does not have a good reputation for protecting a customer's money and processing transactions accurately would likely lose customers  In addition, governments typically subject banks to laws and regulations designed in part to ensure that banks are well run and that the money they hold is safe  As such, banks take substantial measures to ensure security and accuracy  In addition, intermediaries generally are required to provide certain protections to consumers involved in electronic transactions, in part to protect them from losses resulting from unauthorized transfers  For example, the Electronic Fund Transfer Act ( P L  95-630 ) limits consumers' liability for unauthorized transfers made using their accounts  Similarly, the Fair Credit Billing Act ( P L  93-495 ) requires credit card companies to take certain steps to correct billing errors, including when the goods or services a consumer purchased are not delivered as agreed  Both laws also require financial institutions to make certain disclosures to consumers related to the costs and terms of using an institution's services  Significant costs and physical infrastructure underlie systems for electronic money transfers to ensure the systems' integrity, performance, and availability  For example, payment system providers operate and maintain robust digital networks to connect retail locations with banks  The Fed operates and maintains electronics networks to connect banks to itself and each other  These intermediaries store and protect huge amounts of data  Because these intermediaries are generally highly regulated, they incur regulatory compliance costs  Intermediaries recoup the costs associated with these systems and regulations and earn profits by charging fees directly when the system is used (such as the fees a merchant pays to have a card reading machine and "swipe fees" on each card transaction) or by charging fees for related services (such as checking account fees)  It is difficult to quantify how much traditional noncash payment systems cost and what portion of those costs is passed on to consumers and businesses  Performing a quantitative analysis is beyond the scope of this report  What bears mentioning here is that certain costs of traditional payment systems—and, in particular, the fees intermediaries in those systems charge—have at times been high enough to raise policymakers' concern and elicit policy responses  For example, in response to businesses' assertions that Visa and MasterCard had exercised market power in setting debit card swipe fees at unfairly high levels, Congress included Section 1075 in the Dodd-Frank Consumer Protection and Wall Street Reform Act (Dodd-Frank Act; P L  111-203 )—sometimes called the Durbin Amendment  Section 1075 directs the Fed to limit debit card swipe fees charged by banks with assets of more than $10 billion  In addition, studies on unbanked and underbanked populations cite the fees associated with traditional bank accounts, a portion of which may be the result of providing payment services, as a possible cause for those populations' limited interaction with the traditional banking system  Although electronic payment systems protect customers from physical theft and are subject to a complex and sometimes overlapping array of state and federal laws, regulators, and regulations related to cybersecurity, they could nevertheless expose individuals to cyber-theft and identity theft  In addition, the systems themselves could be susceptible to disruption from cyberattacks  The occurrence of successful hacks of banks and other financial institutions, wherein huge amounts of individuals' personal information are stolen or compromised, illustrates cyber-related risks  For example, in 2014, JPMorgan Chase, the largest U S  bank, experienced a data breach that exposed financial records of 76 million households  However, no consensus exists on how best to reduce the occurrence of such incidents, and whether current cybersecurity measures and regulatory frameworks are effective and efficient in mitigating cybersecurity risk is an open question  For a more detailed examination of cybersecurity at financial institutions, see CRS Report R44429, Financial Services and Cybersecurity: The Federal Role , by N  Eric Weiss and M  Maureen Murphy  In addition, although the traditional electronic payment system is sufficiently fast and convenient to complete many transactions, other transactions can involve problematic delays  One such delay that can be particularly costly for consumers is the lag between when a payment (such as a paycheck) is deposited and when the full amount of the funds are available to the individual  Depending on factors related to which networks the payer's and payee's bank uses to process payments, it can take up to two business days (or more under certain circumstances) after a deposit is made for banks to fully validate, process, and settle the deposit  Settlement delays can create a situation in which an individual has made a deposit that would give sufficient funds to pay a bill that is due, but nevertheless may overdraw the account because the deposit is awaiting processing  In such a situation, the individual faces a choice between costly outcomes—a late payment penalty on the bill, an overdraft fee on the bank account, or a fee from a check cashing or payday lending service  These costs are likely disproportionately borne by low- or moderate-income individuals who typically have low balances in their bank accounts  Faster or immediate payment processing could potentially reduce or eliminate costs incurred by individuals facing this situation  While delays in the payment system may seem anachronistic at a time when digital messages can be sent and data processed nearly instantaneously, the fact remains that aspects of the systems, networks, and infrastructures used today (including those operated by the Fed) were developed and deployed decades ago  Both the Fed and private institutions are working to increase system speed and efforts are underway to make real-time payments in the United States the norm  However, payment system operators arguably have little incentive to achieve faster or real-time payments because (1) they are in compliance with the current requirement facing banks pursuant to the Expedited Funds Availability Act of 1987 ( P L  108-100 ) to generally make most types of deposits available by the second business day, (2) updating legacy systems is costly for the institutions that operate them, and (3) banks are generating revenue through overdraft fees  Currently, it appears that the traditional noncash payment systems described above likely would replace cash payments should cash usage significantly decline  However some observers, citing the various costs and disadvantages associated with those systems—including delays in processing as well as reliance on traditional financial intermediaries—point to alternative electronic payment systems as potential dominant payment systems of the future  Cryptocurrenc y , such as Bitcoin , is the most well-known of these alternatives  Described in more detail below, cryptocurrencies use blockchain technology and public or "distributed" ledgers to achieve validated transfers of digital representations of value  The use of these systems to make payments is quite rare relative to cash and traditional systems, and the role they will play in the future is speculative  Nevertheless, their potential to significantly affect the usage of cash and traditional systems for payments has drawn the attention of central banks  Some central banks are examining whether they should create a comparable payment system of digital currencies to offer the advantages of those systems themselves and to avoid being bypassed in the future  This section briefly describes (1) existing private alternative electronic payment systems and (2) possible future central bank-run systems  With respect to alternative electronic payment systems, the section examines their potential advantages, costs, and obstacles to their widespread adoption  With respect to a potential central bank-run system, which is more speculative at this time, the section examines potential advantages and obstacles to their widespread adoption and uncertainties they present  In general, private electronic payment systems using distributed ledgers allow individuals to establish an account identified by a string of numbers and characters (often called an address or public key ) that is paired with a password or private key known only to the account holder  A transaction occurs when two parties agree to transfer digital currency (perhaps in payment for a good or service) from one account to another  The buying party will "unlock" the currency used as payment with her private key, allowing some amount to be transferred from her account to the seller's  The seller then "locks" the currency in her account using her own private key  From the perspective of the individuals using the system, the mechanics are similar to authorizing payment on any website that requires an individual to enter a username and password  In addition, companies offer applications or interfaces that users can download onto a device to make transacting in cryptocurrencies more user-friendly  Many digital currency platforms use blockchain technology to validate changes to the ledgers  In a blockchain-enabled system, payments are validated on a public or "distributed" ledger by a decentralized network of system users and cryptographic protocols  In these systems, parties that otherwise do not know each other can exchange something of value (i e , a digital currency) not because they trust each other but because they trust the platform and its protocols to prevent invalid changes to the ledger  A notable feature of transfers using blockchain is that they require no centralized, trusted intermediary such as a bank, government central bank, or other financial or government institution  Proponents envision these systems could achieve instantaneous transfers, although they currently require minutes or hours to finalize transfers  The decentralized nature of digital currencies and their recent proliferation poses challenges to performing industry-wide analysis of their use in payments  For example, as of August 27, 2018, one industry group purported to track trading prices of 1,890 cryptocurrencies alone  For brevity and clarity, this report uses statistics on Bitcoin—the first and most well-known cryptocurrency, the total value of which accounts for more than half of the industry as a whole —as an illustrative example of a digital currency's use in payments  In January 2017, the price of a Bitcoin on an exchange was about $993  The price surged during the year, peaking at about $19,650 in December 2017, an almost 1,880% increase  However, the price then dramatically declined  Overall, the price of Bitcoin has experienced a high degree of volatility  On March 12, 2018, the price of Bitcoin was $3,860, down 80% from its peak  More recently, the price rebounded and was $5,948 on May 8, 2019  Although price data on Bitcoin illustrates the public interest in and overall demand for this cryptocurrency, it is a poor indicator of how often it is being exchanged for goods and services (i e , how often it is being used as money)  Certain analyses appear to show that digital currencies are not being widely used and accepted as payment for goods and services, but rather as investment vehicles  The number of Bitcoin transactions may serve as a better indicator—though a flawed one—of the use of Bitcoin as a payment system  This number reveals how many times Bitcoins are transferred between accounts each day, and data indicates the number of transactions is miniscule compared with those of traditional systems  For example, in 2019 through March 12, the Bitcoin system averaged about 310,000 transactions per day globally, a pace that would result in about 113 million transactions per year  Recall that in the United States alone, more than 144 billion traditional (nearly 1,275 times as many) noncash payments were made in 2015  Moreover, one problem with this measure it that it is a count of how many times two parties have exchanged Bitcoin, not a count of how many times Bitcoin has been used to buy something  Some portion of those exchanges, possibly a significantly large portion, is driven by investors giving fiat currency to an exchange to buy and hold the Bitcoin as an investment  In those transfers, Bitcoin is not acting as money (i e , not being exchanged for a good or service)  Advantages of Private Payment Systems Using Distributed Ledgers   As discussed in an earlier section, traditional electronic payment systems involve a number of intermediaries, such as government central banks and private financial institutions  To carry out transactions, these institutions operate and maintain extensive electronic networks and other infrastructure, employ workers, and require time to finalize transactions  To meet costs and earn profits, these institutions charge various user fees  Cryptocurrency advocates anticipate that a decentralized payment system operated through the internet could be less costly than traditional payment systems and existing infrastructures  However, whether such efficiencies can or will be achieved remains an open question  In addition, opening a bank account or otherwise using traditional electronic payment systems generally requires an individual to divulge to a financial institution certain basic personal information, such as name, Social Security number, and birthdate  Financial institutions store and may analyze or share this information  In some instances hackers have stolen personal information from financial institutions, causing concerns over how well these institutions can protect sensitive data  Individuals seeking a higher degree of privacy or control over their personal data than that afforded by traditional systems may choose to use an alternative digital currency system that provides a degree of pseudonymity or anonymity  Although inflation in the United States and other developed economies has been low in recent decades, some individuals may nevertheless believe that nontraditional digital money may maintain its value better than government-backed money in traditional systems  The dollar and most modern currencies are fiat money—that is, money that derives value based solely on government decree  Historically, incidents of hyperinflation in certain countries have seen government-backed currencies lose most or nearly all of their value  Thus, some individuals may judge the probability of their fiat money losing a significant portion of its value to be undesirably high  These individuals may place greater trust in the ability of a decentralized network using cryptographic protocols that limit the creation of new money to maintain stable value of money than in the ability of government institutions to do so  Obstacles to Widespread Adoption of Private Payment Systems Using Distributed Ledgers   Several characteristics of cryptocurrency undermine its ability to serve the functions of money in a payment system  Currently, a relatively small number of businesses and individuals use or accept cryptocurrency for payment  As discussed above, Bitcoin transactions have averaged about 310,000 per day globally  Cryptocurrency may be used as a medium of exchange less frequently than traditional money for several reasons  Unlike the dollar and most other government-backed currencies, cryptocurrencies are not legal tender, meaning creditors are not legally required to accept them to settle debts  Consumers and businesses also may be hesitant to place their trust in these systems because they have limited understanding of them  Relatedly, consumers and businesses may have sufficient trust in and be generally satisfied with traditional payment systems  The recent high volatility in the price of many cryptocurrencies undermines their ability to serve as a unit of account and a store of value  Cryptocurrencies can have significant value fluctuations within short periods of time; as a result, pricing goods and services in units of cryptocurrency would require frequent repricing and likely would cause confusion among buyers and sellers  Whether cryptocurrency systems are scalable —meaning their capacity can be increased in a cost-effective way without loss of functionality—is uncertain  At present, the systems underlying cryptocurrencies do not appear capable of processing the number of transactions that would be required of a widely adopted, global payment system  One concern involves the significant energy consumption required to run and cool the computers that validate the transactions on these platforms  Costs of Private Payment Systems Using Distributed Ledgers   As the energy consumption of a digital currency system demonstrates, these systems are not costless  In addition to energy, they require computer hardware and facilities  Often making payments on these platforms involves paying fees  Whether these direct economic costs of using the system are fixed or—as they develop and mature—become less than existing systems is an open question  Digital currency systems, at least as currently designed and regulated, also might impose other costs on society  Some critics of these systems fear their pseudonymous, decentralized nature may provide a new avenue for criminals to launder money, evade taxes, or sidestep financial sanctions  For example, Bitcoin was the currency used on the internet-based, illegal drug marketplace and Bitcoin escrow service called Silk Road  This marketplace facilitated more than 100,000 illegal drug sales from approximately January 2011 to October 2013, at which time the government shut down the website and arrested the individuals running the site  Consumer groups and other observers are also concerned that digital currency users are inadequately protected against unfair, deceptive, and abusive acts and practices  The way cryptocurrencies are sold, exchanged, or marketed can subject cryptocurrency exchanges or other cryptocurrency-related businesses to generally applicable consumer protection laws, and certain state laws and regulations are being applied to cryptocurrency-related businesses  However, other laws and regulations aimed at protecting consumers engaged in electronic financial transactions may not apply  For example, the Electronic Fund Transfer Act of 1978 (EFTA; P L  95-630 ) requires traditional financial institutions engaging in electronic fund transfers to make certain disclosures about fees, correct errors when identified by the consumer, and limit consumer liability in the event of unauthorized transfers  Because no bank or other centralized financial institution is involved in digital currency transactions, EFTA generally has not been applied to these transactions  In addition, the laws and regulations that do apply generally have not been implemented specifically to address digital currencies or related businesses  Whether the current regulatory regime applied to digital currency transactions, but originally implemented for different financial activities (e g , traditional money transmission), is effective and efficient is a debated issue  Finally, some central bankers and other experts and observers have speculated that the widespread adoption of cryptocurrencies could affect the ability of the Fed and other central banks to implement and transmit monetary policy  The Fed conducts monetary policy with the goals of achieving price stability and low unemployment  Like other central banks it achieves its goals by, putting it simply, controlling the amount of money in circulation in the economy  If one or more additional currencies that the government did not control the supply of were also prevalent and viable payment options, it could limit central banks' ability to transmit monetary policy to financial markets and the real economy  In this scenario, central banks likely would have to make larger adjustments to the fiat currency they do control to have the same effect as previous adjustments  Another possibility is that they would have to start buying and selling the digital currencies themselves in an effort to affect the availability of these currencies  These risks have led some central banks and other observers to suggest that perhaps central banks could issue their own digital currencies  The risks and challenges posed by private digital currencies have led some observers to suggest that perhaps central banks should offer their own central bank digital currencies (CBDCs) to realize certain hoped-for efficiencies in the payment system in a way that would be "safe, robust, and convenient " To date, no country has successfully created a CBDC for payment use by the general public  The extent to which a central bank could or would want to create a new, digital-only payment system likely would be weighed against the consideration that these government institutions already have trusted digital payment systems in place  Because of such considerations, the exact form that CBDCs would take could vary across a number of features and characteristics  Nevertheless, some central banks are examining the idea of CBDCs and the possible benefits and issues they may present  For the purposes of this discussion, this report examines a CBDC that would be available to consumers for retail payments  Some proposals would limit CBDCs to wholesale payments between banks and other financial institutions  Potential Advantages of CBDCs   Proponents of CBDCs generally argue they could provide efficiency gains over traditional legacy systems and contend that central banks could use the technologies underlying digital currencies to deploy a faster, less costly government-supported payment system  Observers have speculated that a CBDC could take the form of a central bank allowing individuals to hold accounts directly at the central bank  Advocates argue that a CBDC created in this way could increase systemic stability by imposing additional discipline on commercial banks  Because consumers would have the alternative of safe deposits made directly with the central bank, commercial banks likely would have to offer interest rates and limit risks at levels necessary to attract deposits above any deposit insurance limit  In addition, CBDCs could increase government revenue through a seignoriage-like mechanism  A more expansive definition of seignoriage is the income government obtains from having government liabilities act as money  Physical money—because it is liquid and low-risk—earns no interest rate and carries a cost to produce  Money—both physical and electronic in the traditional system—is also a balance sheet liability to the issuing authority, such as the Fed or other central banks  If the Fed allowed individuals to hold accounts directly with the Fed, the Fed would issue low- or no-interest liabilities to individuals (as electronic entries in a ledger produced at less cost than physical currency)  Then, as happens now, the Fed would use those liabilities to fund purchases of assets that earn a higher interest rate than what the Fed pays on liabilities  This would produce income, perhaps greater income than is earned through traditional seignoriage  Potential Obstacles to Creation of CBDCs   One of the main arguments critics—including various central bank officials—make against CBDCs is that there is no "compelling demonstrated need" for such a currency, because central banks and private banks already operate trusted electronic payment systems that generally offer fast, easy, and inexpensive transfers of value  Opponents also argue that a CBDC in the form of individual direct accounts at the central bank would reduce the role of private banks in financial intermediation and potentially expand the role of government central banks inappropriately  A portion of consumers likely would shift their deposits away from private banks toward central bank digital money, which would be a safe, government-backed liquid asset  Deprived of this funding, private banks likely would have to reduce their lending, leaving central banks to decide whether or how they should support lending markets to avoid a reduction in credit availability  In addition, skeptics of CBDCs object to the assertion that these currencies would increase systemic stability, arguing that CBDCs would create a less-stable system because they would facilitate runs on private banks  These critics argue that at the first signs of distress at an individual institution or the bank industry, depositors would transfer their funds to this alternative liquid, government-backed asset  Uncertaint y : CBDCs' Potential Effects on Monetary Policy   Observers also disagree over whether CBDCs would have a desirable effect on central banks' role and abilities in carrying out monetary policy  Proponents argue that, if individuals held a CBDC on which the central bank set interest rates, the central bank could directly transmit a policy rate to the macroeconomy, rather than achieving transmission through the rates the central bank charges banks and the indirect influence of rates in particular markets  In addition, if holding cash (which in effect has a 0% interest rate) were not an option for consumers, central banks potentially would be less constrained by the zero lower bound   The zero lower bound is the idea that the ability of individuals and businesses to hold cash and thus avoid negative interest rates limits central banks' ability to transmit negative interest rates to the economy  Critics argue that taking on such a direct and influential role in private financial markets is an inappropriately expansive role for a central bank  They assert that if CBDCs were to displace cash and private bank deposits, central banks would have to increase asset holdings, support lending markets, and otherwise provide a number of credit intermediation activities that private institutions currently perform in response to market conditions  As discussed above, although cash remains a frequently used payment system, other payment systems continue to develop that offer their own advantages and costs  Various trends suggest that due to market preference or government policy, the role of cash in the payment system has begun to decline and may continue to decline, perhaps significantly, in coming years  If the relative benefits and costs of cash and the various other payment methods evolve in such a way that cash is significantly displaced as a commonly accepted form of payment, that evolution could have a number of effects, both positive and negative, on the economy and society  This section of the report describes a number of potential benefits of a reduced role for cash in the U S  economy and the various risks and costs that may occur  Many of the factors discussed below may not occur wholly as a benefit, risk, or cost; rather, a potential benefit may bring with it a risk, and vice versa  Some observers argue that reducing or eliminating cash payments in the U S  economy will produce certain beneficial outcomes, including improved efficiency in payments, reduced criminality, and improved ability for the Fed to implement certain monetary policy  As discussed below, although these outcomes generally may be beneficial, that does not mean that there are not certain costs, or drawbacks, that may counterbalance these positive effects  Proponents of noncash payment systems assert that net economic benefits from the use and maintenance of a cash payment system are (or will become as technology advances) less than the net benefits of using and maintaining noncash systems  Put another way, they argue that the resources, labor, and capital that go into the cash system—for example, producing currency; stocking and maintaining ATMs; safely transporting cash; protecting businesses from theft and robbery—make it less efficient than noncash systems  If true—and absent policy interventions—market forces likely will result in the displacement of cash by other payment methods as businesses increasingly choose not to accept cash and consumers increasingly prefer not to use it  Under this scenario, although the payment system on net may be more efficient, it would not necessarily be true that all people would benefit, as is discussed in the " Potential Costs and Risks of a Reduced Role for Cash " section  Proponents of cashless societies assert that the elimination of cash would reduce crime by making operating an illegal enterprise more difficult and certain crimes, such as robbery and burglary, less remunerative  These proponents argue that criminals are more likely to conduct business in cash and to hold cash as an asset, in large part because cash is anonymous and allows them to avoid establishing relationships with and generating records at financial institutions that may be subject to anti-money laundering reporting and compliance requirements  Accordingly, they assert that the elimination of cash would be beneficial on net, because operating a criminal enterprise would become more difficult  Certain studies have shown that the prevalence of cash is correlated with the incidence of crime  In addition, the amount of "strong" currencies (i e , highly valuable and highly stable currencies) in circulation exceeds what many people would consider a reasonable amount needed for typical consumer transactions  For example, with the U S  population at approximately 329 million, the $1 6 trillion of currency in circulation equates to about $4,900 per person  Proponents of a cashless society assert that this number is inflated due in part to the cash demand of criminals (although part is also due to demand for the U S  dollar from abroad)  Although a robust analysis of this question is beyond the scope of this report, arguments that cash facilitates crime and even that reducing cash may reduce crime appear in certain cases to be well founded  However, when analyzing the net benefit to society of going cashless, reduced crime should be weighed against any cost that a reduction in cash would impose on legitimate cash users  One such legitimate group is examined in more detail in the " Lack of Financial Access for Certain Groups " section below  The effect a reduction in cash payments would have on crime should not be overstated, as criminals likely would seek other ways to commit and hide their crimes  For example, the prevalence of cybercrime may increase  Another benefit (from a macroeconomic perspective) of a cashless society cited by economists would be the potential elimination of the practical inability of central banks, such as the Fed, to implement negative interest rates  When an economy is in recession or otherwise performing poorly, one monetary policy response is to lower interest rates  Lower interest rates can spur companies to borrow in order to invest and spur consumers to borrow in order to make additional purchases, thus boosting economic activity and mitigating the impact of recessions  However, many economists believe that policymakers are constrained by a zero lower bound—that whatever policy rate they may set, interest rates in many markets will not fall below zero  The reason is that holding cash offers a zero interest rate  Thus, if the Fed attempted to implement negative interest rates, individuals could avoid those rates by transferring their funds into cash  If holding cash was not an available option, it would be easier for negative interest rates to be transmitted to more financial markets  However, any benefit provided by increasing policymakers' ability to affect the macroeconomy with negative interest rates should be weighed against the cost it would impose on the individual savers whose account balances would decrease in value during a period of negative interest rates  Skeptics of reducing or eliminating the role of cash in the economy assert that cash serves a number of beneficial purposes, and argue that eliminating it would have adverse effects on certain financially vulnerable groups, eliminate an asset that provides safety against cyber vulnerabilities and financial crises, and reduce individuals' privacy  As with potential benefits to a reduction in cash, many of the factors discussed below may not occur wholly as a risk or cost, and they must be weighed against potential benefits when considering their overall impact  If the United States were to move toward becoming a cashless society that required consumers to use noncash, electronic payment services, it could present difficulties for those segments of the population who lack access to the financial system or to an electronic network  Access to electronic payments typically requires an account with some financial institution, usually a bank  Often—and increasingly—it also involves using or accessing a device connected to the internet  However, these factors can present hardships and obstacles for certain vulnerable groups  The Federal Deposit Insurance Corporation reported that in the United States in 2015, 9 million households were unbanked, meaning that no member had a bank account  Of these, 37 8% reported that the main reason was that they do not have enough money to keep in an account, 9 4% reported that fees were too high, and 1 9% reported fees were unpredictable  In total, this indicates almost half of the total unbanked, or roughly 4 5 million households, do not access banking services due to economic obstacles  Sweden has been at the forefront of the move away from cash (see Appendix ), and observers there, including Stefan Ingves, governor of Sweden's central bank, have voiced some of these concerns about going cashless  In addition, anecdotal reporting indicates that retirees in Sweden are finding the change difficult and costly  In the United States, many assert that it would be beneficial to bring the unbanked into the banking system  Nevertheless, if the unbanked engaged with the banking system at a relatively high cost only because cash (which was a less expensive option for them) was no longer available, it would likely be a detrimental outcome for this group  Conversely, if the move to a cashless system led to less costly financial access for this group, they may stand to benefit  Proponents of cash often cite the robustness of physical currency as a payment system  Once in an individual's possession, cash does not rely on financial institutions or information technology (IT) based payment networks  These proponents argue that if payments became entirely electronic, events such as power outages, hacker attacks, or (in the event of future cyber war) a state-sponsored attack would be capable of shutting down the most simple financial transaction—the exchange of money for goods and services  The financial system is already exposed to these threats to varying degrees, but the argument is that the elimination of cash amplifies those risks  Because it functions well as a store of value, cash is a relatively safe asset in which to invest savings with no risk of losses resulting from a decline in a securities value or the failure of financial institutions or other entities  The perceived safety of cash and its non-reliance on financial institutions also makes it desirable in times of financial turmoil or distress, when confidence in such institutions decreases  During these periods, many people prefer assets that are free from credit risk  For some of these individuals, deposit insurance guarantees may not wholly eliminate their fear of losses, whereas the safety of physical currency would  Holding cash, then, could also provide a sense of security to risk-adverse people that may mistrust the financial system  Opening a bank account or otherwise using traditional noncash payment systems generally requires an individual to divulge certain basic personal information, such as name, Social Security number, and birthdate, to a financial institution  Financial institutions store this information and information about the transactions linked to this identity  Under certain circumstances, they may analyze or share this information, such as with a credit-reporting agency  In some instances hackers have stolen personal information from financial institutions, causing concerns over how well these institutions can protect sensitive data  Finally, provided it follows proper legal procedures, the government also can access this information under certain circumstances  Similarly, although new alternative payment systems may offer a degree of anonymity or pseudonymity, these systems still generate an unalterable record of transactions between parties  Cash, by contrast, can be used anonymously, and people may wish to use cash for legitimate purposes to ensure their privacy  Certain consumers who are uncomfortable divulging and generating private information—even basic information that a transaction occurred—may prefer cash to any electronic payment methods  Cash has a number of advantageous features that has made it a simple and robust payment system throughout most of human history  It is difficult to imagine conditions under which cash would be replaced entirely, and disappear from the economy, at least in the near future  Nevertheless, its hegemony as a payment system appears to have come to an end, as electronic payment systems have gained popularity, and the ubiquity of cash acceptance for in-person purchases also seems precarious  If noncash payment systems significantly displace cash and cash usage and acceptance significantly declines, there would be a number of effects (both positive and negative) on the economy and society  Now or in the near future, policymakers may face decisions about whether to impede or hasten the decline of cash and consider the implications of doing so  Two countries provide interesting case studies of market forces drastically changing the way a society makes payments  Sweden In recent years, the use of cash in Sweden has quickly and substantially declined, dropping from 40% to 13% of transactions between 2010 and 2018  In many cases, businesses no longer accept cash, and one survey indicated that two-thirds of small businesses planned to stop accepting cash  Anecdotal reporting indicates that about 5% of bank branches accept cash deposits or offer cash withdrawals  Furthermore, Sweden's central bank is examining the possibility of creating registered accounts for the purpose of issuing currency electronically  Reportedly, many Swedes are generally in favor of the trend (the displacement of cash is due largely to consumer preference), though some have voiced concerns about financial access issues that the change causes for certain groups, such as the elderly  Observers have put forward a number of explanations for the Sweden's growing preference for electronic payment methods such as cards and mobile app enabled payments  One argument asserts that Sweden is an especially technology savvy country  As such, Swedes are comfortable using electronic payment systems, and Swedish companies have developed fast and easy payment technologies, such as iZettle and Swish  Some observers also have suggested that Swedes are especially trusting of institutions and thus have fewer privacy concerns  Some have noted that the timing of the start of the decline in cash use among Swedes coincided with the start of a transition to new Swedish banknotes and coins  They suggest that this spurred people and businesses to make a switch not to the new bills and coins but instead to electronic payment methods  Kenya In 2007, a company named Safaricom—Kenya's largest mobile phone network operator—introduced a "mobile money" service called M-Pesa ("M" stands for "mobile" and "pesa" is the Swahili word for money)  Users of the service download a phone application and deposit cash with M-Pesa employees called "agents " They can then transfer money into any other M-Pesa account using their phone  Originally intended as a service for Kenyans who had moved to a city to earn money to send back home to rural areas, the service became tremendously popular as a general use payment system  By 2016, there were approximately 31 6 million mobile money accounts in Kenya, which had a total population of 47 6 million in 2017  Many observers identify the combination of lack of access to traditional banking services and the proliferation of mobile phones in Kenya as a driving factor for the expansion of M-Pesa and subsequent mobile money services  These observers argue that in Kenya, as with many developing and largely rural nations, both consumers and banks view financial and bank services as a business need of the rich  In 2006, before the introduction of M-Pesa, just 19% of Kenyans had bank accounts and there was 1 5 bank branches for every 100,000 people  However, 54% of Kenyans had their own mobile phone or access to one  Another explanation for the rise of mobile money is that Safaricom successfully identified a large, profitable, and previously untapped market in Kenya  Available mobile technology and its proliferation among the population meant low-cost money transfers could be profitably offered to lower-income consumers  Certain observers assert that the success of M-Pesa has caused Kenyan financial institutions to reevaluate their business models, shifting their focus to offering services to lower-income groups than they previously targeted, and cite the increase in bank accounts and the decline of the average account balances as evidence of this change  As a result, the portion of the Kenyan population with access to some type of formal financial services has grown from 27% in 2006 to 75% in 2017  Although mobile money appears to have filled a market need, the degree to which it has displaced cash should not be overstated  An official at Safaricom estimated in February 2018 that as many as 8 out of 10 transactions are still cash transactions, as Kenyans still reportedly prefer cash for small, in-person purchases because of convenience and using M-Pesa generally involves fees  In addition, workers are still generally paid in cash 


Report 2: Executive branch agencies are required to take various steps regarding improper payments under IPIA, as amended by IPERA and IPERIA, and related OMB guidance  The steps include the following: 1  reviewing all programs and activities and identifying those that may be susceptible to significant improper payments (commonly referred to as a risk assessment), 2  developing improper payment estimates for those programs and activities that the agency identified as being susceptible to significant improper payments, 3  analyzing the root causes of improper payments and developing corrective actions to reduce them for those programs and activities that the agency identified as being susceptible to significant improper payments, and 4  reporting on the results of addressing the foregoing requirements  Figure 1 lays out these steps, as well as the major components of developing an improper payment estimate  IPERA also directs executive branch agencies’ inspectors general to annually determine and report on whether their respective agencies complied with six criteria listed in the law  On an annual basis, agencies are required to develop improper payment estimates for programs that they consider susceptible to significant improper payments  This generally involves selecting a sample of program payments (or other items, such as invoices) and reviewing them in order to determine whether the relevant payments were proper  OMB guidance for developing improper payment estimates focuses on the statistical nature of the estimates and provides agencies with flexibility in developing their estimates  IPIA, as amended, provides the definition of “improper payment” with IPERIA further instructing OMB to issue guidance requiring agencies to include in the estimate all improper payments, regardless of whether those payments have been or are being recovered  OMB incorporated this requirement into Appendix C to Circular No  A-123, Requirements for Effective Estimation and Remediation of Improper Payments  In accordance with these relevant laws and OMB guidance, agencies must apply “improper payment” in the context of their programs when developing improper payment estimates  The 10 programs we reviewed serve a variety of purposes and are administered by various agencies across the federal government  Table 2 summarizes each of these programs  IPIA, as amended, requires agencies to develop statistically valid improper payment estimates or estimates that are otherwise appropriate using a methodology approved by the Director of OMB  The six agencies we reviewed reported using either statistically valid or alternative sampling approaches for the 10 selected programs, and some agencies reported additionally incorporating actual improper payment amounts into their estimates, as shown in table 3  If an agency is unable to produce a statistically valid improper payment estimate, it can use an alternative approach if approved by OMB  For example, the Department of Education (Education) reported using an alternative methodology for the Direct Loan program after conducting a cost-benefit analysis comparing use of a statistical and an alternative methodology  Similarly, the Department of Health and Human Services (HHS) reported using an alternative methodology for Medicaid to better manage resources needed to conduct the required reviews  In addition to their statistical approaches, two agencies reported incorporating actual improper payment amounts into the estimates for 2 of the programs we reviewed  Officials at the Department of Defense (DOD) stated that the agency calculates its Military Pay improper payment estimate by adding the amount of debts due to DOD entered into its financial system based on overpayments (i e , debts due to DOD by a recipient of an overpayment) identified during the fiscal year to a projected estimate of improper payments  Officials at the Office of Personnel Management (OPM) stated that the agency calculates its Retirement program improper payment estimate by adding the amount of debts due to OPM entered into its financial system based on overpayments (i e , debts due to OPM by a recipient of an overpayment) identified during the fiscal year to a projected estimate of underpayments  To implement their sampling approaches, agencies select a sample of data to test from a larger, specified population of data  For the six agencies we reviewed, data sampled varied by program and include payments, claims, tax returns, and pay accounts  For example, according to their policies and procedures DOD samples invoices related to payments made from 12 financial systems for Defense Finance and Accounting Service Commercial Pay, HHS samples medical claims for Medicare Fee-for-Service, and DOD samples pay accounts for Military Pay  Agencies subject specific data populations to sampling, which may not include all payments made for a program  Reasons for sampling exclusions varied across programs, as shown by the examples in table 4  Some of the selected agencies reported sampling multiple sets of data  For example, for its Direct Loan improper payment estimate, Education officials stated that the agency reviews Program Review Reports to identify improper payments in originations and also samples loan consolidation and refund payments  According to agency officials, Direct Loan origination, consolidation, and refund transactions carry different risks of improper payment  To estimate improper payments for fiscal year 2017, the six agencies we reviewed reported sampling and testing data that varied in age from calendar year 2013 to fiscal year 2017  Figure 2 shows the range of data used  OMB guidance states that to the extent possible, data used for estimating improper payments should coincide with the fiscal year being reported, but agencies may use a different 12-month reporting period with approval from OMB  OMB staff acknowledged there are costs and benefits to sampling newer or older data  OMB staff stated that although they review agencies’ sampling and estimation plans, they defer to the agencies regarding the appropriateness of the age of data used to estimate improper payments  OMB staff stated that they approve the timeframe of the data used in alternative methodologies as part of the approval of the methodology overall, whereas OMB silence provides tacit approval (i e , no communication to the agency) for statistically valid methodologies  After agencies determine what subsets of data and types of transactions to review, they generally test the data and calculate their improper payment estimates  Testing processes varied among the 10 programs, with some of the six agencies using processes designed specifically to estimate improper payments and others leveraging existing processes designed for other purposes  Some of the selected agencies reported using multiple testing processes and combining the results to develop a program’s improper payment estimate  For example, according to their policies and procedures the Direct Loan estimate comprises three component estimates for loan originations, consolidations, and refunds and the Medicaid estimate includes fee-for-service, managed care, and eligibility components  Table 5 summarizes the processes used by the six agencies we reviewed  Although agencies’ testing processes varied, most included steps to address aspects of eligibility of beneficiaries, goods, or services—a key component of determining the appropriateness of a payment—in their programs  For example, according to their policies and procedures for Medicare Fee-for-Service, reviewers examine the medical necessity, compliance with documentation requirements, and coding of services provided, among other things; for the Earned Income Tax Credit (EITC), auditors examine whether the taxpayer properly reported income and whether the taxpayer meets eligibility criteria, including income and qualifying child requirements, and auditors examine, among other things, whether the taxpayer is subject to a disallowance period on receiving EITC; for Medicaid, reviewers examine fee-for-service claims and managed care payments to determine the eligibility status of the beneficiary and the provider, as well as support for the medical necessity of fee-for- service claims, among other things; for Old-Age, Survivors, and Disability Insurance (OASDI), reviewers examine factors to support the beneficiary’s eligibility, including, among other things, citizenship, relationship (in the case of survivor benefits), and receipt of other government benefits; and although Education’s Direct Loan program reviews can vary in scope, they may include, among other things, steps to verify educational institution eligibility (such as licensing and accreditation) and student eligibility (such as enrollment status and satisfactory academic progress)  In contrast, per their policies and procedures, eligibility is not tested for DOD’s Military Pay or the overpayment component of OPM’s Retirement estimate  DOD Military Pay  DOD reported using the results of monthly payment reviews to calculate a projected improper payment amount for Military Pay  However, DOD’s policies and procedures do not require a review of servicemember eligibility for special pay or allowances as part of these monthly reviews  DOD’s Standard Operating Procedures (SOP) direct reviewers to recalculate payments to servicemembers solely based on the pay account data included in DOD systems (i e , to verify that components of servicemember pay were calculated appropriately)  DOD’s SOP does not direct reviewers to verify that servicemembers were eligible for special pay or allowances by verifying the information included in the pay account (such as pay grade) with supporting documentation  According to DOD officials, reviewers may investigate potential inconsistencies in pay account data identified during their reviews—which may include eligibility issues—but this process is not consistently performed or documented  According to DOD officials, an example of a potential inconsistency is when a servicemember receives jump pay (a hazard pay for parachute jumps) but is located at a site where no jump activity occurred  According to DOD officials, to help compensate for the limitations of its monthly reviews, DOD calculates the final reported Military Pay improper payment estimate by adding actual debts due to DOD (related to overpayments) identified during the year to the projected estimate of the monthly reviews  DOD identifies the actual overpayments through various methods, including other postpayment reviews and servicemember self- reporting  Standards for Internal Control in the Federal Government states that management should identify, analyze, and respond to risks related to achieving the defined objectives  DOD has acknowledged internal control deficiencies related to the Military Pay program, which—if addressed in improper payment testing—could have an impact on the program’s improper payment rate  However, these deficiencies were identified through other internal control reviews not related to estimating improper payments  For the purposes of estimating improper payments, DOD has not fully assessed the risks in its Military Pay program and evaluated whether its approach for estimating improper payments effectively addresses these risks  As a result, DOD’s process for estimating Military Pay improper payments may not reflect significant risks of improper payment in the program, specifically whether servicemembers are eligible for the special pay or allowances they receive, calling into question the improper payment estimate and its usefulness for developing effective corrective actions  OPM Retirement  OPM relies on its existing Quality Assurance (QA) process to estimate Retirement underpayments  The QA process is designed to determine whether new Retirement claims (i e , claims paid for the first time) have been adjudicated correctly  Therefore, only new Retirement claims are sampled and tested for accuracy  OPM applies historical results of QA testing to older claims; however, these historical results do not reflect any different risks of underpayment that the older claims may face  Although OPM’s QA process also produces an estimate of overpayments, the agency’s policies and procedures instead use actual debts due to OPM (related to overpayments) that were identified during the fiscal year as its overpayment amount (i e , the overpayment amount does not reflect any testing of Retirement payments to verify eligibility or accuracy)  These actual overpayments represent amounts that have been identified through various means, such as inspector general fraud referrals  OPM officials stated that the agency uses actual amounts because the QA estimate may overstate overpayments  However, the fiscal year 2016 QA overpayment estimate was lower than the actual amount of debts identified as due to OPM  Standards for Internal Control in the Federal Government states that management should identify, analyze, and respond to risks related to achieving the defined objectives  OPM has not fully assessed the risks of improper payments in its Retirement program—particularly related to the risk of underpayments in older claims and the risk of overpayments— and evaluated whether its approach for estimating improper payments effectively addresses these risks  As a result, OPM’s processes for estimating Retirement improper payments may not reflect significant risks of improper payment in the program, calling into question the improper payment estimate and its usefulness for developing effective corrective actions  OMB guidance

ground_truth: Electronic forms of payment have become increasingly available, convenient, and cost efficient due to technological advances in digitization and data processing. Anecdotal reporting and certain analyses suggest that businesses and consumers are increasingly eschewing cash payments in favor of electronic payment methods. Such trends have led analysts and policymakers to examine the possibility that the use and acceptance of cash will significantly decline in coming years and to consider the effects of such an evolution. Cash is still a common and widely accepted payment system in the United States. Cash's advantages include its simplicity and robustness as a payment system that requires no ancillary technologies. In addition, it provides privacy in transactions and protection from cyber threats or financial institution failures. However, using cash involves costs to businesses and consumers who pay fees to obtain, manage, and protect cash and exposes its users to loss through misplacement, theft, or accidental destruction of physical currency. Cash also concurrently generates government revenues through "profits" earned by producing it and by acting as interest-free liabilities to the Federal Reserve (in contrast to reserve balances on which the Federal Reserve pays interest), while reducing government revenues by facilitating some tax avoidance. The relative advantages and costs of various payment methods will largely determine whether and to what degree electronic payment systems will displace cash. Traditional noncash payment systems (such as credit and debit cards and interbank clearing systems) involving intermediaries such as banks and central banks address some of the shortcomings of cash payments. These systems can execute payments over physical distance, allow businesses and consumers to avoid some of the costs and risks of using cash, and are run by generally trusted and closely regulated intermediaries. However, the maintenance and operation of legacy noncash systems involve their own costs, and the intermediaries charge fees to recoup those costs and earn profits. The time it takes to finalize certain transactions—including crediting customer accounts for check or electronic deposits—can lead to consumers incurring additional costs. In addition, these systems involve cybersecurity risks and generally require customers to divulge their private personal information to gain system access, which raises privacy concerns. To date, the migration away from cash has largely been in favor of traditional noncash payment systems; however, some observers predict new alternative systems will play a larger role in the future. Such alternative systems aim to address some of the inefficiencies and risks of traditional noncash systems, but face obstacles to achieving that aim and involve costs of their own. Private systems using distributed ledger technology, such as cryptocurrencies, may not serve the main functions of money well and face challenges to widespread acceptance and technological scalability. These systems also raise concerns among certain observers related to whether these systems could facilitate crime, provide inadequate protections to consumers, and may adversely affect governments' ability to implement or transmit monetary policy. The potential for increased payment efficiency from these systems is promising enough that certain central banks have investigated the possibility of issuing government-backed, electronic-only currencies—called central bank digital currencies (CBDCs)—in such a way that the benefits of certain alternative payment systems could be realized with appropriately mitigated risk. How CBDCs would be created and function are still matters of speculation at this time, and the possibility of their introduction raises questions about the appropriate role of a central bank in the financial system and the economy. If the relative benefits and costs of cash and the various other payment methods evolve in such a way that cash is significantly displaced as a commonly accepted form of payment, that evolution could have a number of effects, both positive and negative, on the economy and society. Proponents of reducing cash usage (or even eliminating it all together and becoming a cashless society) argue that doing so will generate important benefits, including potentially improved efficiency of the payment system, a reduction of crime, and less constrained monetary policy. Proponents of maintaining cash as a payment option argue that significant reductions in cash usage and acceptance would further marginalize people with limited access to the financial system, increase the financial system's vulnerability to cyberattack, and reduce personal privacy. Based on their assessment of the magnitude of these benefits and costs and the likelihood that market forces will displace cash as a payment system, policymakers may choose to encourage or discourage this trend.

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



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



Report 2:  OMB issues guidance for agencies to implement various requirements of the improper payment laws  Specifically, OMB is required by IPERIA to issue guidance to set standards for agencies to follow in determining the underlying validity of sampled payments to ensure that amounts being billed, paid, or obligated for payment are proper  Although existing OMB guidance addresses requirements for sampling, it does not address how agencies test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments, like eligibility, are addressed through testing processes  Without such guidance, there is increased risk that agencies’ processes may not address key risks of improper payments in their programs—for example, the cases of DOD Military Pay and OPM Retirement described above—calling into question the improper payment estimates for such programs and their usefulness for developing effective corrective actions  According to OMB guidance, when an agency’s review is unable to determine whether a payment was proper because of insufficient or lack of documentation, the payment must be considered an improper payment  Among the six agencies and 10 programs we reviewed, treatment of insufficient documentation varied by program, as did the classification of these issues for root cause reporting in the AFRs  HHS’s programs were the only ones we reviewed that reported improper payments in the insufficient documentation root cause category for fiscal years 2016 or 2017, as shown in table 6  Some agencies stated that they report insufficient documentation in other root cause categories that they consider more appropriate  For example, Education officials stated that for the Direct Loan program, payments that lack sufficient supporting documentation may be placed in the “Administrative or Process Error Made by Other Party” root cause category  In these cases, a third party—such as a loan servicer—is unable to provide sufficient documentation supporting that the sampled payment was proper  OMB guidance states that in cases where the agency believes that more than one root cause category might be suitable, the agency should determine which category it believes to be the most appropriate  Additionally, some agencies stated that the “insufficient documentation” category was not always relevant when they recreated sampled cases to estimate a program’s improper payments  For example, according to officials, to complete an OASDI stewardship review of a sampled case, a Social Security Administration (SSA) quality reviewer reviews the documentation related to the original determination and then independently re-develops all factors of the payment and interviews the associated beneficiary  According to agency officials, insufficient documentation would not apply as all improper payments identified in the stewardship sample are supported by documentation and payment has been verified in all reviewed cases  As noted previously, the processes for estimating DOD Military Pay and OPM Retirement improper payments were limited, and these limitations may have an impact on the agencies’ ability to identify improper payments related to insufficient documentation  Treatment of cases of nonresponse  Some agencies contact outside entities—such as payees or beneficiaries—as part of their improper payment testing processes  Among the six agencies we reviewed, treatment of cases of nonresponse differed  For example: SSA officials stated that in cases where quality reviewers do not receive responses from OASDI beneficiaries they contact, they exclude the cases from review (unless the reviewer identifies an improper payment in the initial review that is completed prior to reaching out to the beneficiary)  For EITC improper payment estimation purposes, the Internal Revenue Service (IRS) stated that the agency does not consider the sampled payment associated with a nonresponse case to be proper or improper  It sets the sampling weight of nonresponse cases to zero and adjusts the sampling weights of respondents upward to account for the nonresponse cases  IRS’s methodology assumes nonresponse and response cases have an equal likelihood of improper payment  For Medicare Fee-for-Service and Medicaid, HHS’s policies and procedures consider payments associated with nonresponse cases to be improper  OMB guidance states that when an agency’s review is unable to discern whether a payment was proper as a result of insufficient or lack of documentation, this payment must be considered an improper payment  However, it does not specifically address the appropriate treatment of nonresponse cases for improper payment estimation purposes  As a result, without clearer guidance there is increased risk that agencies’ improper payment estimates may be understated and that estimates for similar programs may not be comparable  When agencies identify improper payments, they must determine the amount of the payment that was improperly made  The six agencies we reviewed generally reported using the definition of improper payment in relevant laws and OMB guidance to determine the amount of improper payments identified  OMB guidance provides agencies with instructions on how to calculate the amount of improper payments  However, when developing its improper payment estimate for EITC, IRS subtracted overpayments that were paid out and later recovered  By subtracting recovered overpayments, IRS excluded them from the EITC improper payment estimate  For 2013—the tax year used to produce the fiscal year 2017 improper payment estimate—IRS estimated that $1 2 billion in EITC overpayments would be recovered  IPERIA directed OMB to provide guidance that requires agencies to include all improper payments in their improper payment estimates, regardless of whether they have been or are being recovered  Although the OMB guidance was revised in October 2014 to implement this requirement, IRS has not updated its estimation methodology for EITC  By not updating its guidance and continuing to remove EITC overpayments that may be subsequently recovered, IRS is understating its improper payment estimate and potentially limits its ability to address these types of improper payments before they occur  Improper payments are a long-standing, significant problem in the federal government  Estimation of improper payments is key to understanding the extent of the problem and to developing effective corrective actions to address it  Among the six agencies we reviewed, processes to estimate improper payments in their programs varied, and certain differences in these processes may affect the quality of the resulting estimates and consequently these agencies’ efforts to reduce improper payments  Specifically, policies and procedures for DOD’s Military Pay and OPM’s Retirement programs’ improper payment estimation methodologies do not address certain key risks, like eligibility, in part because these agencies have not fully assessed their processes  Further, although OMB guidance addresses requirements for sampling, it does not address how agencies test to identify improper payments  Without such assessments and guidance, there is increased risk that agencies’ processes may not address key risks of improper payments in their programs, calling into question the improper payment estimates for such programs and their usefulness for developing effective corrective actions  Additionally, for agencies we reviewed that contact outside entities as part of their improper payment estimation processes, the treatment of cases of nonresponse varied  OMB guidance does not specifically address the appropriate treatment of nonresponse cases for improper payment estimation purposes  Without clearer guidance there is increased risk that agencies’ improper payment estimates may be understated and that estimates for similar programs may not be comparable  Finally, although IPERIA directed OMB to provide guidance that requires agencies to include all improper payments in their improper payment estimates, regardless of whether they have been or are being recovered, IRS has not updated its processes to reflect the change  By not updating its guidance and continuing to remove EITC overpayments that may be subsequently recovered, IRS is understating its improper payment estimate and potentially limits its ability to address these types of improper payments before they occur  We are making two recommendations to the Director of OMB that have government-wide implications and specific recommendations to DOD, OPM, and IRS regarding their programs included in this review  The Director of OMB should develop guidance on how agencies test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments, such as eligibility, are addressed through testing processes  (Recommendation 1) The Director of OMB should develop guidance clarifying the appropriate treatment of nonresponse cases during improper payment testing  (Recommendation 2) The Under Secretary of Defense (Comptroller) should assess the processes for estimating Military Pay improper payments to determine whether they effectively address key risks of improper payments— including eligibility for different types of pay and allowances—and take steps to update the processes to incorporate key risks that are not currently addressed  (Recommendation 3) The Director of OPM should assess the processes to estimate Retirement improper payments to determine whether they effectively address key risks of improper payments—including eligibility and whether older claims face different risks of improper payments than new claims—and take steps to update the processes to incorporate key risks that are not currently addressed  (Recommendation 4) The Commissioner of IRS should update IRS’s improper payment estimation methodology to not exclude recovered overpayments from its EITC improper payment estimate  (Recommendation 5) We provided a draft of this report for comment to OMB, DOD, Education, HHS, Treasury, OPM, SSA, and USDA  OMB provided oral comments, which are summarized below  OPM, DOD, and IRS provided written comments, which are reproduced in appendixes II through IV, respectively  Education, HHS, SSA, and USDA did not provide written comments on the draft report  In addition, HHS, IRS, OMB, OPM, and SSA provided technical comments, which we have incorporated, as appropriate  In oral comments provided on April 30, 2018, a Senior Policy Advisor in OMB’s Office of Federal Financial Management stated that OMB partially agreed with our first recommendation and agreed with our second recommendation  Regarding the first recommendation, the Senior Policy Advisor stated that OMB should not have to develop more specific guidance as each program and activity has its own risks  Instead, inspectors general are better equipped and positioned to review the sampling and estimation plans as part of their annual IPERA compliance audits and that agencies, their statisticians, and inspectors general should work out the best testing procedures for their agencies  OMB could provide suggestions during OMB’s annual town hall meeting related to improper payments for areas that inspectors general may consider  Although we agree that programs and activities may face different risks of improper payment, we continue to believe that guidance from OMB on how agencies test to identify improper payments—such as directing agencies to take a risk-based approach in developing their testing procedures—could help ensure that agencies address the specific risks they identify when developing improper payment estimates  Further, such guidance could also help ensure that testing processes are designed to address an agency’s identified risks before the estimate is developed, whereas an inspector general’s review—as well as related recommendations for improvement—would generally occur after the agency’s improper payment estimate had been developed and reported  Regarding the second recommendation, the Senior Policy Advisor noted that OMB plans to update its guidance to direct agencies to treat nonresponse cases as improper payments and to include a new category for tracking such cases  In its written comments, OPM partially concurred with our recommendation to assess the processes to estimate Retirement improper payments to determine whether they effectively address the key risks of improper payments  OPM agreed to conduct an audit of older claims to determine if they face different risks than new claims  However, OPM did not agree with the part of the recommendation to assess the risk of improper payments related to eligibility in the estimation process  OPM stated that eligibility is determined before annuity or survivor benefits are fully adjudicated  However, the objective of an improper payment estimate is to determine whether payments were made properly  To do so, an agency should determine whether the payee was eligible for the payment that was made, among other things  As such, we continue to believe that the recommendation—including the assessment of the risk of improper payments related to eligibility—is warranted  In their written comments, DOD and IRS both agreed with our recommendations directed to them and described the steps they plan to take to implement them  We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Defense, Education, Health and Human Services, and the Treasury; the Director of the Office of Personnel Management; the Administrator of the Social Security Administration; the Director of the Office of Management and Budget; and other interested parties  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-2623 or davisbh@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix V  Table 7 lists the fiscal year 2017 improper payment estimates by agency and program, as reported by agencies in their fiscal year 2017 agency financial reports and compiled on the Office of Management and Budget’s payment integrity website, paymentaccuracy gov  In addition to the contact named above, Phillip McIntyre (Assistant Director), James M  Healy (Auditor in Charge), Daniel Flavin, and Fabiola Torres made key contributions to this report 
Report 2:  Specifically, the $456 0 million appropriation in FY2001 was more than double the amount provided for other purposes in any other year  These appropriations were used to fund more than a dozen programs in the Clinton Administration's Lands Legacy Initiative  In that year, total LWCF appropriations exceeded the annual authorization level, totaling nearly $1 billion  This record level of funding was provided partly in response to President Clinton's Lands Legacy Initiative, which sought $1 4 billion for about two dozen resource-protection programs, including the LWCF  It also was provided partly in response to some congressional interest in securing increased and more certain funding for the LWCF  The highest percentage of annual funds provided for other purposes occurred in FY2006 and FY2007 (59% in both years), in response to President George W  Bush's request for funding for an array of programs  For instance, in FY2007 the Bush Administration sought funding from the LWCF for 15 programs in addition to land acquisition and state grants  For that year, the appropriation for five other purposes was $216 1 million, out of a total LWCF appropriation of $366 1 million  In some years, the appropriation for other purposes was significantly less than the Administration requested  For example, for FY2008 the Bush Administration sought $313 1 million for other purposes, or 83% of the total request of $378 7 million  The FY2008 appropriation for other purposes was $101 3 million, or 40% of the LWCF total of $255 1 million  The $2 7 billion appropriated from the LWCF from FY1998 to FY2019 for other purposes represents 27% of the $10 0 billion total appropriations from LWCF during the period  FWS and FS have received the largest shares of the appropriations for other purposes, about $1 4 billion (53%) and $1 0 billion (38%), respectively  BLM, NPS, the U S  Geological Survey, and the Bureau of Indian Affairs have shared the remaining $0 2 billion (9%) of the appropriations for other purposes  (See Figure 1  ) Because there is no set of other purposes specified in the LWCF Act to be funded from the LWCF, presidents have sought funds for a variety of purposes  Congress has chosen which of these requests to fund from the LWCF, and whether to fund any additional programs from the LWCF not suggested by the President  Appropriations for other purposes have been provided for more than a dozen diverse natural resource-related programs, including facility maintenance of the land management agencies, ecosystem restoration, the Historic Preservation Fund, the Payments in Lieu of Taxes program, the FS Forest Legacy program, FWS State and Tribal Wildlife Grants, the FWS Cooperative Endangered Species Conservation Fund, U S  Geological Survey science and cooperative programs, and Bureau of Indian Affairs Indian Land and Water Claim Settlements  (See Appendix A  ) Although in earlier years several other purposes typically were funded from LWCF, since FY2008, funds have been appropriated annually only for grants under two programs: Forest Legacy and Cooperative Endangered Species Conservation Fund  (See Appendix B and Figure 2   ) The total appropriation from LWCF for these two programs (since FY1998) is $1 7 billion, or 63% of all appropriations for other purposes ($2 7 billion)  These two programs and a third grant program funded prior to FY2008 from LWCF—FWS State and Tribal Wildlife Grants—have received more than three-quarters ($2 1 billion, 79%) of the total appropriations for other purposes  The appropriations through FY2019 are $944 4 million for Forest Legacy (35% of the other purposes total), $753 3 million for Cooperative Endangered Species Conservation Fund (28% of total), and $448 5 million for State and Tribal Wildlife Grants (17% of total)  Grants under the Forest Legacy program are used to acquire lands or conservation easements to preserve private forests threatened by conversion to non-forest uses, such as agriculture or residences  FS provides matching grants to states through a competitive process that requires state approval and then national approval and ranking  The ranking is based on the importance of the project (potential public benefits from protection), the likelihood of the forest's conversion to non-forest uses, and the strategic relevance of the project, among other factors  The program is implemented primarily through state partners, usually state forestry agencies  State partners generally acquire, hold, and administer the easements or land purchases, although the federal government also may do so  The Cooperative Endangered Species Conservation Fund provides grants "for species and habitat conservation actions on non-Federal lands, including habitat acquisition, conservation planning, habitat restoration, status surveys, captive propagation and reintroduction, research, and education " In addition to appropriations from LWCF, the Cooperative Endangered Species Conservation Fund typically receives additional appropriations  In recent years, the appropriations from LWCF generally have been used for two types of land acquisition grants provided to state and territories on a matching basis  Recovery land acquisition grants have been made for acquisition of habitats in support of species recovery goals and objectives  Habitat conservation plan land acquisition grants have been made for acquisition of lands that are associated with habitat conservation plans  State and Tribal Wildlife Grants are provided to states, territories, and tribes to develop and implement programs for the benefit of fish and wildlife and their habitats, including nongame species  State and Tribal Wildlife Grants received funding from the LWCF for FY2001-FY2007; subsequently, funding has been provided from the General Fund of the U S  Treasury  Currently, the largest portion of the program is for formula grants to states and territories on a matching basis  Funds from the formula grants may be used to develop state conservation plans and to implement specific conservation projects  Smaller amounts of funding have been appropriated for competitive grants to states and territories, and to tribal governments  The competitive grant programs do not have matching requirements  Appendix A shows the total LWCF appropriations for other purposes summed from FY1998 to FY2019  Appendix B shows the other purposes that received LWCF appropriations each year, the amount of LWCF appropriations for each purpose, and the total annual appropriations for other purposes  Appendix A  Total LWCF Appropriations for Other Purposes Appendix B  Annual LWCF Appropriations for Other Purposes 

ground_truth: Improper payments—which include payments that should not have been made or were made in an incorrect amount—are a long-standing, significant problem in the federal government, estimated at almost $141 billion for fiscal year 2017. Executive branch agencies are required to annually estimate improper payments for certain programs. Estimation of improper payments is key to understanding the extent of the problem and to developing effective corrective actions. Relevant laws and guidance provide agencies flexibility in developing estimates. This report describes agencies' processes to estimate improper payments in selected programs for fiscal year 2017 and the extent to which certain differences in these processes can affect the usefulness of the resulting estimates. GAO selected 10 programs across six agencies with the largest reported program outlays in fiscal years 2015 and 2016. For these programs, GAO reviewed relevant laws and guidance, analyzed agencies' policies and procedures, and interviewed officials at relevant agencies and OMB staff. The six agencies GAO reviewed reported taking various approaches related to key components of estimating improper payments—shown in the figure below—for 10 selected programs, which collectively reported outlays of over $2.5 trillion for fiscal year 2017. Sample selection. Eight of the 10 programs GAO reviewed reported using statistically valid approaches, and the remaining 2 reported using alternative methodologies approved by the Office of Management and Budget (OMB). The sampled data elements varied, including payments, medical claims, and tax returns. The age of the data used to develop fiscal year 2017 improper payment estimates also varied, ranging from calendar year 2013 to fiscal year 2017. Identification of improper payments. Some of the six agencies reported using processes designed specifically to estimate improper payments, whereas others reported leveraging existing reviews. These agencies' policies and procedures include a review of aspects of eligibility, except for those related to the Department of Defense's (DOD) Military Pay and the Office of Personnel Management's (OPM) Retirement overpayments. DOD and OPM have not fully assessed whether their estimation processes effectively consider key program risks. OMB guidance does not specifically address how agencies are to test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments are addressed. The six agencies also varied in the treatment of insufficient documentation, both in identifying and in reporting the root causes of improper payments. For the agencies that contact entities outside the agency to estimate improper payments, the treatment of nonresponse differed, with one agency including nonresponses as improper payments and another generally excluding the nonresponse cases from review. Although OMB guidance states that agencies should treat cases of insufficient documentation as improper payments, it does not specifically address the treatment of nonresponse cases. Calculation of the improper payment estimate. The six agencies generally reported using law and OMB guidance to calculate improper payment estimates for the selected programs, except for the Earned Income Tax Credit (EITC). The Internal Revenue Service (IRS) removed overpayments that were recovered when developing its estimate. OMB guidance requires agencies to include recovered amounts in their estimates. Removing these overpayments understates the EITC improper payment estimate and may limit IRS's ability to develop corrective actions to prevent improper payments. GAO recommends that OMB develop guidance on treatment of nonresponse cases and testing to identify improper payments, that DOD and OPM assess their estimation processes, and that IRS revise its methodology to not exclude recovered payments from its estimate. All of the agencies either agreed or partially agreed with the specific recommendations to them. GAO believes that the actions are warranted, as discussed in the report.