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



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

Report 1: Under SBA’s 7(a) loan program, SBA guarantees loans made by commercial lenders to small businesses for working capital and other general business purposes  These lenders are mostly banks, but some are non-bank lenders, including small business lending companies— lenders whose lending activities are not subject to regulation by any federal or state regulatory agency, but were previously licensed by SBA and authorized to provide 7(a) loans to qualified small businesses  The guarantee assures the lender that if a borrower defaults on a loan, the lender will receive an agreed-upon portion (generally between 50 percent and 85 percent) of the outstanding balance  For a majority of 7(a) loans, SBA relies on lenders with delegated authority to approve and service 7(a) loans and to ensure that borrowers meet the program’s eligibility requirements  To be eligible for the 7(a) program, a business must be an operating for-profit small firm (according to SBA’s size standards) located in the United States and must meet the credit elsewhere requirement  Because the 7(a) program is required to serve borrowers who cannot obtain conventional credit at reasonable terms, lenders making 7(a) loans must take steps to ensure that borrowers meet the program’s credit elsewhere requirement  Because SBA relies on lenders with delegated authority to make these determinations, SBA’s oversight of these lenders is particularly important  However, we found in a 2009 report that SBA’s lack of guidance to lenders on how to document compliance with the credit elsewhere requirement was impeding the agency’s ability to oversee compliance with the credit elsewhere requirement  To improve SBA’s oversight of lenders’ compliance with the credit elsewhere requirement, we recommended in 2009 that SBA issue more detailed guidance to lenders on how to document their compliance with the credit elsewhere requirement  As a result, SBA revised its standard operating procedure to state that each loan file must contain documentation that specifically identifies the factors in the present financing that meet the credit elsewhere test, which we believe met the spirit of our recommendation  SBA’s current credit elsewhere criteria for determining 7(a) loan eligibility include the following factors: 1  the business needs a longer maturity than the lender’s policy permits; 2  the requested loan exceeds the lender’s policy limit regarding the amount that it can lend to one customer; 3  the collateral does not meet the lender’s policy requirements; 4  the lender’s policy normally does not allow loans to new businesses or businesses in the applicant’s industry; or 5  any other factors relating to the credit which, in the lender’s opinion, cannot be overcome except for the guarantee  When the 7(a) program was first implemented, borrowers were generally required to show proof of credit denials from banks that documented, among other things, the reasons for not granting the desired credit  Similar requirements remained in effect until 1985, when SBA amended the rule to permit a lender’s certification made in its application for an SBA guarantee to be sufficient documentation  This certification requirement remained when the rule was rewritten in 1996  SBA stated that it believed requiring proof of loan denials was demoralizing to small businesses and unenforceable by SBA  SBA and lender roles vary among 7(a) program categories—including regular 7(a), the Preferred Lenders Program, and SBA Express  Under the regular (nondelegated) 7(a) program, SBA makes the loan approval decision, including the credit determination  Under the Preferred Lenders Program and SBA Express, SBA delegates to the lender the authority to make loan approval decisions, including credit determinations, without prior review by SBA  For each 7(a) program category, lenders are required to ensure that borrowers meet the credit elsewhere requirement for all 7(a) loans  The maximum loan amount under the SBA Express program is $350,000, as opposed to $5 million for other 7(a) loans  The program allows lenders to utilize, to the maximum extent possible, their own credit analyses and loan underwriting procedures  In return for the expanded authority and autonomy provided by the program, SBA Express lenders agree to accept a maximum SBA guarantee of 50 percent  Other 7(a) loans generally have a maximum guarantee of 75 percent or 85 percent, depending on the loan amount  In fiscal year 2016, 1,991 lenders approved 7(a) loans, of which 1,321 approved at least one loan with some form of delegated authority  SBA’s Office of Credit Risk Management is responsible for overseeing 7(a) lenders, including those with delegated authority  SBA created this office in fiscal year 1999 to help ensure consistent and appropriate supervision of SBA’s lending partners  The office is responsible for managing all activities regarding lender reviews; preparing written reports; evaluating new programs; and recommending changes to existing programs to assess risk potential  Generally, the office oversees SBA lenders to identify unacceptable risk profiles using its risk rating system and enforce loan program requirements  According to SBA’s standard operating procedures, one of the agency’s purposes of its monitoring and oversight activities is to promote responsible lending that supports SBA’s mission to increase access to capital for small businesses  In the federal budget, the 7(a) program is generally required to set fees that it charges to lenders and borrowers at a level to cover the estimated cost of the program associated with borrower defaults (in present value terms)  To offset some of the costs of the program, such as default costs, SBA assesses lenders two fees on each 7(a) loan  First, depending on the term of the loan, the guarantee fee must be paid by the lender within either 90 days of loan approval or 10 business days of the SBA loan number being assigned  This fee is based on the amount of the loan and the level of the guarantee, and lenders can pass the fee on to the borrower  Second, the servicing fee must be paid annually by the lender and is based on the outstanding balance of the guaranteed portion of the loan  The 7(a) program accounts for a small portion of total small business lending  According to a May 2017 report by the Consumer Financial Protection Bureau, the total debt financing available to small businesses was estimated to be $1 4 trillion  Of that amount, the Consumer Financial Protection Bureau estimated that about 7 percent was SBA loans, including 7(a) loans  SBA and some other researchers have suggested that there may be disparities in credit access among small businesses, based on characteristics of the borrower and firm  SBA lists as a strategic objective to “ensure inclusive entrepreneurship by expanding access and opportunity to small businesses and entrepreneurs in communities where market gaps remain ” In 2007, we reported that some studies had noted disparities among some races and genders in the conventional lending market, but the studies did not offer conclusive evidence on the reasons for those differences  Much of the research we reviewed in 2007 relied on the Board of Governors of the Federal Reserve System’s Survey of Small Business Finance, which was last implemented in 2003  Although this survey is no longer available, recently the 12 Federal Reserve Banks conducted the Small Business Credit Survey  In a series of reports based on the more recent survey, researchers found disparities in credit availability based on gender, the age of the firm, and minority status  From fiscal years 2007 through 2016, a majority of loan dollars guaranteed under the 7(a) program went to small businesses that were new, partially or wholly owned by women, or located in a distressed area  As previously mentioned, recent studies we reviewed by the Federal Reserve Banks and other researchers suggest that certain small business borrowers—including businesses that are new or owned by women—have difficulty obtaining conventional small business loans, which may put them at a disadvantage  As shown in figure 1, almost two-thirds of loan dollars guaranteed under the 7(a) program for this period went to small businesses that were in these two categories or located in a distressed area  The remaining 37 percent of 7(a) loan dollars went to businesses that were established, solely male-owned, and not located in economically distressed areas  See appendixes II and III for additional data on 7(a) loans, such as the total volume, percentage of lending provided by year and by state, and other borrower characteristics, including SBA’s loan- and lender-level Small Business Risk Portfolio Solutions score (predictive score) information  In the following figures, we present more detailed data on 7(a) loans to small businesses based on their status as a new business; gender of ownership; location relative to economically distressed areas; and minority ownership for fiscal years 2007 through 2016  New businesses  As shown in figure 2, the percentage of 7(a) loans that went to new businesses decreased from 36 percent in fiscal year 2007 to 23 percent in fiscal year 2011 before increasing to 35 percent by 2016  Gender  From fiscal years 2007 through 2016, the share of the total value of approved 7(a) loans by gender of owner remained fairly consistent (see fig  3)  An average of 70 percent of the total loan value went to male- owned businesses, and the remaining 30 percent went to businesses that were majority (more than 50 percent) or partially (50 percent or less) owned by women  Economically distressed areas  SBA did not provide data on whether 7(a) loans go to businesses located in economically distressed neighborhoods  However, we used data from the American Community Survey for 2011 through 2015, the most recent version available at the time of our analysis, along with zip code information provided by SBA to determine the average poverty rate by zip code (see fig  4)  From fiscal years 2007 through 2016, the proportion of the total value of 7(a) loans approved that went to borrowers in economically distressed areas remained between 23 percent and 26 percent  We defined distressed areas as zip codes where at least 20 percent of the households had incomes below the national poverty line  Minority/Nonminority status of borrower  From fiscal years 2007 through 2016, the proportion of the total value of 7(a) loans approved that went to minority borrowers decreased overall—from 43 percent to 30 percent—with the lowest share at 24 percent in fiscal year 2010 (see fig  5)  The share of approved loan dollars that went to nonminority borrowers varied, increasing to 69 percent in fiscal year 2010 before decreasing to 56 percent in fiscal year 2016  Notably, the share of the total value of loans approved that went to borrowers whose race/ethnicity was categorized as undetermined increased from 5 percent in fiscal year 2007 to 13 percent in fiscal year 2016  This increase does not fully account for the declined share for minority borrowers  However, according to SBA officials, borrowers voluntarily provide self-reported information on race and ethnicity and therefore the associated trend data should be viewed with caution  SBA relies on on-site reviews as its primary mechanism for evaluating lenders’ compliance with the credit elsewhere requirement  The reviews are performed by third-party contractors with SBA staff participation and additional oversight from SBA  According to SBA’s standard operating procedures, these reviews are generally conducted every 12 to 24 months for all 7(a) lenders with outstanding balances on the SBA- guaranteed portions of their loan portfolios of $10 million or more, although SBA may conduct on-site reviews of any SBA lender at any time as it considers necessary  In fiscal year 2016, SBA conducted 40 on-site reviews of 7(a) lenders, representing approximately 35 percent of SBA’s total outstanding 7(a) loan portfolio  As part of SBA’s on-site reviews, reviewers judgmentally selected a sample of approximately 30 to 40 loan files using a risk-based approach  These loan files accounted for approximately 6 percent to 19 percent of each lender’s total gross SBA dollars in fiscal year 2016  For each lender, approximately 70 percent to 90 percent of the loan files in the sample were reviewed to evaluate compliance with the credit elsewhere requirement  According to SBA’s contractors, loans that were selected for other reasons, such as issues related to liquidation, were not required to be reviewed for credit elsewhere compliance  SBA requires lenders to provide a narrative to support the credit elsewhere determination in the credit memorandum included in each loan file  SBA’s standard operating procedures state that lenders must substantiate that credit is not available elsewhere by (1) discussing the criteria that demonstrate an identifiable weakness in a borrower’s credit and (2) including the specific reasons why the borrower does not meet the lender’s conventional loan policy requirements  In keeping with SBA’s documentation requirement, third-party contractors and SBA staff who conduct on-site reviews are supposed to assess whether lenders have adequately documented the credit elsewhere criteria and provided specific reasons supporting the criteria in the credit memorandum  According to SBA’s contractors, adequate documentation of the credit elsewhere determination in the credit memorandum would include not just which of the criteria a borrower met but also a discussion of the basis or justification for the decision  For example, if a lender determined that a borrower needed a longer maturity, the lender should explain in the credit memorandum the reasons why a longer maturity was necessary  SBA’s contractors also told us that they carefully review a lender’s loan policies in preparation for on-site reviews and refer to a lender’s policies throughout the reviews  Reviewers do not attempt to verify the evidence given in support of the credit elsewhere reason beyond the information provided in the credit memorandum  Based on our review of fiscal year 2016 reports, on-site reviews can result in three levels of noncompliance response: Finding: This is the most severe result and is associated with a corrective action for the lender to remedy the issue  Observation: This is a deficiency recorded in the review’s summary but may not warrant a corrective action for the lender  Deficiency Noted: This is the lowest level of response  It is a deficiency noted as part of the review that is not included in the review’s summary and also may not warrant a corrective action  According to SBA officials, SBA’s policy has been that any noncompliance with SBA loan program requirements results in a finding  However, according to SBA officials and our review of the fiscal year 2016 on-site review reports, if a single instance of noncompliance was identified in fiscal year 2016, SBA generally would not issue a finding  Instead, SBA’s contractors said they would attempt to determine whether that instance was an inadvertent error, such as by examining additional loan files  Lenders that are subject to corrective actions are generally required to submit a response to SBA within 30 days to document how they have addressed or plan to address the identified issues  SBA subsequently asks for documentation to show that the lender has remedied the issue, and in some cases will conduct another review that usually includes an assessment of 5 to 10 additional loan files to determine whether the credit elsewhere reason has been adequately documented  According to SBA officials, SBA may also review lenders’ compliance with corrective actions from recent on-site reviews during targeted reviews (discussed below) and delegated authority renewal reviews (for lenders with delegated authority)  In addition to on-site reviews, SBA also monitors lenders’ compliance with the credit elsewhere requirement through targeted reviews (performed on- or off-site)  Targeted reviews of a specific process or issue may be conducted for a variety of reasons at SBA’s discretion, including assessing a lender’s compliance with the credit elsewhere requirement  In fiscal year 2016, SBA conducted 24 targeted reviews that included an examination of lenders’ compliance with the credit elsewhere documentation requirement  For these reviews, SBA examined loan files for 5 judgmentally selected loans that were provided to SBA electronically, as well as copies of the credit elsewhere reasoning (among other underwriting documentation) for 10 additional recently-approved loans  SBA also conducts periodic off-site reviews that use loan- and lender- level portfolio metrics to evaluate the risk level of lenders’ 7(a) portfolios  According to agency officials, SBA also began using off-site reviews to evaluate lenders’ compliance with the credit elsewhere requirement in fiscal year 2016  In that year, SBA conducted off-site reviews of 250 lenders and required these lenders to report the credit elsewhere justification for a sample of 10 loans per lender that were identified by SBA’s selection process  Lenders were not required to provide supporting documentation, and SBA did not follow up with lenders or review loan files to ensure the validity of the self-reported reasons  According to SBA, off-site reviews followed the same procedures in fiscal year 2017 as in 2016 and that the agency planned to use the same procedures for these reviews in the future  According to the agency, it also routinely evaluates and revises its review processes and procedures  In addition, SBA’s Loan Guaranty Processing Center and National Guaranty Purchase Center conduct Improper Payments Elimination and Recovery Act and quality control reviews at the time of loan approval and at the time of guaranty purchase, respectively  These reviews examine the credit elsewhere requirement, among other issues  Lastly, since 2014 SBA’s Office of Inspector General has also examined whether high-dollar or early-defaulted 7(a) loans were made in accordance with rules; regulations; policies; and procedures, including the credit elsewhere requirement  Our review of the on-site reviews conducted in fiscal year 2016 found that 17 of the 40 reviews—more than 40 percent—identified compliance issues with the credit elsewhere documentation requirement  Of those 17 reviews, 10 reviews resulted in a Finding (all with associated corrective 3 reviews resulted in an Observation (none with associated corrective actions or requirements), and 4 reviews resulted in a Deficiency Noted (one with an associated requirement)  For all of the 17 on-site reviews that identified an instance of noncompliance, the issue was related to the lender’s documentation of the credit elsewhere criteria or justification  For example, one review found that the lender’s “regulatory practices demonstrate material noncompliance with SBA Loan Program requirements regarding documentation of the Credit Elsewhere Test ” Another review found that the lender “failed to demonstrate with adequate documentation that credit was not available elsewhere on reasonable terms and conditions ” For 2 of the 17 reviews, the issue was partly related to a discrepancy between the credit elsewhere justification used for some of the sample loan files and the lender’s own loan policy limits  With regard to SBA’s targeted reviews, 7 of 24 reviews (29 percent) conducted in fiscal year 2016 found a compliance issue with the credit elsewhere requirement  Of those 7 reviews, 6 reviews resulted in a Finding (all with associated corrective actions), 1 review resulted in an Observation (without an associated corrective no reviews resulted in a Deficiency Noted  For all of the 7 targeted reviews that identified a compliance issue, the issue was wholly related to the lender’s documentation of the credit elsewhere reason or justification  For example, 4 reviews found that for at least one loan reviewed, “the Lender failed to document justification that credit was unavailable elsewhere ” Another review found that for “three SBA Express loans and one Small Loan Advantage loan reported “other factors relating to the credit that in the lender’s opinion cannot be overcome except for the guaranty’ without specific identification of the factors ” Based on our review of on-site review reports and an interview with one reviewer, the key factors underlying lenders’ high rate of noncompliance with the credit elsewhere documentation requirement were lenders’ lack of proper internal controls and procedures and lack of awareness of the credit elsewhere documentation requirement  In fiscal year 2016, SBA’s corrective actions related to the credit elsewhere requirement required the lenders to establish or strengthen their policies; procedures; underwriting processes; or internal controls  In addition, contractors conducting the on- site reviews with whom we spoke stated that some lenders appeared to be unfamiliar with SBA’s standard operating procedures or were unclear on how to interpret them  For the 11 on-site reviews conducted in 2016 that included corrective actions, SBA generally required lenders to improve controls or procedures  For example, one lender was required to “correct its policy, modify its procedure, and amend its internal controls to ensure that its consideration and documentation of credit unavailable elsewhere identifies the specific fact(s) which are applicable to the specific loan and the determination is rendered and accurate for each individual SBA loan that it originates ” Another lender was required to “improve underwriting processes and controls to ensure that the borrower meets the [credit elsewhere] requirement” and to “document the loan file with the reasons for the determination ” Similarly, for the six targeted reviews in 2016 that included corrective actions, SBA issued a general requirement for the lender to “identify the causes for the Findings and implement corrective actions ” Based on our review of these targeted reviews, lenders generally remedied or intended to remedy the issue by amending their internal controls or procedures  For example, one lender stated that the “Credit Elsewhere test will be incorporated into the Credit Department process ” Another lender stated that it would “centralize all SBA underwriting and has developed an SBA addendum that will be utilized for all SBA-guaranteed loans ” Although some of SBA’s on-site reviews for fiscal year 2016 identified factors leading to noncompliance, they generally did not document reviewers’ assessment of lenders’ policies and practices for complying with the credit elsewhere documentation requirement  SBA’s standard operating procedures state that the on-site reviewers should determine whether or not lenders’ policies and practices adhere to the requirement, but they do not require them to document their assessment of these policies and practices  Only 4 of the 40 fiscal year 2016 review reports that we examined included such an assessment  As a result, although SBA required corrective actions by the lender to address deficiencies, there usually was no record of the underlying factors that resulted in the lender’s noncompliance  Federal internal control standards state that management should design control activities to achieve objectives and respond to risks, including appropriate documentation of transactions and internal control  Because SBA does not require reviewers to document their assessment of lenders’ policies and practices for complying with the credit elsewhere documentation requirement, the agency does not have good information to help explain why so many lenders are not in compliance  This hinders SBA’s ability to take informed and effective actions to improve lender compliance with the requirement and ensure that the program is reaching its intended population  SBA does not routinely collect information on the criteria lenders use in their credit elsewhere justifications  As previously discussed, lenders are required to maintain documentation of borrower eligibility (including the credit elsewhere justification) in each loan file for loans approved through lenders’ delegated authority  However, SBA cannot readily aggregate information on lenders’ credit elsewhere justifications for both delegated and nondelegated loans: For delegated loans, lenders are required to certify the loan’s credit elsewhere eligibility on E-Tran, SBA’s online portal for origination of delegated and nondelegated loans  However, lenders are only required to check a box to certify that the loan file contains the required credit elsewhere justification and are not required to submit any additional information, including which of the criteria was used to make the determination  According to SBA officials, delegated loans account for loans approved by approximately 70 percent of lenders  For nondelegated loans, lenders are required to submit credit elsewhere documentation to be reviewed by SBA’s Loan Guaranty Processing Center  For these loans, which comprise loans approved by the remaining 30 percent of lenders, SBA might maintain paper records of data on borrowers’ eligibility but does not compile such data electronically and thus cannot readily aggregate the data for analysis  Instead, SBA relies on on-site reviews or lender-reported information to review lenders’ credit elsewhere justifications and collects limited data from these reviews  For its on-site reviews, SBA does not collect sample data on lenders’ use of the credit elsewhere criteria  For its off-site reviews, SBA collected sample data on lenders’ use of the credit elsewhere criteria based on 250 such reviews conducted in fiscal year 2016  For these reviews, SBA asked lenders to self-report a short description of the credit elsewhere justifications used for an SBA-selected sample of 10 loans  However, as discussed earlier, SBA did not request or examine loan files as part of these off-site reviews and did not follow up with lenders or review loan files to ensure the validity of the self- reported reasons  One reason why SBA does not routinely collect complete information on lenders’ use of the credit elsewhere criteria is that SBA’s loan origination system, E-Tran, is not equipped to record or tabulate this information  In addition, according to an SBA official, on-site reviews do not collect data on the credit elsewhere criteria because the loans reviewed are judgmentally selected and would not accurately represent the larger population  Federal internal control standards state that management should use quality information to achieve the entity’s objectives  To do so, management should identify the information needed to achieve the objectives and address the risks, obtain relevant data from reliable internal and external sources in a timely manner, and process the obtained data into quality information  More robust information on lenders’ credit elsewhere justifications, including the credit elsewhere criteria, would allow SBA to evaluate patterns in lender practices related to the credit elsewhere requirement and, in turn, help the agency ensure compliance with the requirement  In this context, generalizable data, which can be collected through random sampling, or complete data through required reporting for every loan would allow SBA to better understand patterns in lender practices across the 7(a) program  Further, nongeneralizable data, which are available through SBA’s current off- and on-site review processes, would allow SBA to examine specific groups of lenders and could help SBA determine if it is necessary to collect additional data  SBA does not analyze the limited data it collects to help it monitor lenders’ compliance with the credit elsewhere requirement  According to agency officials, SBA has not performed lender-level analyses of the criteria lenders use for their credit elsewhere justifications  Additionally, SBA has not analyzed 7(a) lenders’ use of the “other factors” criterion— that is, factors not specified in the other criteria that, in the lender’s opinion, cannot be overcome except for the guarantee—for example, by collecting data on the frequency of its use or examining why lenders rely on it  While some 7(a) lenders told us they avoided relying on the “other factors” criterion because it was vague and open to interpretation, some lenders have used it when a borrower’s profile did not meet any of the other criteria  For example, one lender stated that this criterion was used for a borrower who was no longer a start-up but had experienced fluctuations in cash flow due to relocation or change in ownership  Another lender stated that the criterion was used more frequently during the 2007-2009 financial recession to extend financing to borrowers whose owners had experienced a home foreclosure but were otherwise sound  Federal internal control standards state that management should establish and operate monitoring activities to monitor the internal control system and evaluate the results  Analyzing data on lenders’ use of the credit elsewhere criteria as part of its monitoring procedures could help SBA determine whether there are patterns in lender practices related to the criteria that could predict lender noncompliance  For example, SBA could analyze lenders’ use of the criteria along with lender review results and other data on loan characteristics and performance to determine whether certain patterns indicate that a lender might be applying the requirement inconsistently  Additionally, such analysis could inform SBA’s selection of which lenders to review by improving its ability to identify lenders at risk of noncompliance with the credit elsewhere requirement


Report 2:  Better selection criteria for its lender reviews could, in turn, improve identification and remediation of such noncompliance, helping ensure that the 7(a) program serves its target population  Representatives at 8 of the 11 lenders that we contacted said they believed that SBA’s current credit elsewhere criteria are adequate in targeting small business borrowers who cannot obtain credit at reasonable terms  Representatives of these lenders also agreed that the criteria generally serve the types of small businesses that would otherwise have trouble obtaining conventional credit, such as new businesses or those with a shortage of collateral  One lender representative told us its most commonly used criterion related to the overall time in business because of the higher risk of failure  Another lender representative cited the lack of collateral as the most common criterion used  Additionally, representatives at an industry association told us that one of the most commonly used criteria was the one related to loan maturity and many small businesses seek 7(a) loans because they offer repayment terms of up to 10 years, compared to 1 to 3 years for conventional loans  Representatives of two other lenders suggested that the credit elsewhere criteria should not be overly prescriptive, which could limit lenders’ ability to make 7(a) loans to some businesses  For example, one representative said the credit elsewhere criteria should remain flexible because banks have different lending policies  In addition, representatives at three lenders indicated that they were hesitant to use the “other factors” criterion  One lender believed the requirement was open to interpretation and could be used inappropriately with lenders determining their own individual conventional loan policies  Another lender commented that the criterion was vague and rarely used by his institution, noting that SBA should provide some additional guidance on its use  Lenders consider multiple factors in determining whether to offer small businesses a conventional loan or a 7(a) loan, according to stakeholders with whom we spoke  For example, representatives at an industry association stated that a bank goes through several analyses to determine what loan product to offer the borrower  These representatives stated that the credit elsewhere requirement is embedded in the analysis a bank performs, such as whether the borrower qualifies for a loan and has a financial need for an SBA loan and whether the 7(a) program is right for that borrower  Representatives at two other lenders also stated that many small businesses have already been turned down for conventional loans before they seek a 7(a) loan  One representative noted that the “reasonable rates and terms” component of the 7(a) program was important as it allows lenders to look more broadly at a borrower’s needs  For instance, the representative explained, lenders can assess whether repayment terms are reasonable given a particular borrower’s situation and the resources the borrower will have to repay the loan  Economic conditions also affect lending policies, including whether borrowers qualify for a conventional loan, according to representatives at seven lenders with whom we spoke  For example, during the recent economic downturn, banks tightened their underwriting standards for small businesses and were less willing to lend without a government guarantee, according to one lender representative  SBA has issued revised primary operational guidance for the 7(a) program, effective January 1, 2018  As discussed previously, lenders are required to make a determination that the desired credit is not available to the applicant from nonfederal sources  Under the previous guidance, the lender had to determine that some or the entire loan was not available from nonfederal sources or the resources of the applicant business  However under the revised guidance, the scope of nonfederal sources a lender must review was further defined to include sources both related and unrelated to the applicant  The updated guidance states that lenders must consider: Nonfederal sources related to the applicant, including the liquidity of owners of 20 percent or more of the equity of the applicant, their spouses and minor children, and the applicant itself; or Nonfederal sources unrelated to the applicant, including conventional lenders or other sources of credit  Representatives of five lenders told us they have been determining how to interpret the new procedures with a few stating they would like additional guidance, including what information to retain in the file  Representatives of two lenders stated that there is some ambiguity in how to determine nonfederal resources and how to assess whether small business owners have too many available liquid resources to qualify for a 7(a) loan  One representative said that lenders can have different interpretations of what constitutes “available resources,” which is not specified in the new SOP  As a result, he said, there may be some confusion about how to assess family members of the borrower who have high net worths and whether the borrower should decline a family member contribution to qualify for an SBA loan  A representative of one lender stated that lenders will not know what SBA expects until loans are approved under the new procedures, default, and are then reviewed  Another lender’s representative suggested additional guidance on documentation, such as whether the bank must obtain a personal financial statement for each owner of the business  A SBA staff told us SBA has provided multiple training presentations to SBA staff, lenders, and trade associations on the statutory changes to the credit elsewhere requirements and standard operating procedure updates  These have included a presentation at a trade association conference, four monthly conference calls for SBA staff, and two conference calls for SBA lenders  SBA staff said SBA also plans to hold monthly training sessions with SBA field offices, quarterly training sessions with the industry, and at least four training sessions in 2018 at lender trade conferences  Additionally, a representative from an industry association told us it is providing industry training on SBA’s revised procedures, including the credit elsewhere liquidity requirement  SBA’s 7(a) loan program is required to serve creditworthy small business borrowers who cannot obtain credit through a conventional lender at reasonable terms, and SBA largely relies on lenders with delegated authority to make credit elsewhere determinations  However, although there is a high rate of lender noncompliance with the credit elsewhere documentation requirement, SBA does not require its reviewers to document their assessment of the policies and procedures lenders use to meet the requirement  Without better information from lender reviews on how lenders are implementing the requirement to document their credit elsewhere decisions, SBA may be limited in its ability to promote compliance with requirements and, in turn, use such information to help ensure that 7(a) loans are reaching their target population  Furthermore, SBA does not routinely collect or analyze information on the criteria used for credit elsewhere justifications to evaluate patterns in lender practices  SBA recently began collecting some information on lenders’ use of the criteria, but this information is limited, and SBA does not analyze the information that it does collect to better understand lenders’ practices  Without more robust information and analysis, SBA may be limited in its ability to understand how lenders are using the credit elsewhere criteria and whether 7(a) loans are reaching borrowers who cannot obtain credit from other sources at reasonable terms  We are making the following three recommendations to SBA  The Administrator of SBA should require reviewers to consistently document their assessments of a lender’s policies and practices  (Recommendation 1) The Administrator of SBA should use its on-site and off-site reviews to routinely collect information on lenders’ use of credit elsewhere criteria as part of its monitoring of lender practices related to the credit elsewhere requirement  (Recommendation 2) The Administrator of SBA should analyze information on lenders’ use of credit elsewhere criteria obtained from its reviews to identify lenders that may be at greater risk of noncompliance and to inform its selection of lenders for further review for credit elsewhere compliance  (Recommendation 3) We provided a draft of this report for review and comment  SBA’s written comments are reprinted in appendix IV  SBA generally agreed with the recommendations  SBA also provided additional comments on certain statements in the draft report, which are summarized below with our responses  SBA noted that the draft Highlights did not discuss how credit elsewhere is determined for nondelegated loans  We have not revised the Highlights in response to this comment because our review focused on delegated lenders  In the body of the report we note that approximately 70 percent of 7(a) loans are approved under delegated authority  We also refer to SBA’s nondelegated loans in the report for additional context  According to SBA, the statement on our draft Highlights did not fully reflect its monitoring of lender compliance  SBA identified a variety of reviews it uses in addition to on-site reviews by third party contractors, which we discuss in the body of the report  We have modified the Highlights to reflect these other reviews  Also in reference to the draft Highlights, SBA stated that it provides oversight on every on-site lender review and that an SBA employee is present as a subject-matter expert on every review  We revised the Highlights by adding that SBA provides oversight to the on-site reviews conducted by third-party contractors  In response to a statement in our draft report that SBA guarantees loans to small businesses for working capital and other general business purposes, SBA commented that working capital generally is not the primary purpose for SBA-guaranteed loans  We did not revise the statement because SBA’s SOP 50 10 5 (version J) specifies that SBA’s 7(a) loan proceeds may be used for permanent working capital and revolving working capital, among other things  In relation to a footnote in our report that mentions two lender reviews for which we did not receive documentation, SBA stated that on February 15, 2018, it provided documentation to us related to the reviews and that we had confirmed its receipt  However, the text in the footnote in question refers to two targeted lender reviews from 2016 that included corrective actions  The information SBA provided to us on February 15, 2018, was related to on-site reviews conducted in 2016  As a result, we did not revise the footnote  SBA’s letter also contained technical comments that we incorporated as appropriate  We are sending copies of this report to congressional committees, agencies, and other interested parties  In addition, this report will be available at no charge on our website at http://www gao gov  If you or your staff members have any questions about this report, please contact me at (202) 512-8678 or shearw@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix V  This report discusses (1) 7(a) lending to selected categories of small business borrowers from fiscal years 2007 through 2016; (2) how the Small Business Administration (SBA) monitors lenders’ compliance with the credit elsewhere requirement; (3) the extent to which SBA evaluates trends in lender practices related to the credit elsewhere requirement; and (4) lenders’ views on the criteria used to determine eligibility for 7(a) loans and other issues related to the 7(a) program  For background on the 7(a) program and the credit elsewhere requirement, we reviewed the legislative history of the 7(a) program and our previous reports  We also interviewed officials from SBA’s Office of Credit Risk Management on guidance provided to 7(a) lenders  For background on constraints in the small business credit market, we reviewed recent academic literature on the characteristics of small businesses that historically have had more difficulty accessing credit  In addition, we reviewed recent studies published by the Federal Reserve Banks of Atlanta; Cleveland; Kansas City; and New York  To describe the population of borrowers served by the 7(a) program, we selected characteristics (such as gender, minority status, and percentage of new business) that we used in our 2007 report and that were the subject of the recent studies by Federal Reserve Banks  We obtained and analyzed SBA loan-level data to describe 7(a) loans and borrowers  Specifically, SBA provided us with 581,393 records from its administrative data systems, which contained information on all loans approved and disbursed in fiscal years 2007 through 2016  The SBA data included various types of information describing each loan, including the total gross approval amount; the amount guaranteed by SBA; the loan term; and the interest rate; delivery method; and status of the loan  The SBA data also included information on borrower characteristics: Age of business  Firms were classified as new (less than 2 years in operation) or existing  Gender  Firms were classified as 100 percent male-owned; 50 percent or greater women owned; 50 percent or less women-owned; or “unknown ” Information on gender was voluntarily provided by borrowers  Economically distressed area  We identified borrowers in economically distressed areas by matching borrower zip codes provided by SBA to those in the 2011 through 2015 American Community Survey  We defined distressed areas as zip codes where at least 20 percent of households had incomes below the national poverty line  In about 1 percent of the cases, we were unable to classify a lender because a zip code had changed or had insufficient population to report a poverty rate  We consider 1 percent of unmatched cases to be low by data reliability standards  Race/ethnicity  Borrowers were placed in one of nine categories of race/ethnicity, including an “unknown” category  We aggregated these to create minority, nonminority, and undetermined categories  The minority category included all borrowers who reported being a race/ethnicity other than white  The nonminority category included borrowers who reported being white  Information on race was voluntarily provided by borrowers  Industry  Firms were assigned a North American Industrial Classification code  These six-digit codes begin with a two-digit sector code that we used to draw more general conclusions about industries  Geographic information  The data provided the state where the borrower is located  In addition, we obtained information from SBA on loan- and lender-level Small Business Risk Portfolio Solution scores (predictive scores) provided by Dunn & Bradstreet and Fair Isaac Company, for loans approved in fiscal year 2016, the latest available  We were able to obtain predictive scores for approximately 81 percent of the loans for which SBA had provided other information  According to SBA, some loans may not have been disbursed at the time we obtained the predictive scores and, as a result, we do not have scores associated with these loans  We analyzed the information to determine the range of predictive scores and the range of average predictive scores by lender  To assess the reliability of loan-level data on borrower and loan characteristics and predictive scores we received from SBA, we interviewed agency officials knowledgeable about the data and reviewed related documentation  We also conducted electronic testing, including checks for outliers, missing data, and erroneous values  We determined that the data were sufficiently reliable for the purposes of describing the characteristics of borrowers who received 7(a) loans and the distribution of predictive scores  To assess how SBA monitors lenders’ compliance with the credit elsewhere requirement and criteria, we reviewed SBA’s standard operating procedures and other guidance on 7(a) program regulations and lender oversight  Specifically, we reviewed SOP 50 10 5 (versions I and J) on Lender and Development Company Loan Programs, SOP 50 53(A) on Lender Supervision and Enforcement, and SOP 51 00, On-Site Lender Reviews/Examinations, as well as information and policy notices related to the credit elsewhere requirement  Additionally, we interviewed representatives including those at SBA’s Office of Capital Access and Office of Credit Risk Management on lender oversight and lender review processes  We reviewed all the on-site lender review reports (40 reviews), including corrective actions or requirements related to the credit elsewhere requirement (documentation for 11 lenders), and targeted review reports that had credit elsewhere findings (7 reviews) that SBA conducted in fiscal year 2016  We also interviewed officials and reviewed recent reports from SBA’s Office of Inspector General  To assess the extent to which SBA evaluates trends in lender practices related to the credit elsewhere requirement, we interviewed SBA officials and reviewed documentation for SBA’s online portal for loan origination  We also incorporated information from interviews with a nongeneralizable, nonrepresentative sample of 7(a) lenders, which we discuss below  To obtain lenders’ views on the criteria used to determine eligibility for 7(a) loans and other program-related issues, we interviewed SBA staff including from the Office of Capital Access, and representatives of the National Association of Government Guaranteed Lenders; American Bankers Association; Independent Community Bankers Association; and National Federation of Independent Businesses  We also interviewed 11 banks (one bank provided written responses) in order to obtain the lender perspective of credit elsewhere  Nine of the banks were selected by us using a random process that concentrated on larger lenders  These nine lenders selected by us represent about 13 percent of the loans approved and 16 percent of the dollars approved in 2016  In addition, we interviewed two additional banks that represented an industry group – one larger bank and one small bank  Although we partially selected at random, the lenders we interviewed should not be considered generalizable because of the small number  We conducted this performance audit from August 2017 to June 2018 in accordance with generally accepted government auditing standards  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives  In this appendix, we provide information on the total amount and number of approved 7(a) loans and the top eight industry sectors receiving 7(a) loans  Data are also presented on fiscal year 2016 loan volume by state and per capita  As shown in figure 6 below, the total amount of approved 7(a) loans decreased during the period associated with the Great Recession (2007 through 2009)  From fiscal year 2009 on, the total amount of approved 7(a) loans increased until a decline in fiscal year 2012  During this timeframe, the American Recovery and Reinvestment Act of 2009 and the Small Business Jobs Act of 2010 provided fee relief and higher guaranties  The Small Business Jobs Act of 2010 also provided a temporary increase in Small Business Administration (SBA) Express loan limits to $1 million (instead of $350,000)  These programs have since expired  7(a) Loans by North American Industry Classification System (NAICS) code  Table 1 shows the largest eight industrial sectors by proportion of the total amount of 7(a) loans approved, using the NAICS code  The combined share of the top eight sectors declined slightly from 85 percent to 80 percent of the total lending from fiscal years 2007 through 2016, with an average of 82 percent  During this period, the Accommodation and Food Services sector had the largest average share of total loan amount at 17 percent, followed by the Retail Trade sector at 15 percent  Approved loan amount and per capita dollars by state  As shown in figure 7, California; Texas; Florida; Georgia; and New York received the highest total of approved loan dollars in fiscal year 2016  The average approval amount across all loans was $380,619  Georgia and Arkansas had the largest average approval amount in 2016  Also, during this period, Utah; Colorado; Georgia; California; and Washington received the highest per capita approved loan dollars  In fiscal-year 2016, creditworthiness varied widely among 7(a) program borrowers  We analyzed creditworthiness using the Small Business Administration’s (SBA) Small Business Risk Portfolio Solution score (predictive score), which ranges from 70 to 300, with 300 indicating the least risky loan  According to SBA, loans with scores above 180 are considered “lower risk,” scores between 140 and 179 are considered “moderate risk,” and scores 139 and lower are considered “higher risk ” There did not appear be differences in score based on the gender of the borrower or the age of the business  While SBA relies on the Predictive Score data to identify lenders that may pose excessive risk to the SBA 7(a) portfolio, the data also provide potential insights related to lender implementation of the credit elsewhere requirement  Variation  We found that some 7(a) borrowers were much more creditworthy than others  In 2016, the only year for which we obtained data, the predictive score at origination varied widely among borrowers  In 2016, the scores of borrowers ranged from a low of 91 to a high of 246  However, most scores were between 171 and 203, and the median score was 188  Race/ethnicity  We found that there were slight differences in creditworthiness by race/ethnicity, with median scores ranging from 180 to 189 depending on the category  Specifically, loans to African Americans in 2016 had a median score of 180, and loans to Hispanics had a median score of 183  In contrast, loans to whites had a median score of 188, and loans to Asian and Pacific Islanders had a median score of 189  Lender size  We found that lenders with larger numbers of SBA loans tended to have slightly more creditworthy borrowers  The top 5 percent of lenders had a median average score of 187, whereas the bottom 75 percent of lenders had a median average score of 182 5  Among the top 5 percent of lenders (with 374 loans per lender on average, collectively representing about 70 percent of the loans approved), the average score ranged from 171 to 195  Among all lenders, the average score ranged from 116 to 233  However, because many lenders only approved one or two loans in 2016, the average may reflect very few borrowers for that lender, making it difficult to tell whether the scores reflect a real difference between lenders  In addition to the contact named above, Harry Medina (Assistant Director); Janet Fong (Analyst in Charge); Benjamin A  Bolitzer; Gita DeVaney; David S  Dornisch; Amanda D  Gallear (intern); Marc W  Molino; Jennifer W  Schwartz; and Tyler L  Spunaugle made key contributions to this report 

ground_truth: The 2018 National Defense Strategy emphasizes that restoring and retaining readiness is critical to success in the emerging security environment. The Navy and Marine Corps are working to rebuild the readiness of their forces while growing and modernizing their aging fleet of ships and aircraft. However, achieving readiness recovery goals will take years as both services continue to be challenged to rebuild readiness amid continued operational demands. This statement provides information on current and future readiness challenges facing (1) the Navy ship and submarine fleet and (2) Navy and Marine Corps aviation. GAO also discusses prior recommendations on Navy and Marine Corps readiness and progress to address them. This statement is based on previously published work since 2015 related to Navy and Marine Corps readiness challenges, including shipyard workforce and capital investment, ship crewing, weapon system sustainment, the fighter pilot workforce, and modernizing force structure. GAO conducted site visits to the Pacific fleet in November 2018 and analyzed updated data, as appropriate. The Navy has taken steps to address training shortfalls in the surface fleet, but faces persistent maintenance and personnel challenges as it seeks to rebuild ship and submarine readiness. While the Navy has corrective actions underway, they will take years to implement. Following ship collisions in 2017, the Navy has taken steps to ensure its crews are trained to standards prior to deployment and made significant progress in those efforts. However, the Navy has struggled to complete ship maintenance—with only 30 percent of maintenance completed on time since fiscal year 2012—leading to thousands of days that ships were unavailable for training and operations (see figure). Additionally, manning shortfalls and experience gaps continue to contribute to high sailor workload and are likely to continue through at least fiscal year 2021. The Navy has developed a plan to improve shipyards and is re-examining its ship manning, among other actions; however, these positive steps have not yet fully addressed GAO's recommendations. Looking to the future, the Navy has indicated that it wants to grow its fleet to meet demands. However, the costs of such growth are not yet known and would likely require resourcing well above currently planned levels. Navy and Marine Corps aircraft availability has been limited due to numerous challenges (see figure). Specifically, the seven aircraft GAO reviewed have generally experienced decreasing availability since fiscal year 2011 and did not meet availability goals in fiscal years 2017 and 2018. The F-35—the future of naval aviation—also has not met availability goals due to part shortages and poor sustainment planning. In September 2018, the Department of Defense established aggressive targets for aircraft availability. While the Navy and Marine Corps are taking actions to improve aircraft availability, including addressing GAO's recommendations, aviation readiness will take many years to recover. GAO has made a total of 45 recommendations in the prior work described in this statement. The Department of Defense concurred with most of them, and has many actions underway, but has not yet fully implemented any. Attention to these recommendations can assist the Navy and the Marine Corps as they seek to rebuild the readiness of their forces.

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



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

Report 1: We testified before the Senate Committee on Armed Services in September 2017 after four significant mishaps at sea resulted in the loss of 17 sailors’ lives and serious damage to Navy ships  We reported on some of the Navy’s challenges, including the degraded condition and expired training certifications of ships homeported overseas, reductions to ship crews that contributed to sailor overwork and safety risks, and an inability to complete maintenance on time  Since that time, the Navy has completed two internal reviews to address these and other challenges, identifying 111 recommendations to improve surface fleet readiness  The Navy formed an executive group to guide and closely track the implementation of recommendations, and its reform efforts are ongoing  As of November 2018, the Navy reported that it had implemented 78 (i e , 70 percent) of these recommendations  Navy officials recognize that full implementation will take significant time and management attention to address the fundamental readiness challenges identified  In figure 1, we show photographs of two of the four Navy ships involved in significant mishaps that occurred in 2017  Both the USS Fitzgerald and the USS John S  McCain were involved in collisions that resulted in sailor fatalities  DOD has reported that more than a decade of conflict, budget uncertainty, and reductions in force structure have degraded its readiness; in response, the department has made rebuilding readiness a priority  The 2018 National Defense Strategy emphasizes that restoring and retaining readiness across the entire spectrum of conflict is critical to success in the emerging security environment  Nevertheless, DOD reported that readiness of the total military force remains low and has remained so since 2013  Our work has shown that the Navy has experienced increasing maintenance challenges as a high pace of operations has continued and maintenance has been deferred  Maintenance and personnel challenges also hinder readiness recovery of Navy aircraft  For the Marine Corps, our work has shown that ground force readiness has improved and remained stable in recent years, but acute readiness problems remain in aviation units  Over the past year, DOD has made department-wide progress in developing a plan to rebuild the readiness of the military force, with the military services providing regular input on the status of their readiness recovery efforts  In August 2018, we reported that the Office of the Secretary of Defense has developed a Readiness Recovery Framework that the department is using to guide the services’ efforts and plans to use to regularly assess, validate, and monitor readiness recovery  The Office of the Secretary of Defense and the services have recently revised readiness goals and accompanying recovery strategies, metrics, and milestones to align with the 2018 National Defense Strategy and Defense Planning Guidance  We have ongoing work assessing DOD’s progress in achieveing its overall readiness goals  DOD’s readiness rebuilding efforts are occurring in a challenging context that requires the department to make difficult decisions regarding how best to address continuing operational demands while preparing for future challenges  Our work has shown that an important aspect of this, across all of the services, is determining an appropriate balance between maintaining and upgrading legacy weapon systems currently in operational use and procuring new ones to overcome rapidly advancing future threats  Based on updated information we received in November 2018, the Navy has taken steps to provide dedicated training time so its surface forces may meet existing Navy training standards and their training is certified when they deploy  However, the Navy continues to struggle with rebuilding the readiness of the existing fleet due to enduring maintenance and manning challenges  As the Navy seeks to expand its fleet by 25 percent, these challenges will likely be further exacerbated and the Navy will likely face additional affordability challenges  After the collisions in 2017, the Navy focused on training surface ship crews to its existing standards  We testified in September 2017 that there were no dedicated training periods built into the operational schedules of the cruisers and destroyers based in Japan and 37 percent of training certifications for these surface ship crews had lapsed as of June 2017  Since that time, the Navy has worked to ensure surface ships are certified before they are deployed  For example, the Navy has established controls to limit waivers that allowed training lapses to worsen, now requiring multiple high-level approvals for ships to operate uncertified  Based on our analysis of updated data, the Navy has improved markedly in the percentage of cruisers and destroyers with lapsed certifications in Japan, from 41 percent of certifications expired in September 2017 to 9 percent as of November 2018, with less than 3 percent of certifications expired on ships in operational status  While the Navy has demonstrated its commitment to ensuring that crews are certified prior to deploying, training for amphibious operations and higher-level collective training may not be fully implemented for several years  In September 2017, we reported that some Marine Corps units were limited in their ability to complete training to conduct an amphibious operation—a military operation that is launched from the sea to introduce a landing force ashore—by several factors, including a decline in the number of amphibious ships from 62 in 1990 to 32 as of November 2018, access to range space, and a high pace of deployments, among others  We recommended that the Navy and the Marine Corps develop an approach to mitigate their amphibious operations training shortfalls as the services await the arrival of additional amphibious ships into the fleet  Marine Corps officials told us that the Marine Corps and the Navy are working together to maximize amphibious training opportunities  Additionally, the Navy has plans to phase in high-level collective training into the operational schedules of its ships homeported in Japan over the next several years  Previously, advanced and integrated training involving multiple ships was conducted ad hoc if at all for ships homeported in Japan  Such collective training is important because the 2018 National Defense Strategy states that the department’s principal priority is to prepare for threats from strategic competitors due to the magnitude of the threat they pose  However, in November 2018, officials from Fleet Forces Command told us that fully implementing its training approach to prepare for advanced adversaries would not be fully implemented across the fleet for several years  We have reported that the Navy faces persistent challenges in completing maintenance on time and providing sufficient manning to its ships  Unless these challenges are addressed, the Navy will be hampered in its ability to rebuild readiness and prepare for the future  Our work has found that the Navy has been unable to complete ship and submarine maintenance on time, resulting in continuing schedule delays that reduce time for training and operations and create costly inefficiencies in a resource constrained environment  The Navy’s readiness recovery is premised on the rigorous adherence to deployment, training, and maintenance schedules  However, we reported in May 2016 on the difficulty that both the public and private shipyards were having in completing maintenance on time  We reported that, from 2011 through 2014, about 28 percent of scheduled maintenance for surface combatants was completed on time and 11 percent was completed on time for aircraft carriers  We updated these data as of November 2018 to include maintenance periods completed through the end of fiscal year 2018 and found that the Navy continues to struggle to complete maintenance on time  For fiscal years 2012-2018, our analysis for key portions of the Navy fleet shows that 30 percent of Navy maintenance was completed on time, leading to more than 27,000 days in which ships were delayed and unavailable for training and operations as shown in figure 2 below  In addition to affecting training and operations, maintenance delays are costly  In November 2018, we examined attack submarine maintenance delays and reported that the Navy was incurring significant operating and support costs to crew, maintain, and support attack submarines that are delayed getting into and out of shipyard maintenance periods  We estimated that over the past 10 years the Navy has spent $1 5 billion in fiscal year 2018 constant dollars to support attack submarines that provide no operational capability—those sitting idle no longer certified to conduct normal operations—while waiting to enter the shipyards, and those delayed in completing their maintenance at the shipyards (see figure 3)  We recommended that the Navy analyze how it allocates its maintenance workload across public and private shipyards  DOD concurred with our recommendation, stating that it has taken the first steps to take a more holistic view of submarine maintenance requirements and impacts across both the public and private shipyards  In an update provided in November 2018, the Navy told us that they are developing a contracting strategy to conduct two additional depot maintenance periods at private shipyards in the future  Our prior work has shown that three primary factors at the naval shipyards contribute to maintenance delays: Poor conditions and aging equipment limit the ability of the shipyards to meet current and future demands  We reported in September 2017 that facility and equipment limitations at the shipyards contributed to maintenance delays for the aircraft carriers and submarines, hindering the shipyards’ ability to support the Navy  Specifically, we found that the shipyards would be unable to support an estimated one-third of maintenance periods planned over the next 23 years  We recommended that the Navy take steps to improve its management of shipyard investments; the Navy concurred with this recommendation and we are encouraged by its response  For example, the Navy has developed a plan for the optimal placement of facilities and major equipment at each public shipyard, which the Navy estimates can ultimately increase its maintenance efficiency by reducing personnel and materiel travel by an average of 65 percent  This equates to recovering about 328,000 man days per year—an amount roughly equal to that of an aircraft carrier maintenance period  However, the Navy’s preliminary estimate —that this effort will require an estimated $21 billion and 20 years to address—is well beyond historical funding levels, and does not include some potentially significant costs (e g , for utilities, roads, or environmental remediation)  Shipyard workforce gaps and inexperience are limiting factors  The Navy has reported a variety of workforce challenges at the Navy’s four public shipyards such as hiring personnel in a timely manner and providing personnel with the training necessary to gain proficiency in critical skills  The Navy has noted that some occupations require years of training before workers become proficient  According to Navy officials, a large portion of its workforce is inexperienced  For example, 45 percent of the Puget Sound and 30 percent of the Portsmouth Naval Shipyards’ skilled workforce have fewer than 5 years of experience  According to DOD officials, workforce shortages and inexperience contribute to maintenance delays  For example, at Pearl Harbor Naval Shipyard, two submarines were delayed approximately 20 months, in part because of shortages in ship fitters and welders, among other skilled personnel  Most of DOD’s depots, which include the naval shipyards, have taken actions to maintain critical skills through retention incentives, bonuses, and awards  We plan to issue a report examining DOD’s depot skill gaps, including those at the naval shipyards, later this month  Depot supply support may not be cost-effective  In June 2016, we reported that the naval shipyards and other depots had not implemented actions that would likely improve the cost-effectiveness of their supply operations  Specifically, the Navy had not transferred certain functions to the Defense Logistics Agency (DLA) at the shipyards in the same manner as the Navy and Air Force did for their aviation depots  The Navy and Air Force aviation depots that transferred these functions to DLA had reaped a number of efficiencies in their supply operations, including a 10-percent reduction in backorders over a 5-year period  We recommended that the Navy analyze whether such a transfer of functions is warranted at the shipyards and the Navy concurred with the recommendation  However, as of October 2018, the Navy had not conducted a comprehensive analysis of transferring these functions and had provided no plans to do so  In May 2017, we reported that the Navy’s process for determining manpower requirements—the number and skill mix of sailors needed on the Navy’s ships—did not fully account for all ship workload  The Navy was using outdated standards to calculate the size of ship crews that may have been leading to overburdened crews working long hours  We recommended steps to help ensure the Navy’s manpower requirements meet the needs of the existing and future surface fleet, and the Navy has been studying ship workload and revising its guidance  As of November 2018, the Navy was continuing to analyze the manpower requirements of its ship classes to better size and compose ship crews, and the Navy was also working to improve shipboard manning  However, these efforts are not yet complete and it is too early to assess their effectiveness  Until manpower requirements are reassessed across the fleet, the Navy risks that ship crews will continue to be undersized and sailors will be overworked with potential negative effects on readiness and safety  Additionally, the Navy provided information in November 2018 that showed that it is taking steps to ensure that ships have a minimum percentage of crew assigned and with the appropriate skills  The Navy has prioritized manning its surface ships homeported overseas  The Navy established a minimum threshold of filling at least 95 percent of authorized billets in its ship crews with sailors (referred to as fill), with a minimum goal of 92 percent of those sailors having the right qualifications for the billet (known as fit)  According to Navy officials, the Navy is for the most part meeting its fill goals Navy-wide, but has not consistently met its fit goals  However, during group discussions in November 2018 with ship crews and interviews with Navy officials in Japan, we learned that the Navy’s methods for tracking fit and fill do not account for sailor experience and may be inaccurately capturing the actual presence of sailors onboard and available for duty on its ships  Moreover, sailors consistently told us that ship workload has not decreased, and it is still extremely challenging to complete all required workload while getting enough sleep  Navy officials told us that manning challenges will continue through at least fiscal year 2021 as the Navy increases its end strength and trains its new sailors to gain the proper mix of skills to operate and maintain the fleet  To meet continued operational demands, the Navy is planning for the most significant fleet size increase in over 30 years  According to the Navy’s fiscal year 2019 shipbuilding plan, the Navy plans to build and maintain a fleet of 355 battle force ships—an increase of about 25 percent above the Navy’s current force of 287 ships  To reach its goal, the Navy plans to buy 301 ships through 2048 and extend the service life of its 66 Arleigh Burke class destroyers and up to 7 attack submarines  Together, the fiscal year 2019 shipbuilding plan and the service life extensions would allow the Navy to reach a 355-ship fleet by the 2030s  Congressional Budget Office reporting and our past work have shown that the Navy has consistently and significantly underestimated the cost and timeframes for delivering new ships to the fleet  For example, the Navy estimates that buying the new ships specified in the fiscal year 2019 plan would cost $631 billion over 30 years while the Congressional Budget Office has estimated that those new ships would cost $801 billion—a difference of 27 percent  We also reported in June 2018 that acquisition outcomes for ship classes built during the last 10 years have often not achieved cost, schedule, quality, or performance goals that were established  Furthermore, we have reported that: all 8 of the lead ships delivered over the past decade that we reviewed were provided to the fleet behind schedule, and more than half of those ships were delayed by more than 2 years, and six ships of different classes valued at $6 3 billion were delivered to the Navy with varying degrees of incomplete work and quality problems  As a result of past cost and schedule problems, our work has shown that the Navy has a less-capable and smaller fleet today than it planned over 10 years ago  The Navy has also received $24 billion more in funding than it originally planned in its 2007 long-range shipbuilding plan but has 50 fewer ships in its inventory today, as compared with the goals it first established  Therefore, we have reported that as the Navy moves forward in implementing its shipbuilding plan it will be paramount for the Navy to learn from and apply lessons learned from the past  In addition to the cost of buying the ships and submarines to expand fleet size, the Navy will likely face affordability challenges with regard to the manning of an expanded fleet with the right number of sailors with the right mix of skills  In May 2017, we reported that the personnel costs for surface ship classes in fiscal years 2000-2015 were the largest share of total operating and support costs and that careful planning will be needed as new ships are brought into the fleet  We also reported that crew sizes on recently inducted ship classes grew from original projections as the Navy gained experience operating them  For example, the total crew size of Littoral Combat Ships has grown from 75 in 2003 to 98 personnel in 2016, a 31-percent increase  Navy officials told us that they plan to better articulate the personnel and resources needed for a larger fleet after fully accounting for workload and right-sizing ship crews  The Navy’s end strength has since increased by over 11,000 personnel from fiscal year 2017 levels, which should help alleviate manning challenges as the fleet grows  In November 2018, officials from Fleet Forces Command provided us with projections of its manning shortfalls continuing through at least fiscal year 2021 and steps it was planning to take to mitigate them  Our work has shown that Navy and Marine Corps aircraft availability has been limited by aging aircraft, delayed maintenance, and insufficient supply support  Pilot and maintenance personnel shortfalls further limit readiness recovery across legacy air platforms  The growing F-35 program, which is meant to replace many aging aircraft, has presented additional operational and sustainment challenges, which will likely persist into the future if not corrected  DOD, the Navy, and the Marine Corps have emphasized mission capability of critical aviation platforms— including the Navy and Marine Corps F/A-18s and F-35s—and are taking steps to improve availability, but these efforts will take time to realize results  Navy and Marine Corps aircraft availability has been limited by challenges associated with aging aircraft fleets, depot maintenance, and supply support challenges that limit the services’ ability to keep aviation units ready  The Navy and Marine Corps spend billions of dollars each year on sustainment, such as for spare parts and depot maintenance, to meet aircraft availability goals  However, aircraft availability rates have generally declined since fiscal year 2011  While specific aircraft availability data are considered sensitive by the Navy and the Marine Corps, and cannot be discussed in detail, we found in September 2018 that the Navy and the Marine Corps generally did not meet aircraft availability goals in fiscal years 2011-2016 for the seven aircraft we reviewed  In updating data in November 2018, we found that none of the aircraft met aircraft availability goals for fiscal years 2017 and 2018  According to the Navy, the pace of operations has increased wear and tear on its aircraft and decreased the time available for maintenance and modernization—a necessity for an aging fleet  For example, the average age of a legacy F/A-18A-D Hornet is 26 years, of an AV-8B Harrier is 21 years, and of the C-2A Greyhound is 29 years  Both services expect these aircraft will continue to be used for the foreseeable future and in some cases into the 2030s  The Navy and the Marine Corps face delays in the arrival of the F-35 to replace their legacy F/A-18A-D Hornets and AV-8B Harriers  To compensate for the delay, the Navy and the Marine Corps are planning to procure additional aircraft, such as the F/A-18E-F Super Hornet, and extend the service life and upgrade the capabilities of their legacy aircraft  However, these efforts and the sustainment of the Navy and Marine Corps legacy aircraft fleet face key challenges as shown in figure 4  Specifically, our prior work has shown that the Navy and the Marine Corps are confronted with two sets of challenges in sustaining their aircraft: Depot maintenance complexities for aging aircraft and spare parts availability  Depot maintenance on aging weapon systems, including Navy and Marine Corps aircraft, becomes less predictable as structural fatigue occurs and parts that were not expected to be replaced begin to wear out  While the Navy and the Marine Corps reported that sustainment funding accounts, such as those for depot maintenance and spare parts, have been funded at increased levels in fiscal years 2017 and 2018, efforts to improve spare parts availability take time to produce results due to long lead times for acquiring some items  In addition, Navy and Marine Corps aircraft face challenges associated with diminishing manufacturing sources and parts obsolescence  DOD has a program intended to manage these risks, but we reported in September 2017 that its implementation varied across DOD weapon system program offices  We made recommendations to improve the program’s management; DOD concurred and has initiated improvement efforts  Maintenance personnel inexperience and retention  The Navy has had difficulty attracting and retaining skilled maintainers, such as sheet metal workers and machinists at its aviation depots (i e , Fleet Readiness Centers), which directly affects its ability to complete planned maintenance  Some of the depots experienced challenges attracting and retaining skilled personnel due to competition with nearby contractors that are able to offer higher pay, according to Navy depot officials  Similar to the shipyards, the aviation depots also lack experienced personnel, affecting the efficiency and quality of maintenance  For example, 41 percent of the skilled workers at Fleet Readiness Center Southwest have 2 years or fewer of experience  Workforce inexperience and attrition of skilled personnel were some of the reasons cited for machining defects detected in the landing gear for F/A-18, E-2, and C-2A aircraft by a recent Navy report  All of the depots have undertaken retention efforts such as incentives, bonuses, and awards to address these issues  Until the Navy and Marine Corps address maintenance and supply challenges it will be difficult to meet Secretary of Defense-established mission capability goals  Specifically, in September 2018, the Secretary of Defense issued a memorandum emphasizing that a key component of implementing the 2018 National Defense Strategy is ensuring critical aviation platforms meet their mission capability targets by the end of fiscal year 2019  The memorandum established a goal of achieving a minimum of 80-percent mission capable rates for various aircraft, including for the Navy’s and Marine Corps’ F/A-18 inventories, by the end of fiscal year 2019 while also reducing operating and maintenance costs  To accomplish this, the Navy and the Marine Corps developed the Return to Readiness strategy in November 2018 that includes a broad array of actions to improve the availability of spare parts and evaluate the application of best commercial practices to naval aviation sustainment, among other actions  Office of the Secretary of Defense and Navy program officials told us, and based on our prior work we agree, that this goal will be challenging to achieve by the end of fiscal year 2019  We reported in April 2018 that fighter pilot shortages in the Navy and the Marine Corps have been worsening in recent years and shortfalls are projected to remain through at least fiscal year 2023  Our analysis of Navy and Marine Corps data showed that the Navy’s shortage of first operational tour fighter pilots more than doubled from 12 percent in fiscal year 2013 to 26 percent in fiscal year 2017  Similarly, the Marine Corps’ overall shortage of fighter pilots quadrupled from 6 percent in fiscal year 2006 to 24 percent in fiscal year 2017  Also, as we reported in April 2018, service officials attributed the pilot shortages to reduced training opportunities and increased attrition due to career dissatisfaction, among other factors  Officials from both services stated at the time that they have ensured that deploying squadrons have been fully staffed with fighter pilots by using various approaches including using senior pilots to staff junior positions and having pilots deploy more frequently and for longer periods  However, we reported that squadron leaders and fighter pilots said that these approaches had a negative impact on the fighter pilot training and retention and ultimately may be exacerbating the situation  Further compounding their pilot shortages, we also found that the services have not recently reevaluated squadron requirements to reflect an increased fighter pilot workload  As a result, the reported shortage actually could be greater  The services were taking actions, including increasing retention incentives for fighter pilots  To help determine the magnitude of the shortages and help target strategies to better meet their personnel needs, we recommended, and the Navy and Marine Corps agreed, to reevaluate fighter pilot squadron requirements  Sustainment challenges are not just an issue for older aircraft, but represent an enduring challenge for the F-35 Lightning II aircraft—a key component to the future of tactical aviation for the Navy and Marine Corps  The Navy and Marine Corps are both flying F-35s now as the program ramps up development, and they plan to procure nearly 700 aircraft over the coming decades  The sustainment costs of the F-35 fleet are projected to exceed $1 trillion over its 60-year life cycle  In October 2017, we reported that: F-35B aircraft (including Marine Corps aircraft) were available (i e , the aircraft were safe to fly, available for use, and able to perform at least one tasked mission) about 52 percent of the time from March 2017 through June 2017, which fell short of the 65-percent goal established by the Marine Corps for non-deployed units and F-35B aircraft (including Marine Corps aircraft) were fully mission capable (i e , the aircraft were capable of accomplishing all tasked missions) about 15 percent of the time from March 2017 through June 2017, which fell short of the 60-percent goal established by the Marine Corps for non-deployed units  We also reported on numerous sustainment challenges leading to less than desirable outcomes for F-35 warfighter readiness  For example, F-35 aircraft were unable to fly 22 percent of the time because of parts shortages from January 2017 through August 7, 2017  Additionally, DOD’s capabilities to repair F-35 parts at military depots were 6 years behind schedule, which resulted in average part repair times that are twice that of the program’s objective  As DOD gains experience with the F-35, our work has shown that the department has encountered additional challenges  In 2017, the Marine Corps became the first military service to station F-35 aircraft overseas, transferring aircraft to Iwakuni, Japan  While in the Pacific, DOD expects to disperse its F-35s into smaller detachments to outmaneuver the enemy and counter regional threats  However, in April 2018, we reported that this approach posed logistics and supply challenges  In June 2018, we reported that the F-35 program had not improved its reliability and maintainability over the past year and continued to fall short on half of its performance targets  Furthermore, we found that the program may not meet its required targets before each variant of the F-35 is expected to demonstrate maturity—the point at which the aircraft has flown enough hours to predictably determine reliability and maintainability over its lifespan  This means that the Navy and the Marine Corps may have to decide whether they are willing to accept less reliable and maintainable aircraft than originally planned  Among other outcomes, this could result in higher maintenance costs and lower aircraft availability than anticipated which also could pose readiness challenges in the future  As we reported in October 2017, the poor reliability of certain parts is already contributing to shortages of F-35 spare parts  Challenges posed by the F-35 program are largely the result of sustainment plans that do not fully include or consider key requirements  Our work has shown that planning for sustainment and aligning its funding are critical if DOD wants to meet its aircraft availability goals and effectively deploy to support operations  To address the challenges associated with F-35 sustainment and operational deployment, we recommended that DOD revise its sustainment plans, align associated funding, and mitigate the risks associated with key supply chain-related challenges for deployed F-35s in the Pacific, among others  DOD concurred with these recommendations and stated that it is taking steps to address them  Furthermore, as previously discussed, the Secretary of Defense has established an 80-percent mission capability goal for critical aviation assets, including the F-35  Due to current low availability and numerous sustainment issues, the F-35 fleet will be challenged in meeting the goal  In sum, the Navy’s and Marine Corps’ significant readiness challenges have developed over more than a decade of conflict, budget uncertainty, and reductions in force structure  Both services have made encouraging progress identifying the causes of their readiness decline and have begun efforts to arrest and reverse it; however, our prior work shows that fully addressing the persistent readiness challenges will require years of sustained management attention  Our work cited today contains 25 specific recommendations to the Navy and the Marine Corps and an additional 20 recommendations to various other DOD components to assist these services in rebuilding the readiness of their forces and in modernizing for the future  Attention to these recommendations can assist the Navy and the Marine Corps as they seek to rebuild the readiness of their forces  Chairmen Wicker and Sullivan, Ranking Members Hirono and Kaine, and Members of the Subcommittees, this concludes my prepared statement  I would be pleased to respond to any questions you may have at this time  If you or your staff have questions about this testimony, please contact John H  Pendleton, Director, Defense Capabilities and Management at (202) 512-3489 or pendletonj@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement  GAO staff who made key contributions to this testimony are Suzanne Wren, Assistant Director; Clarine Allen; Steven Banovac; John Bumgarner; Chris Cronin; Benjamin Emmel; Cynthia Grant; Mae Jones; Amie Lesser; Tobin McMurdie; Shahrzad Nikoo; Carol Petersen; Cody Raysinger; Michael Silver; John E  “Jet” Trubey; and Chris Watson  Over the past 4 years, we have issued a number of reports related to Navy and Marine Corps readiness and we used them to develop this statement  Table 1 summarizes the recommendations in these reports  The Department of Defense (DOD) concurred with most of the 45 recommendations and has many actions underway  However, DOD has not fully implemented any of the recommendations to date  For each of the reports, the specific recommendations and any progress made in implementing them are summarized in tables 2 through 16  Report numbers with a C or RC suffix are classified  Report numbers with a SU suffix are sensitive but unclassified  Classified and sensitive but unclassified reports are available to personnel with the proper clearances and need to know, upon request  Navy Readiness: Actions Needed to Address Costly Maintenance Delays Facing the Attack Submarine Fleet  GAO-19-229  Washington, D C : November 19, 2018  Air Force Readiness: Actions Needed to Rebuild Readiness and Prepare for the Future  GAO-19-120T  Washington, D C : October 10, 2018  Weapon System Sustainment: Selected Air Force and Navy Aircraft Generally Have Not Met Availability Goals, and DOD and Navy Guidance Need to Be Clarified  GAO-18-678  Washington, D C : September 10, 2018  Weapon System Sustainment: Selected Air Force and Navy Aircraft Generally Have Not Met Availability Goals, and DOD and Navy Guidance Need Clarification  GAO-18-146SU  Washington, D C : April 25, 2018  Military Readiness: Update on DOD’s Progress in Developing a Readiness Rebuilding Plan  GAO-18-441RC  Washington, D C : August 10, 2018  (SECRET) Military Personnel: Collecting Additional Data Could Enhance Pilot Retention Efforts  GAO-18-439  Washington, D C : June 21, 2018  F-35 Joint Strike Fighter: Development Is Nearly Complete, but Deficiencies Found in Testing Need to Be Resolved  GAO-18-321  Washington, D C : June 5, 2018  Warfighter Support: DOD Needs to Share F-35 Operational Lessons Across the Military Services  GAO-18-464R  Washington, D C : April 25, 2018  Military Readiness: Clear Policy and Reliable Data Would Help DOD Better Manage Service Members’ Time Away from Home  GAO-18-253  Washington, D C : April 25, 2018  Military Personnel: DOD Needs to Reevaluate Fighter Pilot Workforce Requirements  GAO-18-113  Washington, D C : April 11, 2018  Military Aircraft: F-35 Brings Increased Capabilities, but the Marine Corps Needs to Assess Challenges Associated with Operating in the Pacific  GAO-18-79C  Washington, D C : March 28, 2018  (SECRET) Navy and Marine Corps Training: Further Planning Needed for Amphibious Operations Training  GAO-18-212T  Washington, DC : December 1, 2017  F-35 Aircraft Sustainment: DOD Needs to Address Challenges Affecting Readiness and Cost Transparency  GAO-18-75  Washington, D C : October 26, 2017  Defense Supply Chain: DOD Needs Complete Information on Single Sources of Supply to Proactively Manage the Risks  GAO-17-768  Washington, D C : September 28, 2017  Navy and Marine Corps Training: Further Planning Needed for Amphibious Operations Training  GAO-17-789  Washington, D C : September 26, 2017  Navy Readiness: Actions Needed to Address Persistent Maintenance, Training, and Other Challenges Facing the Fleet  GAO-17-809T  Washington, D C : September 19, 2017  Naval Shipyards: Actions Needed to Improve Poor Conditions That Affect Operation  GAO-17-548  Washington, D C : September 12, 2017  Navy Readiness: Actions Needed to Address Persistent Maintenance, Training, and Other Challenges Facing the Fleet  GAO-17-798T  Washington, D C : September 7, 2017  Navy Readiness: Actions Needed to Maintain Viable Surge Sealift and Combat Logistics Fleets GAO-17-503  Washington, D C : August 22, 2017 (reissued on Oct 31, 2017)  Department of Defense: Actions Needed to Address Five Key Mission Challenges  GAO-17-369  Washington, D C : June 13, 2017  Military Readiness: Coastal Riverine Force Challenges  GAO-17-462C  Washington, D C : June 13, 2017  (SECRET) Navy Shipbuilding: Policy Changes Needed to Improve the Post-Delivery Process and Ship Quality  GAO-17-418  Washington, D C : July 13, 2017 Offshore Petroleum Discharge System: The Navy Has Not Mitigated Risk Associated with System Limitations  GAO-17-531C  Washington, D C : June 22, 2017  (SECRET) Navy Force Structure: Actions Needed to Ensure Proper Size and Composition of Ship Crews  GAO-17-413  Washington, D C : May 18, 2017  Military Readiness: DOD’s Readiness Rebuilding Efforts May Be at Risk without a Comprehensive Plan  GAO-16-841  Washington, D C : September 7, 2016  Military Readiness: DOD’s Readiness Rebuilding Efforts May Be at Risk without a Comprehensive Plan  GAO-16-534C  Washington, D C : June 30, 2016  (SECRET) Defense Inventory: Further Analysis and Enhanced Metrics Could Improve Service Supply and Depot Operations  GAO-16-450  Washington, D C : June 9, 2016  Navy and Marine Corps: Services Face Challenges to Rebuilding Readiness  GAO-16-481RC  Washington, D C : May 25, 2016  (SECRET//NOFORN) Military Readiness: Progress and Challenges in Implementing the Navy’s Optimized Fleet Response Plan  GAO-16-466R  Washington, D C : May 2, 2016  F-35 Sustainment: DOD Needs a Plan to Address Risks Related to Its Central Logistics System  GAO-16-439  Washington, D C : April 14, 2016  Navy Force Structure: Sustainable Plan and Comprehensive Assessment Needed to Mitigate Long-Term Risks to Ships Assigned to Overseas Homeports  GAO-15-329  Washington, D C : May 29, 2015  This is a work of the U S  government and is not subject to copyright protection in the United States  The published product may be reproduced and distributed in its entirety without further permission from GAO  However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately 


Report 2: The Robert T  Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), as amended, establishes the process for states or tribal entities to request a presidential disaster declaration  The act also generally defines the federal government’s role during the response and recovery after a disaster and establishes the programs and process through which the federal government provides disaster assistance to state, local governments, tribal entities and individuals  In addition to its central role in recommending to the President whether to declare a disaster, FEMA has primary responsibility for coordinating the federal response when a disaster is declared as well as recovery, which typically consists of providing grants to assist state and tribal entities to alleviate the damage resulting from such disasters  Once a disaster is declared, FEMA provides assistance through the IA, Public Assistance, and Hazard Mitigation Assistance programs  For instance, some declarations may provide grants only for IA and others only for Public Assistance  Hazard Mitigation Assistance grants, on the other hand, are available for all declarations if the affected area has a FEMA-approved Hazard Mitigation plan  The process for requesting assistance is the same for the three types of assistance  Under the Stafford Act, states’ governors or tribal chief executives may request federal assistance, if state and tribal resources are overwhelmed after a disaster  As part of the request to the President, a governor or tribal chief executive must affirm that the state or tribe has implemented an emergency plan and that the situation is of such severity and magnitude that effective response is beyond the capabilities of the state or tribal entity, among other things  After a state or tribe submits a request for disaster declaration through FEMA’s regional office, the regional office is to evaluate the request and make a regional recommendation through the RVAR, which is submitted to FEMA headquarters for further review  The FEMA administrator then is to review the state’s or tribe’s request and the RVAR, and recommend to the President whether a disaster declaration is warranted  Figure 1 shows the process for a disaster declaration from the time a disaster occurs until the President approves or denies a declaration request  The IA program provides financial and direct assistance to disaster victims for expenses and needs that cannot be met through other means, such as insurance  The IA comprises five different programs as shown below  When states or tribal entities request disaster declarations, they may request assistance under any or all of the five programs  Likewise, when the President makes a disaster declaration, the declaration may authorize IA which may also include any or all of the five IA programs  1  Individuals and Households Program provides assistance to eligible disaster survivors with necessary expenses and serious needs which they are unable to meet through other means, such as insurance  According to FEMA headquarter officials, direct assistance is provided to individuals to meet housing needs  2  Crisis Counseling Program assists individuals and communities by providing community-based outreach and psycho-educational services  3  Disaster Legal Services provides assistance through an agreement with the Young Lawyers Division of the American Bar Association for free legal help to survivors who are unable to secure legal services adequate to meet their disaster-related needs  4  Disaster Case Management Program involves a partnership between a FEMA disaster case manager and a survivor to develop and carry out a Disaster Recovery Plan  5  Disaster Unemployment Assistance provides unemployment benefits and reemployment services to individuals who have become unemployed as a result of a major disaster and who are not eligible for regular state unemployment insurance  In accordance with its responsibilities under the Stafford Act, FEMA issued a regulation in 1999 that outlines the six factors regional and headquarters officials are to consider when assessing requests for a disaster declaration and when developing a recommendation to the President for a federal disaster declaration  The regulation states that FEMA considers the six factors not only to evaluate the need for IA but also to measure the severity, magnitude, and impact of the disaster  The state or tribe provides information on these factors when submitting its disaster declaration request  The six factors for IA include the following: 1  Concentration of Damages—characterizes the density of the damage in individual communities  The regulation states that highly concentrated damages “generally indicate a greater need for federal assistance than widespread and scattered damages throughout a state ” For example, concentration of damage data includes the numbers of homes destroyed, homes with major or minor damages, and homes affected  2  Trauma—the regulation provides conditions that might cause trauma including large numbers of injuries and deaths, large-scale disruption of normal community functions, and emergency needs such as extended loss of power or water  3  Special Populations—FEMA considers the impact of the disaster on special populations, such as low-income populations, the elderly, or the unemployed  4  Voluntary Agency Assistance—involves the availability and capabilities of voluntary, faith, and community-based organizations, and state and local programs to help meet both the emergency and recovery needs of individuals affected by disasters  5  Insurance Coverage—addresses the level of insurance coverage among those affected by disasters  Because disaster assistance cannot duplicate insurance coverage, as recognized in the regulation, if a disaster occurred where almost all of the damaged dwellings were fully insured for the damage that was sustained, FEMA could conclude that a disaster declaration by the President was not necessary in accordance with this factor  6  Average Amount of Individual Assistance by State—according to the regulation, there is no set threshold for recommending IA  However, it states that the averages, depicted in table 1, may prove useful to states and voluntary agencies as they develop plans and programs to meet the needs of disaster victims  The inference is that these averages generally indicate the amount of damages that could be expected for a state based on its size (small, medium, and large)  The averages contained within the regulation and depicted in table 1 are based on disasters that occurred between July of 1994 and July of 1999  The President declared 57 percent of all IA declaration requests from calendars years 2008 through 2016, with total IA obligations of approximately $8 6 billion  FEMA received 294 IA declaration requests from calendar years 2008 through 2016  Of these, the President declared 168 requests (57 percent), and 51 percent of these declarations were from Regions IV and VI, as shown in table 2  Additionally, of the 126 IA declaration requests denied by the President, Regions X and IX had the highest percentage of denials, at 71 percent (10 out of 14) and 67 percent (12 out of 18), respectively, and Region I had the lowest percentage of denials at 13 percent (2 out of 15), as shown in table 3  See appendix I for the number of IA declarations requested, declared, and denied by states and tribes from each FEMA region for disaster declarations requested from calendar years 2008 through 2016  According to a FEMA headquarters official, when a disaster declaration is denied, FEMA sends a denial letter to states or tribes based on the review of all the information available  The letter generally states that the damage was not of such severity and magnitude as to be beyond the capabilities of the state, affected local governments, and voluntary agencies, and accordingly the supplemental federal assistance is not necessary  Of the emergency management officials we interviewed in 11 states, officials in five states reported that FEMA provided a rationale behind the denial, while officials in three states reported that no rationale was provided  Among the various types of disasters for which IA declaration requests were received, severe storms, flooding, and tornados accounted for the highest number of IA requests, with drought, fishery closure, and contaminated water being the least common, as shown in table 4  FEMA obligated a total of approximately $8 6 billion in IA for disaster declarations made from calendar years 2008 through 2016  These actual obligations were provided to 46 states and they ranged from less than $1 million to more than $1 billion as shown in figure 2  See appendix II for FEMA’s IA actual obligations by state and type of disasters for disaster declarations made from calendars years 2008 through 2016  Additionally, actual obligations for IA declarations made from calendar years 2008 through 2016 varied greatly by FEMA region, as also shown in figure 3  For example, FEMA Region VI had the highest obligations at around $3 3 billion  Region X had the lowest obligations at $24 8 million  As shown in table 5, the amount of obligations for disasters declarations also varied greatly by state  For example, Louisiana had the highest obligations at approximately $2 billion, followed by New York and Texas at about $1 3 billion and $1 1 billion, respectively  The state with the lowest obligations was the U S  Virgin Islands at about $2,100  Six of FEMA’s 10 regional offices reported using all six regulatory factors when evaluating states’ or tribes’ IA declaration requests  Officials from the other 4 regions reported using five of the six factors, with the exception being the average amount of individual assistance by state factor  These officials noted that they do not use this factor because FEMA considers the factor to be outdated or they consider all of the factors holistically  Officials from FEMA’s regional offices also generally reported that the extent to which they consider the six IA regulatory factors equally in all cases varies, depending on the circumstances of the related disaster  Specifically, officials from 7 of the 10 regions stated that they use the regulatory factors on a case-by-case basis as certain factors are more relevant than others based on the disaster  For example, if a tornado hits a rural community and completely destroys all properties within the community with no death or injury, then the regulatory factor for trauma may not be as applicable, while the concentration of damages regulatory factor would have greater relevance  On the other hand, if a tornado hits the center of a town resulting in damages with death and injuries, then the trauma regulatory factor would become more important to consider  Additionally, officials in 3 of the 10 regions reported that in addition to the six regulatory factors, they also take into account institutional knowledge and staff experience when evaluating the regulatory factors  For example, officials in one region stated that their staff have more than 10 years of IA declaration experience, and as such, they are familiar with the extent of the information needed and collect the information accordingly  Based on our analysis of RVARs from July 2012 through December 2016 used to recommend approving or denying IA requests, FEMA regional offices did not consistently obtain and document information on all elements of the IA regulatory factors  As described earlier, FEMA regions are to use the RVAR to document information on the IA factors and to recommend to the FEMA administrator whether a disaster should be declared  According to FEMA headquarters officials, FEMA developed the RVAR template in June 2012 to help ensure consistency across regions when making recommendations to headquarters on IA declaration requests  Officials stated that prior to the template, information on the six factors was mainly provided in narrative format  The new template listed the various elements found within each of the six regulatory factors, guiding the regional offices to provide information based on those elements  For example, instead of providing a general narrative on the trauma factor, the new template listed the elements to be provided under trauma, such as the number of injuries and deaths, as well as information on power outages and disruption of other community functions and services  Also, instead of summarizing the concentration of damages factor, the template allowed regional offices to categorize the damage concentration as low, medium, high, or extreme  Furthermore, the template also provided a uniform format to present quantitative information such as the number of homes destroyed; whether home damages are major or minor; the number of homes affected; and level of home ownership  See appendix III for a sample RVAR template  We analyzed 81 RVARs developed by the 10 FEMA regions from July 2012 through December 2016 and found that regions did not consistently obtain and document information on all elements related to each of the six regulatory factors in their RVARs  As shown in table 6, all 81 RVARs had at least some elements documented but not all for each of the IA regulatory factors  For example, for the IA concentration of damages regulatory factor, the six elements to be addressed include the number of homes destroyed, damaged or affected, damage concentration, and damage to critical facilities  While 44 of the 81 RVARs documented all of the six elements, 37 documented some but not all of the elements  Similarly, for the trauma regulatory factor, the four elements to be addressed include injuries, death, power outages, and disruption of community functions  While 30 of the 81 RVARs documented all of the four elements, 51 documented some but not all of the elements  For the insurance coverage factor, while five RVARs documented all of the elements, 73 RVARs documented some but not all of the elements  Elements under this factor include home ownership, insurance, and flood insurance, when applicable  None of the six regulatory factors were fully documented across all RVARs  See appendix IV for detailed information on the extent to which all of the elements of the six regulatory factors were documented in the RVARs from July 2012 through December 2016  FEMA headquarters officials acknowledged that information related to all the elements for each of the IA regulatory factors were missing from the RVARs  They stated that they had not collected all information on all factors because one factor may have more weight than another based on the specific incident that has occurred  However, they also indicated that they do not fully know and have not evaluated all of the reasons why a region may have omitted information on an element of a factor  FEMA headquarters officials agreed that having complete information on all elements of the regulatory factors in the RVARs would assist in their recommendation process  Standards for Internal Control in the Federal Government suggest that agencies should establish and operate monitoring activities to ensure that internal controls—such as the documentation of all of the elements of the IA regulatory factors FEMA regions considered—are effective, and to take corrective actions as appropriate  Because it is unclear why regions are not completely documenting all elements related to the current six regulatory factors, such an evaluation could help FEMA identify whether any corrective steps are needed  Doing so could help FEMA ensure it is achieving its stated goals in providing consistency in the evaluation process and in the types of factors it considers  Officials we interviewed in 9 of the 10 FEMA regions and state emergency management offices in all 11 states reported the positive relationship they maintain with each other as a strength in the IA declaration process  For example, both FEMA regional officials and state emergency management officials stated that they have a good working relationship and are in regular communication via telephone or in-person meetings with each other  Also, state emergency management officials we spoke to stated that whenever they are in need of assistance, they know they can reach out to FEMA regional officials for assistance  However, FEMA regional and state emergency management officials we spoke to also reported various challenges with the process  These include the subjective nature of the IA regulatory factors given the lack of eligibility thresholds, the lack of transparency in the decision-making process, and difficulty gathering information on IA regulatory factors  Subjective nature of the IA factors and lack of eligibility thresholds  Officials from 9 of 10 FEMA regions stated the subjective nature of the IA program is a challenge; and officials in 6 of the 10 regions also said they found the lack of eligibility thresholds a challenge  An official in one region stated that unlike FEMA’s Public Assistance program, which has minimum thresholds for eligibility, it is unclear when states should apply for IA funds  Under the Public Assistance program, for example, for states or tribes to qualify for assistance, they must demonstrate that they have sustained a minimum of $1 million in damages and the impact of damages must amount to $1 00 per capita in the state  An official in another region explained that although the subjectivity of the IA factors provides flexibility in determining the type of IA program needed, having some quantifiable criteria could help officials explain to states why their requests were denied or approved  Similarly, officials we interviewed in 7 of the 11 states said they found the subjective nature of the factors with no threshold to be a challenge  A state emergency management official in one state said this subjectivity makes it difficult to determine whether or not the state should make an IA request  A state emergency management official in another state reported that the subjectivity can cause the IA declaration process to be inconsistent, and it is not always clear how or why certain declarations were approved and others were not  Further, a state emergency management official in an additional state also pointed to the subjective nature of the factors with no threshold as a reason for not being able to provide a more detailed rationale behind a declaration denial  To illustrate this, table 7 shows how four states requested IA declarations related to the same tornado in 2012 and varied in what they reported across the six IA factors, such as the levels of damages incurred, special populations among their residents, and insurance coverage  Two of these four states—Kentucky and Indiana—received IA declarations and the other two—Ohio and Illinois—were denied  Lack of transparency  Another challenge reported by FEMA regional and state emergency management officials was the lack of transparency in how FEMA evaluates and provides a recommendation to the President on whether a declaration is warranted  For example, officials we interviewed in 4 of 10 regions indicated the lack of transparency as a challenge  A FEMA official in one region stated that the region would like more transparency regarding what FEMA headquarters recommends to the President and whether the President’s decision aligns with FEMA’s recommendation  State emergency management officials we interviewed in 10 of 11 states also reported that lack of transparency with the IA process is a challenge  For example, an emergency management official in one state said it is not clear how or if FEMA considers all of the factors  Also, an emergency management official in another state reported that it was unclear to him why his state’s declaration request was denied while the requests of other states with similar incidents were declared  Difficulty gathering information on IA regulatory factors  Officials in 4 of 10 FEMA regions reported difficulty gathering information, such as income or insurance coverage, as a challenge  An official in one region stated that it is difficult to obtain information related to IA factors from states  For example, the official said that calculating the concentration of damages is difficult absent technical guidance from FEMA headquarters, as the current guidance only accounts for the number of structure damage but not the impact of damage  Further, officials in two FEMA regions stated that states lack a dedicated IA official, making it difficult for state officials, who play multiple roles, to provide the necessary information related to the IA factors in their IA declaration request  Additionally, a state emergency management official in one state also reported that lack of staff resources in her state makes it difficult to verify all the local damage assessments prior to making a declaration request  Pursuant to the Sandy Recovery Improvement Act of 2013, in November 2015, FEMA issued a Notice of Proposed Rulemaking to revise the six current IA regulatory factors to the following proposed factors: state fiscal capacity and resource availability; uninsured home and personal property losses; disaster-impacted population profile; impact to community infrastructure; casualties; and disaster-related unemployment  According to FEMA headquarters officials, the revisions aim to provide more objective criteria, clarify the threshold for eligibility, and speed the declaration  The officials said the proposed rule also seeks to provide additional clarity and guidance for all the established factors  Table 8 shows FEMA’s description of current and proposed IA factors  FEMA received public comments from 14 states in the Federal Register during the comment period for the proposed rule and proposed guidance  The 14 states expressed concern about the proposed factor for state fiscal capacity and resource availability, including the reliability and relevance of data sources such as total taxable resources  These states expressed concern that the data collection necessary to meet the new requirements would fall upon them, adding to the cost burden of completing an IA disaster declaration request  They also explained that the use of total taxable resources and other similar data is not an effective way to assess a state’s current ability to provide resources following a disaster  Also, these states indicated that the data points such as total taxable resources and per capita personal income that would be used to evaluate state fiscal capacity are outdated and inaccurate and would be an inefficient way to evaluate a state’s true fiscal capacity to respond to a disaster  Regarding the other five proposed factors, several states in their comments raised questions about ambiguities in interpreting the factors or the feasibility and cost of gathering related data  For example, in regards to the factor on disaster impacted population, five states expressed concern that the data required for the disaster-impacted population factor would be a cost burden to the state or that the data would be inappropriate for evaluation  Additionally, two states said unemployment related to a disaster incident for the disaster-related unemployment factor would be hard to quantify in the first 30 days following a disaster  They stated that this was especially an issue given that states work to submit an IA disaster declaration request as soon as possible following a disaster  According to the Office of Management and Budget’s Office of Information and Regulatory Affairs website, the projected date for finalization of the proposed rule is September 2018; however, as of April 2018, FEMA officials stated that they were not certain whether that timeframe would be met  Until the proposed rule is finalized, we will not know the extent to which the various challenges FEMA regions and state officials raised in our interviews and in comments on the proposed rule will be addressed  FEMA has obligated over $8 6 billion nationwide in IA from calendar years 2008 through 2016, highlighting the importance of FEMA’s evaluation of states’ and tribes’ IA declaration requests  FEMA’s regional offices evaluate the request and make a regional recommendation through the Regional Administrator’s Validation and Recommendation, which documents information on all relevant IA regulatory factors  FEMA has developed the Regional Administrator’s Validation and Recommendation to ensure regions consistently obtain and document the information needed by FEMA to make a disaster declaration recommendation to the President based on the IA regulatory factors  However, FEMA’s regional offices do not consistently obtain and document information on all elements of the current IA regulatory factors  Because it is unclear why regions are not always documenting all of the elements related to these factors, evaluating the reasons why could help FEMA identify if any corrective steps are needed  Doing so could also help FEMA ensure it is meeting its stated goals in providing consistency in the evaluation process and in the types of factors it considers  We recommend that the Administrator of FEMA evaluate why regions are not completing the Regional Administrator’s Validation and Recommendations for each element of the current IA regulatory factors and take corrective steps, if necessary  We provided a draft of this report to DHS for its review and comment  DHS provided written comments, which are summarized below and reproduced in full in appendix V  DHS concurred with the recommendation and described planned actions to address it  In addition, DHS provided written technical comments, which we incorporated into the report as appropriate  DHS concurred with our recommendation that FEMA evaluate why regions are not completing the Regional Administrator’s Validation and Recommendations for each element of the IA regulatory factors and take corrective steps, if necessary  DHS stated that a FEMA working group consisting of headquarters stakeholders will draft survey questions for FEMA region officials to identify the common reasons why an element of an IA regulatory factor may not be addressed within a RVAR  According to DHS, the working group will also analyze, assess, and present the findings of the survey responses to FEMA senior leadership, and if needed, FEMA will develop and send a memorandum to the regions with additional guidance regarding the appropriate preparation of RVARs  DHS stated that the estimated completion date is in the fall of 2018  These actions, if implemented effectively, should address the intent of our recommendation  We will send copies of this report to the Secretary of Homeland Security, the FEMA Administrator, and the appropriate congressional committees  If you or your staff have any questions about this report, please contact me at (404) 679-1875 or curriec@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  Key contributors to this report are listed in appendix VI  Table 9 provides the total number of Individual Assistance declaration requests made, declared, and denied, by region, state, and tribe for disaster declarations requested from calendar years 2008 through 2016  Table 10 provides Federal Emergency Management Agency’s (FEMA) Individual Assistance (IA) actual obligations for declarations made from calendar years 2008 through 2016 by state and type of disaster  As part of the Federal Emergency Management Agency’s (FEMA) declaration process, FEMA’s regional offices are to evaluate states’ or tribes’ declaration requests, including the IA declaration request, and make a recommendation called the Regional Administrator’s Validation and Recommendation (RVAR) and submit the RVAR to FEMA headquarters  In June 2012, FEMA headquarters issued a template for FEMA regional offices to use in developing the RVAR as identified in figure 3  Tables 11 through 16 provide information on each element of the 6 Individual Assistance (IA) regulatory factors documented in the Regional Administrator’s Validation and Recommendation (RVAR) from July 2012 through December 2016 by the Federal Emergency Management Agency region  In addition to the contact named above, Aditi Archer (Assistant Director), Su Jin Yon (Analyst-In-Charge), Hiwotte Amare, Eric Hauswirth, Susan Hsu, Jun S  (Joyce) Kang, Christopher Keisling, Heidi Nielson, Hadley Nobles, Anne Rhodes-Kline, and Jerome (Jerry) Sandau made significant contributions to this report 

ground_truth: FEMA's IA program provides help to individuals to meet their immediate needs after a disaster, such as shelter and medical expenses. When a state, U.S. territory, or tribe requests IA assistance through a federal disaster declaration, FEMA evaluates the request against regulatory factors, such as concentration of damages, and provides a recommendation to the President, who makes a final declaration decision. GAO was asked to review FEMA's IA declaration process. This report examines (1) the number of IA declaration requests received, declared, and denied, and IA actual obligations from calendar years 2008 through 2016, (2) the extent to which FEMA accounts for the regulatory factors when evaluating IA requests, and (3) any challenges FEMA regions and select states reported on the declaration process and factors and any FEMA actions to revise them. GAO reviewed FEMA's policies, IA declaration requests and obligation data, and FEMA's RVARs from July 2012 through December 2016, the most recent years for which data were available. GAO also reviewed proposed rulemaking comments and interviewed FEMA officials from all 10 regions and 11 state emergency management offices selected based on declaration requests and other factors. From calendar years 2008 through 2016, the Department of Homeland Security's (DHS) Federal Emergency and Management Agency (FEMA) received 294 Individual Assistance (IA) declaration requests from states, U.S. territories, and tribes to help individuals meet their immediate needs after a disaster. Of these, the President declared 168 and denied 126 requests. Across the various types of IA declaration requests, severe storms (190) were the most common disaster type and drought (1) was among the least common. FEMA obligated about $8.6 billion in IA for disaster declarations during this period. GAO found that FEMA regions did not consistently obtain and document information on all elements of established IA regulatory factors when making IA recommendations to headquarters. Following a declaration request, a FEMA region is to prepare a Regional Administrator's Validation and Recommendation (RVAR)—a document designed to include data on each of the six IA regulatory factors for each declaration request as well as the regional administrator's recommendation. GAO reviewed all 81 RVARs from July 2012—the date FEMA began using the new RVAR template—through December 2016. GAO found that regions did not consistently obtain and document information for the elements required under the six regulatory factors (see table). For example, only 44 of the 81 RVARs documented all elements under the concentration of damage factor. By evaluating why regions are not completing all elements of each current IA regulatory factor, FEMA could identify whether any corrective steps are needed. Officials from the 10 FEMA regions and 11 states GAO interviewed, reported positive relationships with each other, but also cited various challenges with the IA declaration process and regulatory factors. For example, these officials told GAO that there are no established minimum thresholds for IA, making final determinations more subjective and the rationale behind denials unclear. However, as required by the Sandy Recovery Improvement Act of 2013, FEMA has taken steps to revise the IA factors by issuing a notice of proposed rulemaking. According to FEMA, the proposed rule aims to provide more objective criteria, clarify the threshold for eligibility, and speed up the IA declaration process. As of April 2018, the proposed rule was still under consideration. According to FEMA officials, they plan to finalize the rule in late 2018; therefore, it is too early to know the extent to which it will address these challenges. GAO recommends that FEMA evaluate why regions are not completing the RVARs for each element of the current IA regulatory factors and take corrective steps, if necessary. DHS concurred with the recommendation.