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



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

Report 1: The defense lab enterprise consists of 63 labs, warfare centers, and engineering centers across the Departments of the Army, Navy, and Air Force, as shown in Figure 1 below  About 50,000 federally employed scientists and engineers work at these defense labs to support warfighter needs and develop transformative capabilities  Defense labs are managed and operated within the military service chain of command  DOD budgets for technology and product development activities under its research, development, test, and evaluation budget, which DOD groups into seven budget activity categories for its annual budget estimates  Air Force and Army labs rely on appropriated funding provided from the service—often referred to as mission funding—or from customers (or some combination thereof)  Customers, such as program offices, provide funding to defense labs for technology development activities and related research  The Air Force and Army funding structure is in contrast to Navy research and development activities, which operate under the Navy Working Capital Fund—a revolving fund that finances Department of the Navy activities on a reimbursable basis  Under this funding model, the Navy employs a Capital Investment Program to obtain capital assets, including minor military construction projects for labs  The program provides the framework for planning, coordinating, and controlling Navy working capital funds and expenditures to obtain capital assets  Figure 2 illustrates the varying funding models used by the military service labs  In addition to its labs, DOD sponsors other entities to provide for its technology development needs  Specifically, these include: FFRDCs are operated by universities, other not-for-profit or nonprofit organizations, or private firms under long-term contracts and provide special research and development services that generally cannot be readily satisfied by government personnel or private contractors  For example, the Massachusetts Institute of Technology Lincoln Laboratory develops key radar and electronic warfare technologies for integrated air and missile defense systems  In addition, the Software Engineering Institute operated by Carnegie Mellon University provides cybersecurity solutions for defense entities  While DOD sponsors 10 FFRDCs in total, it designates 3 FFRDCs as research and development labs, which maintain long-term competencies in key technology areas  In addition to these, DOD sponsors 2 systems engineering and integration FFRDCs and 5 studies and analysis FFRDCs  UARCs provide specialized research and development services similar to FFRDCs and also operate under long-term contracts  However, unlike FFRDCs, DOD requires that UARCs be affiliated with a university  Generally, UARCs may not compete against industry in response to a competitive Request for Proposals for development or production that involves engineering expertise  DOD currently sponsors 13 UARCs  Key DOD offices provide oversight to the defense labs: The Under Secretary of Defense for Research and Engineering (USD(R&E))—the principal advisor to the Secretary of Defense for research, engineering, and technology development activities and programs—serves as DOD’s chief technology officer  The powers and duties of this office include establishing policies and providing oversight for DOD’s research, engineering, and technology development activities  The Defense Laboratories Office—within the Office of the USD(R&E)—supports DOD’s research and engineering mission by helping to ensure comprehensive department-level insight into the activities and capabilities of the defense labs  This office carries out a range of core functions related to the defense labs, including analysis of capabilities, alignment of activities, and advocacy  Congress has granted authorities that address hiring, infrastructure, and technology transition challenges to defense labs since 1995  These authorities provide defense lab directors with certain flexibilities within the established legal framework to manage their operations  While Congress has provided a number of authorities, in this report we focus on four authorities that our prior work on best practices in science and technology management and expedited lab hiring has shown are, or have the potential to be, the most crucial for supporting innovation within DOD labs  Laboratory Initiated Research Authority  This authority provides lab directors with the means to fund some of the research projects that the lab will pursue  The authority provided in Section 219 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, as implemented, provides lab directors with a means to fund projects they consider to be a priority in four allowable categories: (1) basic and applied research, (2) technology transition, (3) workforce development, and (4) revitalization, recapitalization, or repair or minor construction of lab infrastructure  These projects include those not specifically tied to defined requirements, outside of the normal 2-year budget planning process  The authority directs the Secretary of Defense to establish mechanisms under which lab directors may use an amount of funds equal to not less than 2 percent and not more than 4 percent of all funds available to the defense lab for projects under the four allowable categories  Further, lab directors are permitted to obtain additional funding by charging customers a fixed percentage fee that may not exceed 4 percent of costs  Direct Hire Authorities  These authorities provide lab directors with a streamlined and accelerated hiring process  Congress has enacted four types of direct hire authorities since 2008, which help labs compete with private industry and academia for high-quality scientific, engineering, and technical talent  Specific types of direct hire authorities include hiring: (1) candidates with advanced degrees; (2) candidates with bachelor’s degrees; (3) veterans; and (4) students currently enrolled in graduate or undergraduate science, technology, engineering, and mathematics (STEM) programs , Laboratory Enhancement Pilot Program  This authority provides methods for effective lab management operations  Section 233 of the National Defense Authorization Act for Fiscal Year 2017 established a pilot program for lab directors to propose alternative and innovative methods that might lead to more effectively managing labs, and authorized lab directors to waive any regulation, restriction, requirement, guidance, policy, procedure, or departmental instruction that would affect implementation of these methods, unless such implementation would be prohibited by a provision of an existing statute or common law  Micro-purchase Authority  This authority facilitates the purchasing process for labs  The FAR states a preference for government agencies to purchase and pay for micro-purchases of supplies or services using the government-wide commercial purchase card up to and at the micro-purchase threshold, but micro-purchases may be conducted using any of the simplified acquisition methods  This facilitates the ability of lab officials to quickly and easily acquire needed items for their activities and reduce the administrative costs associated with such small purchases  While the FAR micro-purchase was generally $3,500 during our review, Congress increased it to $10,000 for activities of the science and technology reinvention labs in Section 217 of the National Defense Authorization Act for Fiscal Year 2017  As we found in June 2018, the federal government spends approximately $137 billion annually government-wide on research and development (R&D) to help further agencies’ missions, including at federal labs  From fiscal years 2015 to 2017, DOD, Energy, and NASA represented three of the top four federal agencies with the highest annual federal R&D spending, accounting for about 66 percent of total federal R&D spending on average, as shown in Figure 3  While the labs primarily support the agencies that directly fund them, DOD, Energy, and NASA research entities also collaborate extensively to support activities of shared interest  For example, DOD and NASA research centers have collaborated to develop hypersonic vehicle capabilities  Further, Energy’s national labs help provide critical national security capabilities for DOD and support NASA’s deep space mission radioisotope requirements  In 2017, Energy reported performing about $2 6 billion of work per year from fiscal years 2011 through 2015 for other federal agencies and other customers, including DOD  Most defense labs have used the selected authorities since 2008, but their use has sometimes been limited for a variety of reasons  According to lab directors, this is because of DOD legal and policy restrictions and stakeholder concerns  For example: Use of the laboratory initiated research authority was limited by DOD’s military construction funding and financial management policies  Use of the direct hire authority was limited, in part, by personnel- related delays, security clearance challenges, and military hiring restrictions  Use of the laboratory enhancement pilot program was limited by stakeholder uncertainty about how to use this authority effectively  Use of the increased micro-purchase authority was limited by stakeholder concerns about the authority’s potential effect on small businesses  We found that most defense labs have used the laboratory initiated research authority  Twenty-three of 31 of respondents to our survey— about 74 percent—reported obligating funds under this authority  However, we found that most labs are not using the full 4 percent of all funds available to each lab, or charging customers the full fixed percentage fee of 4 percent of costs, as allowed by law  Specifically, we found that, as of September 2018: Navy labs reported charging customers a percentage fee of about 2 percent of costs as of fiscal year 2018  Prior to this, Navy labs only charged a 1 percent fixed fee on these costs  Because Navy labs are working capital funded organizations, they can use payments from customers for goods delivered or services performed  Army labs reported using between 2 and 3 percent of all funds available to the lab for projects under the four allowable categories and charging customers a fixed fee of between zero and 3 percent of costs to fund such activities  Only the Air Force Research Laboratory reported using the full 4 percent of all funds available to the lab  According to agency officials, the lab is using 3 percent of all funds available to the lab and is allowing individual technology directorates the option to use the additional 1 percent of funds available  In fiscal year 2018, three of the lab’s nine technology directorates chose to use this additional 1 percent  However, the lab has not charged customers a fixed percentage fee on their costs at all  As figure 4 shows, in fiscal year 2017, the aggregate fixed percentage fee charged by labs in each of the military departments totaled under the full 4 percent allowed by law for each funding source  Decisions to charge lower percentages are decisions to forego additional potential funding, although agencies have various reasons why this can happen, as we will discuss later  In total, DOD reported that this authority provided almost $300 million to labs in fiscal year 2017 and funded more than 1,750 projects across the four allowable categories, as Figure 5 illustrates  We previously found, in June 2017, that the laboratory initiated research authority provides defense lab directors with limited flexibility to initiate science and technology projects  These projects include those that are not road mapped or tied to defined requirements outside of the normal 2- year budget planning process, and are focused on both near- and long- term needs  For this review, defense lab officials we interviewed stated that the laboratory initiated research authority enables their scientists and researchers to pursue projects not necessarily tied to requirements and provides necessary funds for workforce development and lab infrastructure projects  Further, as shown in Figure 6, lab directors we surveyed generally view the authority as both fostering innovation and increasing efficiency across the four allowable categories on which funds can be used  In accordance with the one of the statutory purposes for the use of the funds, lab directors have developed new, innovative technologies using this authority  For example, DOD reported that: In fiscal year 2017, the Naval Surface Warfare Center, Crane Division, developed and fielded a solution to an urgent requirement for defeating small unmanned aerial vehicles that attack Navy assets or surveil naval activities  The center delivered this technology to the warfighter in May 2017 just 7 weeks after the Navy submitted the requirement  The Army Research Laboratory used the authority to fund a project that eventually developed a material that could increase the speed and lower the power needs of future generations of computer chips, thereby supporting Army networks  The Navy invested more than $700 thousand in laboratory initiated research authority funds to commission a Ballast Water Research Lab at Naval Surface Warfare Center, Carderock Division  Through the use of this new facility, engineers will be able to study ways to treat ballast water to prevent introduction of non- native aquatic species into a new environment that can be disastrous for the marine life that already inhabit that environment, and ensure that the Navy is able to meet various port regulations around the world for its ships  The Air Force Research Laboratory invested funds in fiscal year 2017 to renovate an existing facility to provide high performance computing capability to aid the rapid development of “game-changing” technologies and weapon systems  Officials at the Army’s Space and Missile Defense Command Technical Center noted they used the laboratory initiated research authority for the first time in fiscal year 2018 because the current executive director, who assumed the position in 2017, prioritized implementing this authority  Most of the Center’s planned investments are focused on workforce development and laboratory infrastructure projects; officials cited a high energy laser technology lab as one of the projects being supported by the revitalization, recapitalization, or minor military construction portion of this authority  Although the majority of defense labs reported using the laboratory initiated research authority, interviews we conducted throughout our review, along with other DOD reports, identified certain obstacles that have, at times, impeded wider usage  DOD-wide military construction funding restrictions  DOD restrictions limit the amount of laboratory initiated research authority funds that labs can spend on lab infrastructure  DOD’s limit is $6 million for the revitalization and recapitalization projects that can be funded under the laboratory initiated research authority  Lab officials stated that this amount is often insufficient to construct advanced lab facilities  Air Force Research Laboratory officials indicated that it is nearly impossible to construct lab facilities for less than $6 million  Officials at the Army’s Aviation and Missile Research, Development and Engineering Center echoed this sentiment and noted that they have primarily used funds to renovate existing buildings rather than fund new lab facility construction  In January 2017, the Defense Science Board identified lab infrastructure challenges, including that the average age of research and development facilities was nearly 50 years  Further, the Board reported that the labs are usually not successful in competing against broader service needs for military construction funds  Air Force does not charge customers a fixed percentage fee of costs  The Air Force Research Laboratory reported that it is not charging customers the allowable fixed percentage fee of costs to fund science and technology activities because it does not have a mechanism in place to do so  Air Force Research Laboratory officials estimated the lab would collect approximately $3 million a year if the lab charged customer activities the maximum allowable fee (4 percent)  Air Force financial management officials stated that the service’s accounting system does not currently have an automated capability to transfer the allowable percentage fee of costs to a central account at the Air Force Research Laboratory  This lack of capability, officials noted, creates a significant administrative burden for charging these fees  The officials stated that they have not yet estimated the cost to add an automated capability  Although it is possible for the Air Force Research Laboratory to charge customer work orders manually—outside of the Air Force’s accounting system—officials with the Office of the Assistant Secretary of the Air Force for Financial Management and Comptroller perceive that the resources (time and people) required to manage such a process would be cost prohibitive  However, according to these officials, the Air Force has not assessed the costs required to improve the accounting system to do so, nor has it identified the potential benefits any improvements would provide  Federal internal control standards state that changes in condition affecting an entity and its environment often require changes to the entity’s internal control system, as existing controls may not be effective for meeting objectives (or addressing risks) under changed conditions  Further, these standards state that any internal control deficiencies require further evaluation and remediation by management  By not assessing the potential costs and benefits related to the options for collecting these allowable fees, the Air Force could be missing out on a potential source of funding to support its needs  DOD lacks clear guidance on how the Navy should use the initiated research authority for some infrastructure investments within the Capital Investment Program  In our review of DOD documentation, we found that, among the military departments, Navy labs funded recapitalization and revitalization projects using the laboratory initiated research authority the least  As recently as early 2017, a DOD-commissioned study found that defense labs face substantial infrastructure deficiencies that it has not yet identified funding to address  In fiscal year 2017, Navy labs invested $7 3 million in lab recapitalization projects, compared to $32 9 million and $53 7 million at the Air Force and Army, respectively  Navy lab officials told us that their ability to fund lab recapitalization and revitalization projects using funds available under the laboratory initiated research authority is limited because they have not been provided with clear guidance as to whether and how to use the laboratory initiated research authority within the Capital Investment Program of the Navy Working Capital Fund  Some Navy lab officials stated that they have found ways to use the initiated research authority for certain infrastructure investments  These officials stated that they used authority outside of the Capital Investment Program of the Navy Working Capital Fund, for instance, for projects below applicable thresholds because using the authority within the Program creates a bureaucratic and financial burden for them  For example, officials at two separate warfare centers—Naval Surface Warfare Center, Crane Division, and the Naval Air Warfare Center, Aircraft Division, noted that they did not expend funds in either fiscal year 2016 or fiscal year 2017 for recapitalization and revitalization projects  Both cited the Capital Investment Program as a significant barrier to their desired use of the laboratory initiated research authority  Officials from the Office of Budget, within the Office of the Assistant Secretary of the Navy for Financial Management and Comptroller agreed that, to date, clarifying guidance on the use of the laboratory initiated research authority within the Capital Investment Program has not been issued, effectively limiting the extent to which the labs can use it for infrastructure needs  According to these officials, the Office of the Secretary of Defense (OSD) Comptroller—in coordination with the Office of Financial Policy and Systems within the Office of the Assistant Secretary of the Navy for Financial Management and Comptroller—is responsible for developing the clarifying guidance their office has sought  This persistent lack of guidance on whether or how Navy labs should use the laboratory initiated research authority within the context of the Capital Investment Program presents an opportunity cost  Namely, the Navy’s labs have missed out on, and continue to miss, opportunities to invest in needed improvements to its aging lab infrastructure  The Army requires its laboratories to apply similar percentages to what is refers to as “Army direct appropriations” and “customer funds ” The Army requires that the percentage fee applied to direct appropriations not vary from the percentage fee applied to customer funds by more than 1 percent  The Army implemented this policy to maximize the laboratory initiated research authority’s effect on its 17 laboratories  However, the Office of the USD(R&E) reported in March 2018 that the policy was having a significant limiting effect on the breadth and scope of activities executed under this authority  Similarly, we found that the policy may, in practice, create a disincentive for Army lab directors to use the authority  In their responses to our survey, Army lab directors, representing key capability areas, acknowledged their concern about the percentage fee they assessed on customer funds affecting their ability to increase or maintain their customer bases  Further, some Army lab directors reported assessing a lower percentage fee on customer funds than allowed, which could help retain customers that might otherwise be driven away with higher assessed fees to carry out activities  As a result, these labs generally are setting a lower percentage fee on their directly appropriated funds, thereby lowering the overall laboratory initiated research funding available to them  Nonetheless, the Army has not assessed its policy to determine whether changes are needed to eliminate these disincentives  Continuing to operate without such an assessment could result in Army labs using the laboratory initiated research authority to fund fewer self-initiated projects—with the downstream effect that fewer new technologies for warfighters are available  The Navy applies a consistent fixed percentage fee of costs across its labs  Within the Navy, senior leadership has set the fixed percentage fee of costs the labs charge on customer funds at 2 percent  A senior Navy science and technology official stated that Navy leadership set a uniform fixed percentage fee to charge to customer activities across the Navy lab enterprise, in part, to ensure the labs were not inadvertently competing against one another for customer funds  For example, without a uniform rate, a Navy warfare center could offer a lower fee to entice a customer to use it rather than another center  The use of a fixed percentage fee facilitates program offices selecting warfare centers on the basis of best available match in capabilities  On the other hand, the Navy’s fixed 2 percentage fee of costs does limit—by half, as compared to the maximum 4 percent allowable—the amount of fees that Navy labs can collect  Consequently, several Navy lab directors told us that they would like to have the ability to increase the fixed percentage fee of costs above the Navy’s 2 percent to provide their labs with additional resources they said they need for innovation-related investments  Among the lab directors that responded to our survey, 30 of 31 replied that their lab had used at least one of the four types of direct hire authorities previously discussed since fiscal year 2014  Officials view direct hire authority as allowing the labs to compete with private industry for qualified applicants  Lab directors reported they generally believe that each type of direct hire is extremely or very useful for fostering innovation and increasing efficiency, as shown in Figure 7  Selected Officials’ Testimony on the Value of Direct Hire Authority: The U S  Army Engineer Research and Development Center “was able to meet this important goal [of annually hiring more than 160 new researchers] in large part because of its direct hiring authorities, which save time, effort, and costs, and allow the organization to more effectively hire the best and brightest minds available ” – Dr  Jeffrey P  Holland, Past Director, U S  Army Engineer Research and Development Center, in testimony before the Senate Committee on Armed Services (Emerging Threats and Capabilities Subcommittee), May 3, 2017  “The Air Force’s ability to recruit, retain, and develop the STEM workforce is vital toward building the future Air Force; Congress has been greatly supportive of these efforts…the addition of direct hire for candidates has been extremely useful in hiring qualified scientists and engineers in less than half the time of traditional hiring methods ” – Jeffrey Stanley, Air Force Deputy Assistant Secretary— Science, Technology and Engineering in testimony before the House Committee on Armed Services (Emerging Threats and Capabilities Subcommittee), March 14, 2018  Although participation in the laboratory enhancement pilot program is open to the DOD labs—and 19 of the 31 lab directors, or 61 percent, that responded to our survey reported they were participating—to date, only the Navy has formally established a pilot program for its labs  The Army and Air Force have not yet used this relatively new authority  A senior Navy science and technology official told us the Navy took important steps to facilitate the implementation of that service’s pilot program  According to the Navy official: The Office of the Deputy Assistant Secretary of the Navy for Research, Development, Test and Evaluation led the effort across the Navy labs, compiling—from each lab’s submission—a single list of proposals to forward to Navy leadership that would apply to all participating Navy labs  The Navy pursued a three-phased approach with its pilot program, with Phase 1 primarily focused on contracting and acquisition policy- related matters  Senior Navy research and development officials perceived these matters as being the easiest from which to obtain buy-in from Navy policy officials and attorneys, as well as Navy leadership  Phase 2 will include proposals related to Information Technology systems for research and development networks, while Phase 3 will most likely address personnel issues  Navy research and development officials deferred proposals— including information technology network enhancements—that might require extensive discussions with policy officials and attorneys stakeholders across the Navy  These proposals were pushed back to allow time for those stakeholders to see how the pilot program was being implemented and executed by the labs  None of the Army and Air Force labs has yet established a laboratory enhancement pilot program  Consistent with Army policy, the Medical Research and Materiel Command and the Space and Missile Defense Command Technical Center submitted proposals; however, they have yet to establish a pilot program  The Army’s Research, Development and Engineering Command, with input from its subordinate labs and engineering centers, developed a list of lab enhancement proposals but, as of September 2018, had yet to formally submit these final proposals to Army leadership for approval  These include initiatives in business operations, contracting, finance, information technology, and personnel management  A senior Army science and technology acknowledged that organizations across the military department have concerns about providing the labs with too much autonomy to use this new authority  Air Force Research Laboratory officials said they previously submitted a list of approximately 30 proposals to the Defense Laboratories Office in September 2017, but ultimately pulled back those requests because of stakeholder concerns within the Air Force  Specifically, officials with the Office of the Deputy Assistant Secretary of the Air Force for Science, Technology, and Engineering stated that the Air Force Materiel Command, to which the lab is a subordinate organization, had not seen the proposals before they were submitted  In addition, these officials identified concerns about how various stakeholders throughout the Air Force—such as those from financial management and personnel—would react to these proposals  These proposals could potentially sidestep the stakeholders’ oversight function of related lab activities  A senior Air Force Research Laboratory official stated that the lab re-submitted its proposals to the Air Force Materiel Command and that Air Force leadership was still reviewing them at the time of this report  Twenty-six of 31 labs directors—84 percent—reported having used the $10,000 micro-purchase threshold authority granted by Congress in 2016  However, we found that contracting and small business management officials’ concerns with this authority have created implementation challenges at some defense labs  For instance, a senior Navy official indicated that multiple stakeholders from across the Navy—including its Office of Small Business Programs—raised concerns about the authority’s potential impact on small businesses as micro-purchasing allows defense labs to bypass small business set asides  Several labs reported similar stakeholder concerns that prevented implementation of the micro-purchase threshold increase  At the same time, however, lab officials we interviewed expressed the view that the increased threshold will be beneficial, consistent with their opinions about the laboratory enhancement pilot program  For example, officials at the Naval Research Laboratory stated that increasing the threshold to $10,000 allows their scientists and engineers to directly purchase necessary equipment and materials through simplified procedures  They identified examples of projects that had been delayed by as much as several months because scientists and engineers used other than simplified acquisition procedures to purchase a relatively inexpensive piece of equipment, such as a specialized microscope, because the cost was above the previous threshold of $3,500  Similarly, the Army’s Armament Research, Development and Engineering Center reported that the micro-purchase threshold increase enables the lab to use simplified acquisition procedures for more items  As a result, they noted that the new authority increases efficiency by reducing contracting time and cost for those additional items  The Navy’s Space and Naval Warfare Systems Center Atlantic similarly reported that requirements, which were previously procured using other than simplified acquisition procedures, took up to 60 to 90 days to procure, while it took as little as 3 to 4 days under this new authority, which enabled its scientists and engineers to purchase materials needed for critical, time sensitive projects  However, lab officials acknowledged that the $10,000 micro-purchase threshold authority—like the laboratory enhancement pilot program—is too new to fully understand how it will increase efficiency and foster innovation over the long term  DOD sponsors several research centers, which are governed through noncompetitive agreements, including contracts  These centers provide the department with access to scientific experts employed by universities and other non-profit organizations  Scientists employed by these external to DOD research centers—specifically, three lab FFRDCs and 13 UARCs—execute DOD-funded science and technology development projects in emerging technical areas  DOD staff oversee these centers using routine oversight of funded research tasks and comprehensive reviews, which help DOD determine whether the centers’ funding should continue  DOD and research center officials told us that their ability to authorize work at the FFRDCs that DOD sponsors is limited by legislative restrictions on the staffing levels at these centers, as well as by infrastructure modernization challenges they face  DOD sponsors three research and development FFRDC labs that were established under noncompetitive procedures  Two of the three lab FFRDCs are operated by universities and one is operated by a nonprofit company  DOD also has contracts with 13 UARCs that fulfill a similar scientific role as the lab FFRDCs, while also differing from them in other respects  These differences are described in more detail in table 1  DOD’s contractor-operated research centers received about $1 3 billion annually in DOD funding in fiscal year 2016 and fiscal year 2017, according to DOD data  The two largest research and development FFRDCs, the Lincoln Laboratory and the Software Engineering Institute, received about 67 percent of total research center funding from DOD in 2017  UARCs received an average of $27 million in DOD funding, which was a 15 percent decrease from 2016  Research centers may also receive work and funding from other federal departments and private companies after obtaining DOD sponsor approval  Appendix II provides an overview of DOD FFRDC and UARC funding in fiscal years 2016 and 2017  DOD Sponsorship and Contract Awards: We reported in 2014 that FFRDCs in the federal government are defined through the sponsoring agreement between the agency and the contractor retained to operate the FFRDC  A written agreement of sponsorship between the government and the FFRDC must be prepared when the FFRDC is established, which may be included in a contract between the government and the FFRDC, or in another legal instrument under which an FFRDC accomplishes effort, or it may be in a separate written agreement  Historically, DOD sponsors retain contractors for many years or decades as FFRDC operators  We found that research centers undertake DOD-sponsored projects and, in some limited instances, scientific projects initiated by centers that are overseen by DOD staff  Individual sponsors enter into noncompetitive contracts with FFRDCs and UARCs  DOD uses noncompetitive contracts to establish or maintain an essential engineering, research, or development capability to be provided by an educational or other nonprofit institution or a federally funded research and development center  Scientific Project Funding: We found that project sponsors provide funding to existing contracts  For example, the government issues orders for requirements under Lincoln Laboratory’s indefinite delivery indefinite quantity base contract as funding sponsors approve new projects  Individual project sponsors, along with the primary sponsor, oversee how project funds are spent by the centers  Project sponsors decide whether they will continue to work with these entities based on perceived performance success  This effectively provides an incentive for FFRDCs and UARCS to perform successfully  This work and review cycle is described in Figure 9 below  FFRDCs and UARCs also partner with DOD government-operated labs to plan and execute technology development projects  For example, according to Navy officials, Naval Surface Warfare Center, Carderock Division collaborated with Navy-sponsored UARCs, such as Penn State’s Applied Research Laboratory, to help develop Navy submarine propeller and propulsion designs  Self-initiated Projects: Research center officials said that DOD provides some research centers with limited funds to self-initiate innovative projects  This funding helps the centers ensure that development projects are not limited to just satisfying near-term DOD requirements  Instead, future generations of DOD technologies can be funded  For example, officials at Johns Hopkins University Applied Physics Laboratory proactively conducted work on advanced naval defense technologies in response to similar technology development in adversary countries  Although Navy sponsors did not fund this initial work, they subsequently provided funding in this area after Hopkins’ research identified a risk reduction strategy for the Navy, according to the Johns Hopkins officials  This allowed the UARC to move relatively quickly on a new science and technology project idea  DOD uses 13 UARCs and three lab FFRDCs to obtain direct access to scientific expertise in emerging technical areas, supplementing research conducted at DOD’s government-owned and operated labs  These research centers provide DOD with additional scientific capabilities and the ability to expand quickly into new technical fields  Hiring Scientific Personnel: Although FFRDCs are largely federally funded, they are generally operated, managed, and administered by either a university or consortium of universities, other not-for-profit or nonprofit organization, or an industrial firm, as an autonomous organization or as an identifiable separate operating unit of a parent organization  The contractor operating the FFRDC exercises primary control over its FFRDC’s business concerns, such as personnel policies and compensation  DOD-funded research centers have flexibility in hiring scientists that leverage a parent institution’s expertise in emerging scientific fields  For example, leadership officials at the Army Institute for Soldier Nanotechnologies UARC at MIT and the Software Engineering Institute FFRDC at Carnegie-Melon University noted that projects they have conducted for DOD have benefitted from university experts in fields such as dark matter physics and artificial intelligence  Personnel Compensation: Research center officials we spoke with noted that their workforce policies permit them to flexibly hire, fire, and compensate staff as needed  Although employee salaries are established separately from the government schedule, they are approved by the government  Further, officials noted that university centers typically offer salaries in line with the labor market, but do not attempt to compete on a salary basis with relatively high, unaffordable private sector company salaries  Instead, they compete on the basis of other factors, such as offering scientists the opportunity to work for a prestigious university conducting science and technology research  Research Center Infrastructure: As with personnel matters, research centers have discretion to manage infrastructure in accordance with the policies and procedures of their parent institutions  While one center, Lincoln Laboratory, is located on government property, others primarily reside on property owned or leased by their parent institutions  According to agency officials, DOD contributes funding for the use and repair of these facilities through their contracts with research centers  Officials noted that Lincoln Laboratory uses military construction funding to pay for new buildings as it is located on government property  Trusted Advisor Role: FFRDCs and UARCs function as trusted advisors for the government and operate in the public interest with objectivity and independence  FFRDCs are independent, private-sector, non-profit organization units required to be free from personal or organizational conflicts of interest, as the FFRDCs answer to the government customer  As a result, DOD’s lab FFRDCs perform tasks that are closely associated with the performance of inherently governmental functions and have access to sensitive and proprietary data  Research center officials noted challenges limiting their work providing scientific expertise to DOD  FFRDCs are also limited in executing infrastructure investments  Limitation on Available Work Hours: DOD FFRDCs are limited by an annual ceiling set by Congress on the amount of staff years of technical effort (STE) that may be funded for defense FFRDCs  We previously found in October 2008 these limits were imposed in response to concerns that DOD was inefficiently using its FFRDCs  We found that the STE workload limitation aimed to ensure that FFRDC work was appropriate and limited resources were being used for DOD’s highest priorities  As a result, Software Engineering Institute officials said they decline many DOD programs’ requests for assistance due to the annual work hour limitation  Further, officials at the Office of the Secretary of Defense’s Studies and FFRDC Management Office reported that this limit significantly constrains the use of DOD’s FFRDCs and that DOD customer demand for their services is significantly greater than the annual STE limit  OSD officials indicated that FFRDC related work must be deferred to later years when these limits are reached, since there are no other legally compliant alternatives capable of fulfilling these requirements  Infrastructure: FFRDC officials we interviewed identified infrastructure challenges—including aging facilities and equipment—as hindering their research and development efforts  For example, many buildings at the Massachusetts Institute of Technology (MIT) Lincoln Laboratory are over 60 years old; MIT considers over half of them to be in substandard condition  According to an MIT official, these facilities, located on government property, were not structurally designed for modern research and have relatively poor vibration isolation, resulting in inefficient workarounds or work that could not be performed  Officials from the Defense Laboratories Office noted that the MIT Lincoln Laboratory is unique among DOD’s FFRDCs in that it is operated on government- owned property  A 2013 study, conducted on behalf of the White House Office of Science and Technology Policy, found that lab infrastructure project funding proposals must compete with hospitals, barracks, runways, and roads and, therefore, tend to be lower on the priority list for military construction funding  A 2017 Defense Science Board report and DOD officials we spoke with indicated this continues to be true  While contract research centers have significant flexibility to execute infrastructure work, they are still affected by limited availability of military construction funding  Officials at another center noted that in some instances, DOD sponsors have been unable or slow to provide required secure facilities and equipment within needed time frames  Delays of this nature can affect the research centers’ ability to deliver the technologies or related services needed by DOD  The Department of Energy (Energy) primarily relies on contractor- operated FFRDCs to operate its labs, while the majority of NASA labs and centers are government-operated  Energy’s national labs form the core of the agency’s scientific work and mission  This is in contrast to DOD-funded labs, which constitute a relatively small aspect of DOD’s overall mission  We have previously found that Energy’s labs can use funding for minor infrastructure improvements  NASA centers can also approve and fund certain facility projects, in accordance with NASA policies, and they have encountered significant challenges with aging infrastructure  Also, in some cases, energy and space research centers have significant challenges with hiring replacement staff and competing with private sector employers for staff  Energy’s labs can hire scientific personnel with the flexibility of private companies, while NASA centers were previously provided hiring flexibilities by Congress in 2004 to facilitate staff hiring  While Energy and NASA’s research entities follow their specific governance models, there are broad characteristics common across these agencies as well as DOD  Table 2 illustrates that while research centers are largely government-owned, the government is not always the operator  As we have reported, Department of Energy national labs are primarily operated by for-profit, non-profit and university FFRDC contractors using management and operating contracts, which are competed on a limited basis  Energy’s funding sponsors and headquarters officials are required to reevaluate FFRDC performance in increments not to exceed 5 years by federal acquisition regulations, which inform future decisions to renew the agreement  In 1990, we designated Energy’s contract management—including both contract administration and project management—a high-risk area because of Energy’s inadequate management and oversight of contractors, leaving the department vulnerable to fraud, waste, abuse, and mismanagement  In 2009, we subsequently narrowed the focus of Energy’s high-risk designation to the National Nuclear Security Administration and Office of Environmental Management, which together oversee four national labs  Further, in our 2017 High Risk report, we found that these two agencies had made progress in addressing our contract management concerns, but we identified continued problems with the agencies having sufficient capacity to mitigate contract and project management risks  Also, we found that they had demonstrated little progress in addressing contract management challenges, particularly in the area of financial management  The Department of Energy uses performance-based management and operating contracts, which have been subject to limited competition, with universities, non-profit companies and for-profit companies to operate the national labs on government-owned property  These contractor-operated FFRDCs provide the vast majority of Energy’s science and technology capacity, rather than supplementing the work of government-operated labs like DOD’s FFRDCs  Energy has depended on the expertise of private organizations to execute its science and technology work since the Manhattan Project produced the first atomic bomb during World War II  The Spallation Neutron Source is an experimental research facility at Oak Ridge National Laboratory—a government-owned contractor-operated laboratory  The Spallation Neutron Source includes the world’s most powerful pulsed-neutron sources and provides information about the structure and properties of materials that cannot be obtained by other means  The Spallation Neutron Source is a user facility whereby researchers from universities, national laboratories, and industry submit proposals, which are peer- reviewed and must compete for time at the user facility  The primary focus of each lab varies based on its expertise and facilities  Energy largely oversees its lab contractors through its headquarters program offices, which include the National Nuclear Security Administration, Office of Science, the Office of Fossil Energy, as well as co-located government field offices  Office of Science-sponsored labs primarily support scientific research for energy and physical sciences, while the National Nuclear Security Administration-sponsored (NNSA) labs primarily focus on nuclear weapons and related science and technologies  Energy also oversees its lab contractors’ activities through on-site Energy oversight offices that work alongside lab management at each FFRDC  Some labs specialize in earlier-phase science, while other labs work on later-phase nuclear weapons technologies in addition to earlier-phase science  As Figure 10 shows, these labs are spread across the United States  Energy has only one government-operated and government-owned lab, the National Energy Technology Laboratory  Key differences between Energy’s contractor-operated and government-operated governance models are described in table 3  Energy’s FFRDCs use their own personnel systems, which Energy officials stated provide more flexibility for hiring and retaining qualified staff  Management within these FFRDCs can move staff in or out of scientific areas more quickly than government labs can, thereby providing greater agility to meet Energy’s needs in emerging science areas  For example, Energy’s lab oversight staff at Oak Ridge National Laboratory told us that use of lab contractors’ human resources management systems allows for workforce flexibilities to meet Energy’s needs  While these contractors have leeway in managing their human resources systems, Energy’s headquarters maintains oversight—through its contracting officers—over employee compensation  Energy’s FFRDC contractors manage and operate nearly all of the department’s government-owned national lab facilities—including day-to- day management of government-controlled facilities and real property  Lab operators used funding to complete minor construction projects, which cost $10 million or less  This funding comes from a percentage of science and technology projects’ funding, requires local Energy oversight office approval, and has streamlined project management requirements  In contrast, major infrastructure upgrades are funded through relatively long and complex line-item funding processes, and projects over $50 million are subject to more rigorous project management requirements  Energy’s labs use a small portion of their funding to initiate discretionary projects for science and technologies that will benefit sponsors in the long-term by maintaining the scientific and technical vitality of the laboratories  To maintain and enhance lab expertise, the National Defense Authorization Act for Fiscal Year 1991 authorized Energy’s contractor-operated labs receiving funding for national security programs to use a percentage of lab funds to perform lab-directed R&D of a creative and innovative nature  The actual percentages allowed to be used for lab-directed R&D are subject to Energy’s approval  Energy’s entities sponsor most national lab projects based on their needs and lab expertise  Typically, earlier foundational science projects are funded through a process whereby funding sponsors issue calls for proposals to Energy’s national labs  Interested scientific teams at labs provide proposals to conduct these projects for sponsor consideration  Sponsors then assess proposals for scientific merit and decide which teams receive funding to execute their projects  NNSA provides funding for later-phase nuclear technology development projects to its labs after agreement is made regarding objectives and deliverables for specific projects, according to Lawrence Livermore National Laboratory officials  Despite their flexibilities with regard to hiring and infrastructure decisions compared to government operated labs, Energy’s lab leadership and government oversight officials noted human resource and facilities related challenges, such as: Sufficiently compensating staff located in high-cost of living areas  For example, the labor market of the San Francisco area, where several Department of Energy national labs are located, is highly competitive for employers  Commercial firms offer salaries and compensation that typically exceed those of government-funded, contractor-operated labs, although Energy’s contractors have more pay flexibility than is allowed for Energy’s government employees  Obtaining government clearances in a timely manner  Energy’s NNSA oversight officials and lab management staff, in particular, cited this challenge, which they stated has led to a backlog of people needing clearances  Government hiring freeze constraining overall hiring  Officials at Energy’s government-operated National Energy Technology Laboratory reported that as a result of a government hiring freeze, the lab has increasingly hired private contractor staff to the point that more than half of the total lab staff is now comprised of contractor employees  Major infrastructure challenges at Energy labs  Energy reported in July 2018 that over half of all national lab buildings are in either substandard or inadequate condition  The Energy Inspector General also identified infrastructure modernization as one of Energy’s top management challenges  This finding followed a mandated commission’s report in 2015 that facilities and infrastructure across Energy’s national lab network were hampered by high levels of deferred maintenance and excess facilities  The majority of NASA’s science and technology facilities are operated within the governance framework of government-operated research centers, similarly to most DOD labs  While government-operated, they have been granted additional legislative flexibilities for hiring employees beyond those normally available to government entities  NASA locates its science and technology staff at four government- operated research centers, one contractor-operated FFRDC, and at five NASA centers assisting space and space flight development  These centers and the Jet Propulsion Laboratory—NASA’s sole sponsored FFRDC—execute NASA’s research missions including technology development in exploration and aeronautics  The differences between these two governance approaches are described in Table 4  NASA also works with Johns Hopkins University Applied Physics Lab, a UARC, to develop major space flight missions  The NASA Glenn Research Center—a government- operated laboratory—is currently developing solar electric propulsion technologies intended to allow manned and unmanned spacecraft to be propelled far beyond earth orbit using solar power  This project is developing large, flexible, radiation-resistant solar arrays that can be unfurled to capture solar energy powering fuel-efficient electrostatic thrusters  Scientists expect a system-level flight test within the next decade to demonstrate key technologies supporting NASA’s Lunar Orbital Platform-Gateway project, a platform to mature necessary short- and long-duration deep space exploration capabilities  Headquarters, including funding sponsors providing oversight for their individual projects  Title 51, Chapters 201 and 203 of U S  Code and technology efforts with DOD and other organizations, including use of NASA lab and test facilities  Operated by university contractor having sole source contract  Not permitted to compete against industry, except for operation of an FFRDC  property (originally part of DOD)  5-year contract renewable to 10 years total  Headquarters, including funding sponsors providing oversight for their individual projects  Title 51, Chapters 201 and 203 of U S  Code; 10 U S C  § 2304 (c) (3)(B) ; Federal Acquisition Regulation § 35 017 based NASA oversight staff  sponsors seeking FFRDC assistance with NASA approval  “Lab” as used in this context refers to science and technology organizations equivalent to NASA Research Centers, DOD UARCs and FFRDCs  Mission leadership officials at NASA Headquarters—including the Associate Administrators for Aeronautics Research, Human Exploration, Science and Space Technology—oversee NASA’s research centers as well as the Jet Propulsion Laboratory  These officials are responsible for technology programs providing funds to research centers and the Jet Propulsion Laboratory to support their specific mission areas  NASA’s science and technology project portfolios are based on the requirements and priorities established by NASA’s leaders in collaboration with key stakeholders in academia and industry among others  In planning their science and technology work, NASA’s Glenn Research Center officials noted that NASA research center directors consider the capabilities and resources—including staff and facilities—of other research centers to minimize redundant work  NASA depends on a highly skilled civil servant and contractor workforce to plan and execute its missions  Congress provided NASA with additional human resource authorities beyond those otherwise allowed for federal government personnel through the NASA Flexibility Act of 2004  We found in September 2008 that NASA sought this flexibility to ensure that it could hire and retain the workforce it desired  This law consisted of multiple provisions to address a range of human capital challenges and to strengthen all levels of the workforce  The provisions included incentives—including compensation—to allow NASA to compete successfully in the labor market with the private sector and reshape its workforce more effectively to support the Agency’s mission  NASA also employs a significant contractor workforce across its different centers  Glenn Research Center officials we interviewed stated their portfolio of science and technology projects—and funding—mostly aligns with NASA’s top requirements and priorities  They, along with NASA sponsors, create technology roadmaps and investment plans to determine their future projects  NASA policy requires that NASA’s scientific teams offer proposals for potential research and science and technology projects  This is similar in some ways to how many DOD and Energy centers must find sponsors willing to fund specific technology development projects, rather than receiving technology development funding for a given year  These proposals are reviewed by peer review teams, who identify for selecting officials those proposals they believe have the most scientific merit  Ames Research Center officials said they believe this process can foster innovation, encourage employees to keep skills honed, and mitigate complacency  Glenn Research Center officials said that while most of the work they conduct is for sponsored applied research or advanced technology development, about 2 percent of their science and technology budget is spent on early-stage scientific innovation  Recommended projects of this nature proposed by the research center are typically approved by headquarters officials, according to these Glenn officials  NASA provides technical grants for basic research and applied science to university scientists nationwide on a competitive basis, and also funds similar research done internally at research centers  As with DOD and Energy’s research centers, NASA officials have identified some key operating challenges, including: Aging infrastructure and facilities  The NASA Inspector General listed infrastructure area as one of the top five management and performance challenges facing NASA  Further, the Inspector General identified deficiencies with facilities planning and reported that about 80 percent of facilities at three of four NASA research centers are over 50 years old, while about half of the facilities at the Jet Propulsion Laboratory and the fourth research center are that old  Infrastructure projects and upgrades of $1 million or less are undertaken by research center management instead of at the NASA headquarters level  Construction above this threshold has significantly more requirements and is approved by NASA headquarters  Glenn Research Center officials indicated it is difficult to obtain funding for projects that exceed the minor infrastructure threshold, in part, due competition with major construction of facilities proposals from across the agency for limited funds  As a result, they put most of their efforts into sustaining existing infrastructure  Workforce shortages in key technical areas  As we found in May 2018, NASA has experienced workforce challenges on several major projects such as the Mars 2020 and Europa Clipper projects  Also, over 40 percent of NASA’s workforce is either eligible to retire now or will be eligible in the next 5 years  NASA headquarters officials noted that NASA’s workforce is aging because NASA has a low attrition rate—about 4 percent annually—and high numbers of staff stay several years beyond retirement  Further, in 2017, the NASA Inspector General found gaps in NASA’s workforce planning for specific capability areas and how workforce plans would meet future needs, and recommended that NASA establish standardized guidance defining the data and analyses for these planning efforts  NASA concurred with and identified its plan to implement this recommendation  However, NASA has not implemented this recommendation, according to the NASA Inspector General’s latest semiannual report to Congress  Congress provided DOD lab directors with key authorities to foster targeted, timely investments in the most pressing technology areas  Lab directors have used these authorities—such as laboratory initiated research and direct hire authorities—to varying degrees, but more needs to be done to facilitate innovation and efficiency  Specifically, service specific obstacles in the Air Force, Navy, and Army impede lab directors from capitalizing on laboratory initiated research authority to a greater extent  Service leadership can take actions to better understand and potentially remove barriers to more fully use laboratory initiated research tools  We are making the following three recommendations to DOD: The Secretary of the Air Force should assess the potential costs and benefits of implementing accounting system improvements that would allow the Air Force Research Laboratory to charge customers a fixed percentage fee on provided science and technology activities to the extent allowed under the laboratory initiated research authority  (Recommendation 1) The Secretary of the Navy should clarify whether and how to use the laboratory initiated research authority within the Capital Investment Program  (Recommendation 2) The Secretary of the Army should assess existing Army policy for laboratory initiated research authority and determine whether to implement changes to eliminate disincentives for lab usage of the authority  (Recommendation 3) We provided a draft of this report to DOD, Energy, and NASA for review and comment  Energy and NASA did not provide any comments on the draft report  In DOD’s written comments, reproduced in appendix III, DOD concurred with our three recommendations  Further, in its response to our third recommendation, DOD stated that the Army plans to initiate a study by January 2, 2019, regarding its use of the laboratory initiated research authority  According to DOD, the Army’s study will identify potential opportunities for policy improvements  We are sending copies of this report to the appropriate congressional committees and offices; the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Secretary of Energy; and the NASA Administrator  In addition, the report will be made available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions concerning this report, please contact me at (202) 512-4841  Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report  Staff members making key contributions to the report are listed in appendix IV  This report examines (1) how the Department of Defense (DOD) labs have used selected legislative authorities to foster innovation and efficiency and identify what barriers impede their use; (2) identifies and describes governance models used by selected DOD-sponsored federally funded research centers and university affiliated research centers; and (3) identifies and describes governance models used non-defense labs, specifically at the Department of Energy (Energy) and National Aeronautics and Space Administration (NASA)  To address the first objective, we selected four specific authorities for our review based on previous work identifying science and technology best practices and expedited lab hiring: Laboratory Initiated Research Authority  The authority provided in Section 219 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, as implemented, provides lab directors with flexibility to fund projects in four allowable categories: basic and applied research; technology transition; workforce development; and revitalization, recapitalization, or repair or minor military construction of lab infrastructure  Laboratory Enhancement Pilot Program  Section 233 of the National Defense Authorization Act for Fiscal Year 2017 established a pilot program for lab directors to propose alternative and innovative methods that might lead to more effectively managing and operating labs and authorized lab directors to waive any regulation, restriction, requirement, guidance, policy, procedure, or departmental instruction that would affect implementation of these methods unless such implementation would be prohibited by a provision of an existing statute or common law  Direct Hire Authority  Four types of direct hire authorities authorized by Congress since 2008 are intended to provide a streamlined and accelerated hiring process to allow the labs to successfully compete with private industry and academia for high-quality scientific, engineering, and technician talent  Micro-purchase Authority  The Federal Acquisition Regulation states a preference for government agencies, to purchase and pay for micro-purchases of supplies or services using the government-wide commercial purchase card up to and at the micro-purchase threshold, but micro-purchases may be conducted using any of the simplified acquisition methods  While the FAR micro-purchase threshold was generally $3,500 at the time of our review, Congress increased this threshold to $10,000 for activities of DOD science and technology reinvention laboratories in Section 217 the National Defense Authorization Act for Fiscal Year 2017  Although Congress has provided additional legislative authorities to defense lab directors to address hiring, infrastructure, and technology transition challenges, the authorities that we covered in our review are the ones that our prior and current work have shown are currently, or have the potential to be, the most critical for supporting science and technology reinvention laboratories’ innovation mission within DOD labs  DOD lab leaders use these authorities to flexibly fund projects intended to facilitate research and development; propose alternative and innovative methods that might lead to more effective lab management; directly hire personnel at DOD labs including students currently enrolled in science, technology, engineering, and mathematics (STEM) programs; and expand critical science and technology purchases using simplified acquisition methods  To identify the extent to which DOD laboratories have used these authorities as well as to identify what potential barriers existed to using these authorities, we administered a survey to 44 STRL directors (or their equivalent) to collect information on the use of these specific authorities, their perceptions about the effectiveness of those authorities, and their perceptions about any barriers to using these authorities  The members of the population surveyed were the 44 defense laboratories defined as science and technology reinvention laboratories  For the purposes of our review, we defined laboratories as inclusive of Air Force technical directorates (10), Army warfare centers (17), and Navy warfare centers (17)  We emailed questionnaires to the laboratories beginning in late March 2018, and survey data collection ended in early May 2018, with 31 labs returning completed questionnaires, for an overall response rate of 71 percent at the laboratory level  We took steps to minimize the potential errors that the practical difficulties of conducting any survey may introduce  Nonresponse error can result when a survey fails to capture information from all population members selected into a survey sample  Of the 13 questionnaires not returned, 4 were Army warfare centers, and 9 were Air Force research directorates  Throughout the data collection period, we made multiple follow-up attempts by email and phone to those labs not yet responding  The Air Force Research Laboratory (AFRL) provided a single survey response for the entire laboratory enterprise  Not all returned questionnaires may have answers to every question applicable to a respondent  However, this question-level nonresponse did not exceed one for any of the questions applicable to all 31 labs  Because we selected the entire population of laboratories for our survey, our estimates are not subject to sampling error  We developed our list of the 44 labs in our population in consultation with DOD, and are confident that none were left out, so our or survey has no known sources of coverage error  We conducted pretests of the draft questionnaire with 3 laboratories in the population and made revisions to reduce the possibility of measurement error from differences in how questions were interpreted and the sources of information available to respondents  After reviewing the answers received, we also followed up as necessary with respondents to clarify apparent inconsistencies or other possible misreports, and made changes to responses where corrections were needed  A second, independent analyst checked the accuracy of all computer analyses to minimize the likelihood of errors in data processing  To obtain additional information on this objective, we reviewed relevant legislation which established or amended these authorities and reviewed applicable DOD and service policy documentation  Further, we collected military service related information on the usage of two authorities, such as: Spending data on the use of the laboratory initiated research authority  We gathered this information from DOD-mandated reports to Congress on the use of this authority and military service officials  We determined these data to be reliable based on reviews of agency documentation collected and interviews with agency officials  Data on the usage of direct hire authorities by the service laboratories  We collected direct hire data from each of the military services including the number of direct hire authority candidates hired as well as the number of direct hire positions the laboratories were authorized to hire  We determined these data to be reliable based on reviews of agency documentation collected and interviews with agency officials  We also used select findings from our May 2018 report where we evaluated DOD’s use of hiring authorities, including direct hire authority  More information about the scope and methodology of our prior work can be found in that report  In addition, we also collected information on military service proposals to utilize the laboratory enhancement pilot program authority  To obtain further information on department- and service-level involvement in and perspectives of defense laboratory authorities and challenges, we interviewed officials responsible for the management, execution, and oversight of DOD’s science and technology enterprise, including military service labs  At the Office of the Secretary of Defense and military department headquarters level, those responsible for the management and oversight of science and technology activities, we met with officials from the: Office of the Assistant Secretary of Defense for Research and DOD Defense Laboratories Office; Office of the Deputy Assistant Secretary of the Army for Research and Office of the Deputy Assistant Secretary of the Air Force for Science, Technology, and Engineering; Office of the Assistant Secretary of the Air Force for Financial Office of the Deputy Assistant Secretary of the Navy for Research, Development, Test, and Evaluation; and Office of the Budget, within the Office of the Assistant Secretary of the Navy for Financial Management and Comptroller We also met with military department lab officials responsible for the management and execution of science and technology activities from the: Army Research, Development and Engineering Command; Army Research Laboratory; Army Aviation and Missile Research, Development, and Engineering Air Force Research Laboratory; Naval Research Laboratory; Naval Surface Warfare Center, Headquarters; and Naval Surface Warfare Center, Carderock Division To identify and describe governance models used by selected DOD- sponsored federally funded research centers (FFRDCs) and university affiliated research centers (UARCs), we focused our review on the 3 FFRDCs designated as research and development labs as well as all 13 UARCS sponsored by DOD entities  We reviewed appropriate sections of the FAR language related to FFRDCs and UARCs, DOD guidance for working with FFRDCs and UARCs, relevant contracts, and performance assessments  Further, we met with officials from the office of the Deputy Director, OSD Studies and Federally Funded Research & Development Centers Management and Office to discuss overall FFRDC and UARC management, policies, and challenges facing FFRDCs and UARCs  We interviewed officials at selected research and development FFRDCs and UARCS to discuss their experience conducting DOD research and interactions with their customers, such as defense program executive offices  We met with officials at the two major research and development lab FFRDCs—The Lincoln Laboratory at the Massachusetts Institute of Technology (MIT) and the Software Engineering Institute at Carnegie Mellon University  We also selected a university affiliated research center sponsored by the Army and Navy: The Applied Physics Laboratory at Johns Hopkins University and the Institute for Soldier Nanotechnologies also at the MIT  To identify and describe governance models by non-defense labs, we selected Energy and NASA to focus our efforts  We identified 17 Energy national labs and 4 NASA research centers conducting basic and applied research similar to DOD labs  These agencies, along with DOD, represent 3 of the top 4 agencies in terms of average federal research and development spending from fiscal years 2015 to 2017  In our August 2016 GAO Technology Readiness Assessment Guide, we drew heavily from DOD, NASA, and Energy for best practices, terminology, and examples  This contributed to our decision to focus on Energy and NASA’s research entities in this laboratory governance review  We did not include the fourth agency—the National Institutes of Health—in our review because it is not as similar to DOD  We also reviewed relevant Energy and NASA guidance as well as relevant FAR sections  At Energy, we met with officials from the National Nuclear Security Administration which is semi-autonomous entity within Energy responsible for managing the nation’s nuclear weapons and nuclear security  We also met with Officials from the Office of Science, a program office responsible for supporting energy related fundamental science and research  To gain further insights on operating structures, funding arrangements, and their overall experience we met with lab leadership at selected Energy labs which were chosen based on initial discussions with agency officials and our review of past GAO work: Oak Ridge National Laboratory, Lawrence Berkeley National Laboratory, Lawrence Livermore National Laboratory, and National Energy Technology Laboratory (the sole Energy government owned and operated laboratory) We also met with leadership from Battelle Memorial Institute, which is the sole or joint contract manager for five Energy national labs including Oak Ridge National Laboratory  In addition, Battelle is an integrated subcontractor at Lawrence Livermore National Laboratory  At NASA, we met with officials with NASA’s Science Mission Directorate and Mission Support Directorate to discuss overall research center management and operations  We also leveraged ongoing and recently completed work at GAO to gain additional insight on NASA’s operations such as human capital management  Almost all of NASA’s research, space, and space flight centers conduct research and development activities  However, we focused our review on four research centers where NASA primarily conducts its aeronautics research, which has substantial overlap with DOD activities  To gain additional insight into the experience of lab leaders at NASA research centers, we met with officials at NASA’s Glenn Research Center and Ames Research Center  In addition, we also met with officials at the NASA Jet Propulsion Center, which is the only NASA-sponsored FFRDC  We conducted this performance audit from July 2017 to December 2018 in accordance with generally accepted government auditing standards  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives  Office of the Secretary of Defense (OSD) In addition to the contact named above, Christopher R  Durbin (Assistant Director); Charlie Shivers, III (Analyst-in-Charge); Emily Bond; Lorraine Ettaro; Carl Ramirez; Sylvia Schatz; Sean Seales; Brian Smith; and Robin Wilson made significant contributions to this report 


Report 2: The DEA, within the Department of Justice, is responsible for ensuring the availability of controlled substances for legitimate uses while preventing their diversion through its administration and enforcement of the Controlled Substances Act and its implementing regulations  Under the Controlled Substances Act, all persons or entities that manufacture, distribute, or dispense controlled substances are required to register with DEA, unless specifically exempted  DEA regulates these entities to limit diversion and prevent abuse  For example, DEA regulates pharmaceutical companies that manufacture controlled substances, health care providers who prescribe them to patients, and pharmacies that dispense them  In October 2010, the Disposal Act amended the Controlled Substances Act to allow the public to deliver unused controlled substances to an entity authorized by DEA to dispose of the substances  DEA was given responsibility for promulgating the implementing regulations, and the Disposal Act stipulated that the regulations should prevent diversion of controlled substances while also taking into consideration public health and safety, ease and cost of implementation, and participation by various communities  In addition to disposal bins, DEA’s regulations describe two other options for the public to transfer controlled substances for the purpose of disposal: mail-back programs and take-back events  Law enforcement agencies may use all three methods of drug disposal without the need for authorization by DEA  The Disposal Act stipulates that the regulations cannot require an entity to participate in or establish any of the disposal options  To participate as authorized collectors of unused prescription drugs, eligible entities—retail pharmacies, hospitals/clinics with an on-site pharmacy, narcotic treatment programs, reverse distributors, distributors, and drug manufacturers that are already authorized by DEA to handle controlled substances—must modify their DEA registration  According to DEA officials, such modification is free and simple to do  Eligible retail pharmacies or hospitals/clinics that become authorized collectors are able to install and maintain disposal bins in long-term care facilities in addition to their own location  DEA’s website contains a public search feature to identify authorized collectors located near a specific zip code or address  Authorized collectors must install, manage, and maintain the disposal bins following DEA regulations  For example, under DEA’s regulations for maintaining the disposal bins, the disposal bin must be securely fastened to a permanent structure, securely locked, substantially constructed with a permanent outer container and removable inner liner, and have a small opening that allows contents to be added but not removed; the bin must also prominently display a sign indicating which types of substances are acceptable; users must dispose the unused prescriptions into the collection receptacle themselves without handing them to staff at the pharmacy; the disposal bin must typically be located in an area where an employee is present and near where controlled substances are stored, and the bin must be made inaccessible to the public when an employee is not present; the inner liner of the disposal bin must meet certain requirements, including being waterproof, tamper-evident, tear-resistant, opaque, and having the size and identification number clearly labeled; and the installation and removal of inner liners must be performed under the supervision of at least two employees of the authorized collector  DEA regulations also require that all controlled substances collected in the disposal bin’s inner liners must be destroyed in compliance with applicable federal, state, and local laws and rendered non-retrievable  According to DEA regulations, non-retrievable means that the physical and chemical conditions of the controlled substance must be permanently altered, thereby rendering the controlled substance unavailable and unusable for all practical purposes  Authorized collectors are permitted to destroy the inner liner on their premises if they have the capacity to do so  If not, the inner liners can be transported to a separate location to be destroyed  Typically, in this case, an authorized collector contracts with a reverse distributor to periodically remove, transport, and destroy the inner liners  DEA regulations require that two reverse distributor employees transport the inner liners directly to the disposal location without any unnecessary stops or stops of an extended duration  Authorized collectors must document certain information, including inner liner identification numbers and the dates that each liner is installed, removed, and transferred for destruction  The authorized collectors must maintain these records for 2 years  Figure 1 summarizes the steps involved in the collection of unused prescription drugs  About 3 percent of pharmacies and other eligible entities have voluntarily chosen to become DEA-authorized collectors of unused prescription drugs, according to DEA data  As of April 2017, 2,233 of the 89,550 (2 49 percent) of eligible entities—which are already authorized by DEA to handle controlled substances—had registered to use disposal bins to collect unused prescription drugs  Most of the authorized collectors— about 81 percent—were pharmacies, followed by hospitals or clinics  (See table 1)  Narcotic treatment programs, reverse distributors, and distributors made up approximately 1 percent of the authorized collectors  We also found that participation rates varied by state, though in most states relatively few of the eligible entities had registered with DEA to become authorized collectors of unused prescription drugs  In 44 states, less than 5 percent of the eligible entities had registered  (See figure 2 and appendix I for more information on the participation rates of authorized collectors in each state)  As of April 2017, Connecticut, Missouri, and Maine had the lowest participation rates, with 0 11, 0 22, and 0 70 percent, respectively  In contrast, North Dakota had the highest participation rate, with 32 0 percent of its pharmacies and other eligible entities registered to be authorized collectors  The state with next highest participation rate was Alaska, with 8 96 percent  In North Dakota, the state’s Board of Pharmacy provides funding for authorized collectors to purchase and maintain the disposal bins  According to a board official, the board decided to fund these activities to increase participation rates and plans to continue its funding indefinitely using revenue generated from prescription drug licensing fees it collects  In addition, our analysis shows that about 82 percent of all authorized collectors were located in urban areas as of April 2017  However, when comparing the entities registered to be authorized collectors with the total number of eligible entities, we found that a larger percentage of the eligible entities in rural areas became authorized collectors compared with those in urban areas (see table 2)  The data we obtained on the number of eligible and participating authorized collectors and their locations are the only available DEA data on the use of disposal bins to collect unused prescription drugs  According to DEA officials, the agency does not collect any other information on the use of disposal bins, such as the extent to which the bins are used, or the amount and types of prescription drugs deposited into the bins  For example, to minimize the risk of diversion, DEA regulations do not allow authorized collectors to open and inspect the inner liners of the disposal bins, so information on their contents cannot be collected  According to DEA officials, the agency is not responsible for collecting information on the amount and types of prescription drugs destroyed through the disposal bins  DEA officials told us that the agency views its responsibility solely as giving pharmacies and other eligible entities the opportunity to become authorized collectors  Though we do not have information on the extent to which individuals use DEA’s prescription drug disposal bins, we were able to estimate that as of April 2017, about half of the country’s population lived less than 5 miles away from a pharmacy or other DEA-authorized entity offering a prescription disposal bin  In 21 states, at least 50 percent of the state’s population lived within 5 miles of a prescription disposal bin  (See figure 3)  While close to half of the nation’s population lived less than 5 miles from a disposal bin as of April 2017, the availability of nearby disposal bins varied significantly for people depending on whether they lived in an urban or a rural area  Specifically, about 52 percent of the population in urban areas lived less than 5 miles away from a disposal bin, compared to about 13 percent of the population in rural areas  Furthermore, about 44 percent of the population in rural areas lived even further away—more than 30 miles away from a disposal bin  An exception to this is North Dakota, where about 86 percent of its urban population and about 64 percent of its rural population lived within 5 miles of a disposal bin  According to officials from the 11 stakeholder organizations we interviewed—which represent authorized collectors and long-term care facilities—several factors may explain why relatively few pharmacies and other eligible entities have chosen to become authorized collectors of unused prescription drugs  These factors include the associated costs of participating, uncertainty over proper implementation, and participation in other, similar efforts for disposing of unused prescription drugs  Costs: Stakeholders said that the costs associated with purchasing, installing, and managing the disposal bins is a factor that explains the relatively low rate of participation  One stakeholder told us that many eligible entities may decide that the benefit of participating does not outweigh the costs associated with doing so  Specifically, stakeholders told us that the major costs associated with participating include the one-time cost of purchasing and installing a disposal bin; the ongoing costs to train personnel to manage the bins; and the cost of contracting with a reverse distributor to periodically dispose of the bin’s inner liner and contents  Stakeholders gave varying examples of the specific costs associated with these investments  For example, one stakeholder estimated the yearly costs of maintaining a disposal bin ranged from $500 to $600 per location; another stakeholder said that the cost is thousands of dollars per location per year, but did not provide a specific estimate  These stakeholders added that costs can increase if the disposal bins fill more quickly and need to be emptied more often than expected  For their part, officials from the reverse distributor stakeholders we interviewed cited incinerating hazardous waste, the availability of incinerators, and the cost of personnel as factors that increase the cost of their services for authorized collectors  One reverse distributor stakeholder told us that there are not many incinerators available, requiring them to travel long distances to incinerate collected waste  The other reverse distributor stakeholder added that DEA’s requirement that a second employee be present during the transportation and disposal increases the cost of their services  While some stakeholders speculated that costs are a reason for low participation, a few stakeholders told us that the benefits are worth the costs  In fact, two stakeholders we spoke with told us that the benefit to the communities was so important that they decided to provide funding to retail pharmacies, alleviating an individual pharmacy’s concern about the cost of installing and maintaining the disposal bins  We found that as of April 2017, over a quarter of the 2,233 authorized collectors using disposal bins received external funding to pay for the costs associated with installing and maintaining the disposal bins  In addition, stakeholders told us that some localities have enacted laws known as extended producer responsibility ordinances, which require that pharmaceutical manufacturers pay for certain costs associated with drug disposal  When asked about the costs associated with operating disposal bins, DEA officials told us that addressing cost issues with eligible participants falls outside of their responsibilities  Uncertainty: Stakeholders also told us that uncertainty regarding how to comply with aspects of DEA’s regulations for prescription drug disposal bins affected their decisions to participate  One stakeholder added that many eligible entities decide not to participate because uncertainties over participation requirements could result in inadvertent non-compliance with DEA’s regulations  As an example of their uncertainty over some of the requirements governing the disposal bins, officials from both of the reverse distributor stakeholders we interviewed cited DEA’s non-retrievable standard for destruction of the inner liners of the bins  DEA requires that the method of destruction be sufficient to render all controlled substances non- retrievable, meaning that the physical and chemical conditions of the controlled substances must be permanently altered and unusable in order to prevent diversion for illicit purposes  Both reverse distributor stakeholders told us that they are uncertain about whether certain disposal methods meet this standard, and they said that the agency has not provided further guidance on how reverse distributors can meet this requirement  DEA officials told us that the agency responds to questions about whether a specific method of destruction meets the non-retrievable standard by telling the registrant to test the remnants after destruction, to see if any components of the controlled substance are still present  In its summary of the regulations implementing the Disposal Act, DEA stated that in order to allow for the development of various methods of destruction, the agency did not require a specific method of destruction as long as the desired result is achieved  However, DEA officials stated that to their knowledge, incineration is the only method known to meet the non-retrievable standard to date, but the officials hoped other methods will be developed in the future  When asked about the guidance they provide to authorized collectors of unused prescription drugs or those eligible to become authorized collectors, DEA officials told us that they post frequently-asked questions on their website, routinely answer questions from participants and others, and give training presentations at conferences that include information on the disposal bins  In our prior work, we found problems with DEA’s communication and guidance to stakeholders  In 2015, we recommended that DEA identify and implement cost-effective means for communicating regularly with pharmacies and other entities authorized to handle controlled substances  DEA agreed with the recommendation, and officials told us that, starting in August 2017, these entities can subscribe to DEA’s website to receive notifications when it is updated with new guidance  Stakeholders also noted that some DEA requirements related to disposal bins may conflict with other state and federal requirements governing the transportation and disposal of hazardous waste, which includes some controlled substances  For example, the two reverse distributor stakeholders told us that some incinerator permits issued by states require that hazardous waste be examined before incineration; however, DEA requirements do not allow the contents of the liners to be examined, even at the time of incineration  To address the incinerator permit requirements, one reverse distributor told us that they use the Environmental Protection Agency’s hazardous waste household exemption, which treats the liners as household waste and thereby allows incinerator facilities to destroy the liners without examining the contents or violating their state permit  In addition, some stakeholders raised concerns that DEA’s regulations may conflict with other federal regulations  For instance, one stakeholder noted that they recently learned that transporting the disposal bin’s inner liners could violate Department of Transportation regulations  DEA officials told us that they were aware of this, explaining that the conflict was between DEA’s requirement that controlled substances be transported in liners and the Department of Transportation’s requirement that this type of waste be transported in sturdy containers  According to DEA officials, this conflict has been resolved by the Department of Transportation allowing reverse distributors to place the liners inside sturdy containers kept on trucks  Participation in or Availability of Similar Efforts: Stakeholders said that some pharmacies and other eligible entities were already participating in other, similar efforts that allow for the safe disposal of controlled substances, and therefore they did not want to invest additional resources into participating as authorized collectors using disposal bins  For example, the Centers for Medicare & Medicaid Services has an established process that long-term care facilities use to dispose of their unused controlled substances  As a result, all of the long-term care stakeholders told us that long-term care facilities may choose not to partner with pharmacies interested in placing disposal bins within their facilities because it adds significant cost and effort without any additional benefit  Furthermore, pharmacy stakeholders noted that because of the availability of other prescription drug collection efforts in their communities, they did not think that maintaining a disposal bin at their locations was needed  For example, two of the stakeholders explained that local law enforcement precincts already had a similar type of disposal bin in place to collect unused prescription drugs  DEA officials told us that they were aware of other options for the public and entities such as long-term care facilities that are not registered as authorized collectors to dispose of controlled substances  The officials also indicated that the availability of disposal options at law enforcement agencies contributes to the low participation rates among pharmacies as authorized collectors of unused prescription drugs  We provided a draft of this report to the Department of Justice for comment  DEA, part of the Department of Justice, provided technical comments, which we incorporated as appropriate  As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date  At that time, we will send copies to the Attorney General of the United States and the Administrator of DEA  In addition, the report will be available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-7114 or draperd@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix II  In addition to the contact name above, Elizabeth H  Curda (Director), Will Simerl (Assistant Director), Kathryn Richter (Analyst-In-Charge), Nick Bartine, Giselle Hicks, Jessica Lin, and Emily Wilson made key contributions to this report  Also contributing were Muriel Brown and Krister Friday 

ground_truth: Congress created several authorities that provide DOD research labs with ways to increase efficiency and foster innovation. Senate report 114-255 contained a provision for GAO to study governance models used by federal labs. This report evaluates DOD labs' use of authorities to foster innovation and efficiency. GAO selected four authorities that recent work on best practices for science and technology management and expedited defense lab hiring have shown to be the most crucial for supporting innovation; administered a survey to 44 lab directors to gain insight into their use of the authorities; interviewed key lab officials and contractors; and reviewed relevant policies and guidance. Congress has provided the Department of Defense's (DOD) research labs with several authorities to enhance management and operations. Four authorities that GAO examined provide lab directors with greater ability to make their own decisions regarding the funding of projects, hiring, lab management, and purchasing of equipment or services. 1. Laboratory initiated research authority. This authority, as implemented, provides labs with a means to fund new science and technology projects that they consider a priority. Labs may use a percentage of all funds available to the lab and are permitted to charge customers of the lab a percentage fee of the costs for activities performed by the lab for the customer. 2. Direct hire authority. This authority enables labs to compete with private industry for high-quality talent. For example, it provides for streamlined hiring of applicants with relevant advanced degrees, or students enrolled in science, technology, engineering, and mathematics programs. 3. Laboratory enhancement pilot program authority. This authority generally allows lab directors to propose alternative methods that might lead to more effective lab management, and waive certain policies or procedures that might affect implementation of these methods. 4. Micro-purchase authority. This authority raises the threshold for small purchases for DOD research lab activities from $3,500 to $10,000 to facilitate acquisitions. While labs have used these authorities, their use has sometimes been limited, particularly with the laboratory initiated research authority. DOD lab directors at Air Force, Navy, and Army cited several obstacles that impede wider use of that authority, specifically: Air Force: Financial management officials at the Air Force stated that the service's accounting system does not currently have an automated capability to transfer the allowable percentage fee of costs to a central account at the Air Force Research Laboratory. This lack of capability, officials noted, creates a significant administrative burden related to charging these fees. Navy: In fiscal year 2017, Navy labs invested $7.3 million in lab infrastructure projects, compared to $32.9 million and $53.7 million at the Air Force and Army, respectively. Navy lab officials told us that they were restricted in their use of infrastructure funds available under the laboratory initiated research authority due to a lack of clear guidance as to whether and how to use this authority within the Capital Investment Program of the Navy Working Capital Fund. Army: The Army requires its labs to use a similar percentage of funds from two sources: (1) what it refers to as directly appropriated funds and (2) funds labs charge for customer activities. Some Army lab directors reported assessing a lower rate on customer funds than allowed so as not to drive customers away. The labs then generally charge a lower than desired rate on their directly appropriated funds, which further constrains the total funding available to them. GAO is making three recommendations to enhance DOD's use of laboratory initiated research authority, including that the Air Force assess potential accounting system improvements, the Navy clarify how labs can use the authority for infrastructure improvements, and the Army assess its policy to determine whether changes are needed to remove disincentives for labs to use the authority. DOD concurred with the recommendations.

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



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

Report 1: The Federal Reserve's (the Fed's) responsibilities as the nation's central bank fall into four main categories: monetary policy, provision of emergency liquidity through the lender of last resort function, supervision of certain types of banks and other financial firms for safety and soundness, and provision of payment system services to financial firms and the government  Congress has delegated responsibility for monetary policy to the Fed, but retains oversight responsibilities to ensure that the Fed is adhering to its statutory mandate of "maximum employment, stable prices, and moderate long-term interest rates " The Fed has defined stable prices as a longer-run goal of 2% inflation—the change in overall prices, as measured by the Personal Consumption Expenditures (PCE) price index  By contrast, the Fed states that "it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision " Monetary policy can be used to stabilize business cycle fluctuations (alternating periods of economic expansions and recessions) in the short run, while it mainly affects inflation in the long run  The Fed's conventional tool for monetary policy is to target the federal funds rate —the overnight, interbank lending rate  This report provides an overview of how monetary policy works and recent developments, a summary of the Fed's actions following the financial crisis, and ends with a brief overview of the Fed's regulatory responsibilities  In December 2008, in the midst of the financial crisis and the "Great Recession," the Fed lowered the federal funds rate to a range of 0% to 0 25%  This was the first time rates were ever lowered to what is referred to as the zero lower bound   The recession ended in 2009, but as the economic recovery consistently proved weaker than expected in the years that followed, the Fed repeatedly pushed back its time frame for raising interest rates  As a result, the economic expansion was in its seventh year and the unemployment rate was already near the Fed's estimate of full employment when it began raising rates on December 16, 2015  This was a departure from past practice—in the previous two economic expansions, the Fed began raising rates within three years of the preceding recession ending  Since then, the Fed has continued to raise rates in a series of steps to incrementally tighten monetary policy  The Fed raised rates once in 2016, three times in 2017, and four times in 2018, by 0 25 percentage points each time  The Fed has stated that "some further gradual increases in     the federal funds rate" are necessary to fulfill its mandate  The Fed describes its plans as "data dependent," meaning they would be altered if actual employment or inflation deviate from its forecast  Although monetary policy is now less stimulative than it had been at the zero lower bound, the Fed is still adding stimulus to the economy as long as the federal funds rate is below what economists call the "neutral rate" (or the long-run equilibrium rate)  To illustrate, the federal funds rate is currently similar to the inflation rate, meaning that the real (i e , inflation-adjusted) federal funds rate is around zero  However, there is uncertainty as to what constitutes a neutral rate today  By historical standards, a zero real interest rate would be well below the neutral rate, but the neutral rate appears to have fallen following the financial crisis, so that current rates may be close to the neutral rate today  Typically, the Fed keeps interest rates below the neutral rate when the economy is operating below full employment, at neutral levels when the economy is near full employment, and above the neutral rate when the economy is at risk of overheating  Indeed, the Fed identifies this as one of its "three key principles of good monetary policy " Because of lags between changes in interest rates and their economic effects, in the past, the Fed has often preemptively changed its monetary policy stance before the economy reaches the state that the Fed is anticipating  In this business cycle, the Fed has maintained a (progressively less) stimulative monetary policy throughout the expansion, boosting economic activity  In one sense, this policy could be viewed as having successfully delivered on the Fed's mandated goals of full employment and stable prices  The unemployment rate has been below 5% since 2015 and is now lower than the rate believed to be consistent with full employment  Other labor market measures are also consistent with full employment, with the possible exception of the still-low labor force participation rate  Economic theory posits that lower unemployment will lead to higher inflation in the short run, but inflation has not proven responsive to lower unemployment in recent years  After remaining persistently below the Fed's 2% target from mid-2012 to early 2018 as measured by core PCE, inflation has remained around 2% in 2018 as measured by headline or core PCE  Economic growth has also picked up beginning in the second quarter of 2017, after being persistently low by historical standards throughout the expansion  Contributing to the 2018 growth acceleration, a more expansionary fiscal policy (larger structural budget deficit) added more stimulus to the economy in the short run  Two notable policy changes contributing to fiscal stimulus in 2018 were the 2017 tax cuts ( P L  115-97 ) and the boost to discretionary spending in FY2018 and FY2019 agreed to in P L  115-123   The Fed did little to offset this fiscal stimulus, as the pace of monetary tightening in 2018 was only slightly faster than in 2017  Despite strong economic data (which is only available with a lag), the Fed announced in January 2019 that it would be "patient" before raising rates again in light of increased economic uncertainty and financial volatility  The Fed's intended policy path poses risks  If the Fed waits too long to raise rates again, the economy could overheat, resulting in high inflation and posing risk to financial stability  As an example of how overly stimulative monetary policy can lead to the latter, critics contend that the Fed contributed to the precrisis housing bubble by keeping interest rates too low for too long during the economic recovery starting in 2001  Critics see these risks as outweighing any marginal benefit associated with monetary stimulus when the economy is already so close to full employment  Raising rates more quickly would also provide more "headroom" for the Fed to lower rates more aggressively during the next economic downturn  The potential percentage point reduction in rates before hitting the zero bound is currently smaller than the rate cuts that the Fed has undertaken in past recessions  Alternatively, there is uncertainty about whether strong growth, low unemployment, inflation around 2%, and the generally benign economic environment will continue  Economic expansions do not "die of old age"; nevertheless, the current expansion is already the second longest on record and cannot last forever  The flattening of the yield curve (i e , long-term Treasury yields are similar to short-term Treasury yields) is seen by some as a warning signal that rates are too high  Although there is a risk of stimulative monetary policy causing the economy to overheat, there is also a risk that tightening too quickly could be harmful if the economy slows  Some critics would prefer clear evidence that inflation is above the Fed's target or financial conditions are unstable before the Fed raises rates again  Monetary policy refers to the actions the Fed undertakes to influence the availability and cost of money and credit to promote the goals mandated by Congress, a stable price level and maximum sustainable employment  Because the expectations of households as consumers and businesses as purchasers of capital goods exert an important influence on the major portion of spending in the United States, and because these expectations are influenced in important ways by the Fed's actions, a broader definition of monetary policy would include the directives, policies, statements, economic forecasts, and other Fed actions, especially those made by or associated with the chairman of its Board of Governors, who is the nation's central banker  The Fed's Federal Open Market Committee (FOMC) meets every six weeks to choose a federal funds target and sometimes meets on an ad hoc basis if it wants to change the target between regularly scheduled meetings  The FOMC is composed of the 7 Fed governors, the President of the Federal Reserve Bank of New York, and 4 of the other 11 regional Federal Reserve Bank presidents serving on a rotating basis  The Fed targets the federal funds rate to carry out monetary policy  The federal funds rate is determined in the private market for overnight reserves of depository institutions (called the federal funds market)  At the end of a given period, usually a day, depository institutions must calculate how many dollars of reserves they want or need to hold against their reservable liabilities (deposits)  Some institutions may discover a reserve shortage (too few reservable assets relative to those they want to hold), whereas others may have reservable assets in excess of their wants  These reserves can be borrowed and lent on an overnight basis in a private market called the federal funds market  The interest rate in this market is called the federal funds rate  If it wishes to expand money and credit, the Fed will lower the target, which encourages more lending activity and, thus, greater demand in the economy  Conversely, if it wishes to tighten money and credit, the Fed will raise the target  The federal funds rate is linked to the interest rates that banks and other financial institutions charge for loans  Thus, whereas the Fed may directly influence only a very short-term interest rate, this rate influences other longer-term rates  However, this relationship is far from being on a one-to-one basis because longer-term market rates are influenced not only by what the Fed is doing today, but also by what it is expected to do in the future and by what inflation is expected to be in the future  This fact highlights the importance of expectations in explaining market interest rates  For that reason, a growing body of literature urges the Fed to be very transparent in explaining what its policy is, will be, and in making a commitment to adhere to that policy  The Fed has responded to this literature and is increasingly transparent in explaining its policy measures and what these measures are expected to accomplish  The Federal Reserve uses two methods to maintain its target for the federal funds rate: The Fed can also change the federal funds rate by changing reserve requirements, which specify what portion of customer deposits (primarily checking accounts) banks must hold as vault cash or on deposit at the Fed  Thus, reserve requirements affect the liquidity available within the federal funds market  Statute sets the numerical levels of reserve requirements, although the Fed has some discretion to adjust them  Currently, banks are required to hold 0% to 10% of customer deposits that qualify as net transaction accounts in reserves, depending on the size of the bank's deposits  This tool is used rarely—the percentage was last changed in 1992  Each of these tools works by altering the overall liquidity available for use by the banking system, which influences the amount of assets these institutions can acquire  These assets are often called credit because they represent loans the institutions have made to businesses and households, among others  The Fed's control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly  The Fed directly controls the monetary base , which is made up of currency (Federal Reserve notes) and bank reserves  The size of the monetary base, in turn, influences broader measures of the money supply, which include close substitutes to currency, such as demand deposits (e g , checking accounts) held at banks  The Fed's definition of monetary policy as the actions it undertakes to influence the availability and cost of money and credit suggests two ways to measure the stance of monetary policy  One is to look at the cost of money and credit as measured by the rate of interest relative to inflation (or inflation projections), and the other is to look at the growth of money and credit itself  Thus, it is possible to look at either interest rates or the growth in the supply of money and credit in coming to a conclusion about the current stance of monetary policy—that is, whether it is expansionary (adding stimulus to the economy), contractionary (slowing economic activity), or neutral  During the high inflation experience of the 1970s the Fed placed greater emphasis on money supply growth, but since then, most central banks including the Fed have preferred to formulate monetary policy in terms of the cost of money and credit rather than in terms of their supply  The Fed conducts monetary policy by focusing on the cost of money and credit as proxied by the federal funds rate  A simple comparison of market interest rates over time as an indicator of changes in the stance of monetary policy is potentially misleading, however  Economists call the interest rate that is essential to decisions made by households and businesses to buy capital goods the real interest rate  It is often proxied by subtracting from the market interest rate the actual or expected rate of inflation  If inflation rises and market interest rates remain the same, then real interest rates have fallen, with a similar economic effect as if market rates (called nominal rates) had fallen by the same amount with a constant inflation rate  The federal funds rate is only one of the many interest rates in the financial system that determines economic activity  For these other rates, the real rate is largely independent of the amount of money and credit over the longer run because it is determined by the interaction of saving and investment (or the demand for capital goods)  The internationalization of capital markets means that for most developed countries the relevant interaction between saving and investment that determines the real interest rate is on a global basis  Thus, real rates in the United States depend not only on U S  national saving and investment but also on the saving and investment of other countries  For that reason, national interest rates are influenced by international credit conditions and business cycles  How do changes in short-term interest rates affect the overall economy? In the short run, an expansionary monetary policy that reduces interest rates increases interest-sensitive spending, all else equal  Interest-sensitive spending includes physical investment (i e , plant and equipment) by firms, residential investment (housing construction), and consumer-durable spending (e g , automobiles and appliances) by households  As discussed in the next section, it also encourages exchange rate depreciation that causes exports to rise and imports to fall, all else equal  To reduce spending in the economy, the Fed raises interest rates and the process works in reverse  An examination of U S  economic history will show that money- and credit-induced demand expansions can have a positive effect on U S  GDP growth and total employment  The extent to which greater interest-sensitive spending results in an increase in overall spending in the economy in the short run will depend in part on how close the economy is to full employment  When the economy is near full employment, the increase in spending is likely to be dissipated through higher inflation more quickly  When the economy is far below full employment, inflationary pressures are more likely to be muted  This same history, however, also suggests that over the longer run, a more rapid rate of growth of money and credit is largely dissipated in a more rapid rate of inflation with little, if any, lasting effect on real GDP and employment  Economists have two explanations for this paradoxical behavior  First, they note that, in the short run, many economies have an elaborate system of contracts (both implicit and explicit) that makes it difficult in a short period for significant adjustments to take place in wages and prices in response to a more rapid growth of money and credit  Second, they note that expectations for one reason or another are slow to adjust to the longer-run consequences of major changes in monetary policy  This slow adjustment also adds rigidities to wages and prices  Because of these rigidities, changes in the growth of money and credit that change aggregate demand can have a large initial effect on output and employment, albeit with a policy lag of six to eight quarters before the broader economy fully responds to monetary policy measures  Over the longer run, as contracts are renegotiated and expectations adjust, wages and prices rise in response to the change in demand and much of the change in output and employment is undone  Thus, monetary policy can matter in the short run but be fairly neutral for GDP growth and employment in the longer run  In societies in which high rates of inflation are endemic, price adjustments are very rapid  During the final stages of very rapid inflations, called hyperinflation, the ability of more rapid rates of growth of money and credit to alter GDP growth and employment is virtually nonexistent, if not negative  Either fiscal policy (defined here as changes in the structural budget deficit, caused by policy changes to government spending or taxes) or monetary policy can be used to alter overall spending in the economy  However, there are several important differences to consider between the two  First, economic conditions change rapidly, and in practice monetary policy can be more nimble than fiscal policy  The Fed meets every six weeks to consider changes in interest rates and can call an unscheduled meeting any time  Large changes to fiscal policy typically occur once a year at most  Once a decision to alter fiscal policy has been made, the proposal must travel through a long and arduous legislative process that can last months before it can become law, whereas monetary policy changes are made instantly  Both monetary and fiscal policy measures are thought to take more than a year to achieve their full impact on the economy due to pipeline effects  In the case of monetary policy, interest rates throughout the economy may change rapidly, but it takes longer for economic actors to change their spending patterns in response  For example, in response to a lower interest rate, a business must put together a loan proposal, apply for a loan, receive approval for the loan, and then put the funds to use  In the case of fiscal policy, once legislation has been enacted, it may take some time for authorized spending to be outlayed  An agency must approve projects and select and negotiate with contractors before funds can be released  In the case of transfers or tax cuts, recipients must receive the funds and then alter their private spending patterns before the economy-wide effects are felt  For both monetary and fiscal policy, further rounds of private and public decisionmaking must occur before multiplier or ripple effects are fully felt  Second, monetary policy is determined based only on the Fed's mandate, whereas fiscal policy is determined based on competing political goals  Fiscal policy changes have macroeconomic implications regardless of whether that was policymakers' primary intent  Political constraints have prevented increases in budget deficits from being fully reversed during expansions  Over the course of the business cycle, aggregate spending in the economy can be expected to be too high as often as it is too low  This means that stabilization policy should be tightened as often as it is loosened, yet increasing the budget deficit has proven to be much more popular than implementing the spending cuts or tax increases necessary to reduce it  As a result, the budget has been in deficit in all but five years since 1961, which has led to an accumulation of federal debt that gives policymakers less leeway to potentially undertake a robust expansionary fiscal policy, if needed, in the future  By contrast, the Fed is more insulated from political pressures, as discussed in the previous section, and experience shows that it is willing to raise or lower interest rates  Third, the long-run consequences of fiscal and monetary policy differ  Expansionary fiscal policy creates federal debt that must be serviced by future generations  Some of this debt will be "owed to ourselves," but some (presently, about half) will be owed to foreigners  To the extent that expansionary fiscal policy crowds out private investment, it leaves future national income lower than it otherwise would have been  Monetary policy does not have this effect on generational equity, although different levels of interest rates will affect borrowers and lenders differently  Furthermore, the government faces a budget constraint that limits the scope of expansionary fiscal policy—it can only issue debt as long as investors believe the debt will be honored, even if economic conditions require larger deficits to restore equilibrium  Fourth, openness of an economy to highly mobile capital flows changes the relative effectiveness of fiscal and monetary policy  Expansionary fiscal policy would be expected to lead to higher interest rates, all else equal, which would attract foreign capital looking for a higher rate of return, causing the value of the dollar to rise  Foreign capital can only enter the United States on net through a trade deficit  Thus, higher foreign capital inflows lead to higher imports, which reduce spending on domestically produced substitutes and lower spending on exports  The increase in the trade deficit would cancel out the expansionary effects of the increase in the budget deficit to some extent (in theory, entirely if capital is perfectly mobile)  Expansionary monetary policy would have the opposite effect—lower interest rates would cause capital to flow abroad in search of higher rates of return elsewhere, causing the value of the dollar to fall  Foreign capital outflows would reduce the trade deficit through an increase in spending on exports and domestically produced import substitutes  Thus, foreign capital flows would (tend to) magnify the expansionary effects of monetary policy


Report 2:  Fifth, fiscal policy can be targeted to specific recipients  In the case of normal open market operations, monetary policy cannot  This difference could be considered an advantage or a disadvantage  On the one hand, policymakers could target stimulus to aid the sectors of the economy most in need or most likely to respond positively to stimulus  On the other hand, stimulus could be allocated on the basis of political or other noneconomic factors that reduce the macroeconomic effectiveness of the stimulus  As a result, both fiscal and monetary policy have distributional implications, but the latter's are largely incidental whereas the former's can be explicitly chosen  In cases in which economic activity is extremely depressed, monetary policy may lose some of its effectiveness  When interest rates become extremely low, interest-sensitive spending may no longer be very responsive to further rate cuts  Furthermore, interest rates cannot be lowered below zero so traditional monetary policy is limited by this "zero lower bound " In this scenario, fiscal policy may be more effective  As is discussed in the next section, some argue that the U S  economy experienced this scenario following the recent financial crisis  Of course, using monetary and fiscal policy to stabilize the economy are not mutually exclusive policy options  But because of the Fed's independence from Congress and the Administration, the two policy options are not always coordinated  If Congress and the Fed were to choose compatible fiscal and monetary policies, respectively, then the economic effects would be more powerful than if either policy were implemented in isolation  For example, if stimulative monetary and fiscal policies were implemented, the resulting economic stimulus would be larger than if one policy were stimulative and the other were neutral  Alternatively, if Congress and the Fed were to select incompatible policies, these policies could partially negate each other  For example, a stimulative fiscal policy and contractionary monetary policy may end up having little net effect on aggregate demand (although there may be considerable distributional effects)  Thus, when fiscal and monetary policymakers disagree in the current system, they can potentially choose policies with the intent of offsetting each other's actions  Whether this arrangement is better or worse for the economy depends on what policies are chosen  If one actor chooses inappropriate policies, then the lack of coordination allows the other actor to try to negate its effects  When the United States experienced the worst financial crisis since the Great Depression, the Fed undertook increasingly unprecedented steps in an attempt to restore financial stability  These steps included reducing the federal funds rate to the zero lower bound, providing direct financial assistance to financial firms, and "quantitative easing " These unconventional policy decisions continue to have consequences for monetary policy today, as the Fed embarks on monetary policy "normalization " The bursting of the housing bubble led to the onset of a financial crisis that affected both depository institutions and other segments of the financial sector involved with housing finance  As the delinquency rates on home mortgages rose to record numbers, financial firms exposed to the mortgage market suffered capital losses and lost access to liquidity  The contagious nature of this development was soon obvious as other types of loans and credit became adversely affected  This, in turn, spilled over into the broader economy, as the lack of credit soon had a negative effect on both production and aggregate demand  In December 2007, the economy entered a recession  As the housing slump's spillover effects to the financial system, as well as its international scope, became apparent, the Fed responded by reducing the federal funds target and the discount rate  Beginning on September 18, 2007, and ending on December 16, 2008, the federal funds target was reduced from 5 25% to a range between 0% and 0 25%, where it remained until December 2015  Economists call this the zero lower bound to signify that once the federal funds rate is lowered to zero, conventional open market operations cannot be used to provide further stimulus  The Fed attempted to achieve additional monetary stimulus at the zero bound through a pledge to keep the federal funds rate low for an extended period of time, which has been called forward guidance or forward commitment   The decision to maintain a target interest rate near zero was unprecedented  First, short-term interest rates have never before been reduced to zero in the history of the Federal Reserve  Second, the Fed waited much longer than usual to begin tightening monetary policy in the current recovery  For example, in the previous two expansions, the Fed began raising rates less than three years after the preceding recession ended  With liquidity problems persisting as the federal funds rate was reduced, it appeared that the traditional transmission mechanism linking monetary policy to activity in the broader economy was not working  Monetary authorities became concerned that the liquidity provided to the banking system was not reaching other parts of the financial system  As noted above, using only traditional monetary policy tools, additional monetary stimulus cannot be provided once the federal funds rate has reached its zero bound  To circumvent this problem, the Fed decided to use nontraditional methods to provide additional monetary policy stimulus  First, the Federal Reserve introduced a number of emergency credit facilities to provide increased liquidity directly to financial firms and markets  The first facility was introduced in December 2007, and several were added after the worsening of the crisis in September 2008  These facilities were designed to fill perceived gaps between open market operations and the discount window, and most of them were designed to provide short-term loans backed by collateral that exceeded the value of the loan  A number of the recipients were nonbanks that are outside the regulatory umbrella of the Federal Reserve; this marked the first time that the Fed had lent to nonbanks since the Great Depression  The Fed authorized these actions under Section 13(3) of the Federal Reserve Act, a seldom-used emergency provision that allowed it to extend credit to nonbank financial institutions and to nonfinancial firms as well  The Fed provided assistance through liquidity facilities, which included both the traditional discount window and the newly created emergency facilities mentioned above, and through direct support to prevent the failure of two specific institutions, American International Group (AIG) and Bear Stearns  The amount of assistance provided was an order of magnitude larger than normal Fed lending, as shown in Figure 1   Total assistance from the Federal Reserve at the beginning of August 2007 was approximately $234 million provided through liquidity facilities, with no direct support given  In mid-December 2008, this number reached a high of $1 6 trillion, with a near-high of $108 billion given in direct support  From that point on, it fell steadily  Assistance provided through liquidity facilities fell below $100 billion in February 2010, when many facilities were allowed to expire, and support to specific institutions fell below $100 billion in January 2011  The last loan from the crisis was repaid on October 29, 2014  Central bank liquidity swaps (temporary currency exchanges between the Fed and central foreign banks) are the only facility created during the crisis still active, but they have not been used on a large scale since 2012  All assistance through expired facilities has been fully repaid with interest  In 2010, the Dodd-Frank Act changed Section 13(3) to rule out direct support to specific institutions in the future  From the introduction of its first emergency lending facility in December 2007 to the worsening of the crisis in September 2008, the Fed sterilized the effects of lending on its balance sheet (i e , prevented the balance sheet from growing) by selling an offsetting amount of Treasury securities  After September 2008, assistance exceeded remaining Treasury holdings, and the Fed allowed its balance sheet to grow  Between September 2008 and November 2008, the Fed's balance sheet more than doubled in size, increasing from less than $1 trillion to more than $2 trillion  The loans and other assistance provided by the Federal Reserve to banks and nonbank institutions are considered assets on this balance sheet because they represent money owed to the Fed  With the federal funds rate at its zero bound and direct lending falling as financial conditions began to normalize in 2009, the Fed faced the decision of whether to try to provide additional monetary stimulus through unconventional measures  It did so through two unconventional tools—large-scale asset purchases (quantitative easing) and forward guidance  With short-term rates constrained by the zero bound, the Fed hoped to reduce long-term rates through large-scale asset purchases, which were popularly referred to as quantitative easing (QE)  Between 2009 and 2014, the Fed undertook three rounds of QE, buying U S  Treasury securities, agency debt, and agency mortgage-backed securities (MBS)  These securities now comprise most of the assets on the Fed's balance sheet  To understand the effect of quantitative easing on the economy, it is first necessary to describe its effect on the Fed's balance sheet  In 2009, the Fed's emergency lending declined rapidly as market conditions stabilized, which would have caused the balance sheet to decline if the Fed took no other action  Instead, asset purchases under the first round of QE (QE1) offset the decline in lending, and from November 2008 to November 2010, the overall size of the Fed's balance sheet did not vary by much  Its composition changed because of QE1, however—the amount of Fed loans outstanding fell to less than $50 billion at the end of 2010, whereas holdings of securities rose from less than $500 billion in November 2008 to more than $2 trillion in November 2010  The second round of QE, QE2, increased the Fed's balance sheet from $2 3 trillion in November 2010 to $2 9 trillion in mid-2011  It remained around that level until September 2012, when it began rising for the duration of the third round, QE3  It was about $4 5 trillion (comprised of $2 5 trillion of Treasury securities, $1 7 trillion MBS, and $0 4 trillion of agency debt) when QE3 ended in October 2014, and has remained at that level since  Table 1 summarizes the Fed's QE purchases  In total, the Fed's balance sheet increased by more than $2 5 trillion over the course of the three rounds of QE, making it about five times larger than it was before the crisis  This increase in the Fed's assets must be matched by a corresponding increase in the liabilities on its balance sheet  The Fed's liabilities mostly take the form of currency, bank reserves, and cash deposited by the U S  Treasury at the Fed  QE has mainly resulted in an increase in bank reserves, from about $46 billion in August 2008 to $820 billion at the end of 2008  Since October 2009, bank reserves have exceeded $1 trillion, and they have been between $2 5 trillion and $2 8 trillion since 2014  The increase in bank reserves can be seen as the inevitable outcome of the increase in assets held by the Fed because the bank reserves, in effect, financed the Fed's asset purchases and loan programs  Reserves increase because when the Fed makes loans or purchases assets, it credits the proceeds to the recipients' reserve accounts at the Fed  The intended purpose of QE was to put downward pressure on long-term interest rates  Purchasing long-term Treasury securities and MBS should directly reduce the rates on those securities, all else equal  The hope is that a reduction in those rates feeds through to private borrowing rates throughout the economy, stimulating spending on interest-sensitive consumer durables, housing, and business investment in plant and equipment  Indeed, Treasury and mortgage rates have been unusually low since the crisis compared with the past few decades, although the timing of declines in those rates does not match up closely to the timing of asset purchases  Determining whether QE reduced rates more broadly and stimulated interest-sensitive spending requires controlling for other factors, such as the weak economy, which tends to reduce both rates and interest-sensitive spending  The increase in the Fed's balance sheet has the potential to be inflationary because bank reserves are a component of the portion of the money supply controlled by the Fed (called the monetary base ), which grew at an unprecedented pace during QE  In practice, overall measures of the money supply have not grown as quickly as the monetary base, and inflation has remained below the Fed's goal of 2% for most of the period since 2008  The growth in the monetary base has not translated into higher inflation because bank reserves have mostly remained deposited at the Fed and have not led to increased lending or asset purchases by banks  Another concern is that by holding large amounts of MBS, the Fed is allocating credit to the housing sector, putting the rest of the economy at a disadvantage compared with that sector  Advocates of MBS purchases note that housing was the sector of the economy most in need of stabilization, given the nature of the crisis (this argument becomes less persuasive as the housing market continues to rebound); that MBS markets are more liquid than most alternatives, limiting the potential for the Fed's purchases to be disruptive; and that the Fed is legally permitted to purchase few other assets, besides Treasury securities  On October 29, 2014, the Fed announced that it would stop making large-scale asset purchases at the end of the month  Now that QE is completed, attention has turned to the Fed's "exit strategy" from QE and zero interest rates  The Fed laid out its plans to normalize monetary policy in a statement in September 2014  It plans to continue implementing monetary policy by targeting the federal funds rate  The basic challenge to doing so is that the Fed cannot effectively alter the federal funds rate by altering reserve levels (as it did before the crisis) because QE has flooded the market with excess bank reserves  In other words, in the presence of more than $2 trillion in bank reserves, the market-clearing federal funds rate is close to zero even if the Fed would like it to be higher  The most straightforward way to return to normal monetary policy would be to remove those excess reserves by shrinking the balance sheet through asset sales  The Fed does not intend to sell any securities, however  Instead, it is gradually reducing the balance sheet by ceasing to roll over securities as they mature, which began in September 2017—almost three years after QE ended  Initially, it allowed only $6 billion of Treasuries and $4 billion of MBS to run off each month, which was gradually increased to $30 billion of Treasuries and $20 billion of MBS per month, where it will remain until normalization is completed  The Fed believes that it would only cease shrinking the balance sheet or use QE again in the future if it its ability to stimulate the economy using reductions in the federal funds rate were insufficient  The Fed intends to ultimately reduce the balance sheet until it holds "no more securities than necessary to implement monetary policy efficiently and effectively " The Fed has stated that it foresees a balance sheet size that is consistent with this goal will be larger than it was before the crisis  In part, that is because other liabilities on the Fed's balance sheet are larger—there is more currency in circulation now than there was before the crisis, and the Treasury has kept larger balances on average in its account at the Fed  But the balance sheet will also be significantly larger because the Fed decided in January 2019 to continue using its new method of targeting the federal funds rate even after normalization is completed  Under the new method, the federal funds rate is not determined by supply and demand in the market for bank reserves, and the Fed would prefer to maintain abundant bank reserves so that it does not have to use open market operations to respond to changes in banks' demand for reserves  By contrast, if it went back to the pre-crisis method of targeting the federal funds rate, only minimal excess reserve balances would be necessary (but perhaps more than before the crisis), so its balance sheet could be much smaller  The Fed has not yet announced when the wind-down will be completed or how large the balance sheet would be upon completion, but the January 2019 FOMC minutes noted the wind-down could be completed as soon as this year  In that case, the balance sheet would not be much smaller than its current size of $4 trillion when normalization is completed—more than four times larger than its pre-crisis size  Although the Fed has stated that it intends to eventually stop holding MBS, the Fed would still have sizable MBS holdings in 2025, according to projections from the New York Fed  In order to raise the federal funds rate in the presence of large reserves, the Fed has raised the two market interest rates that are close substitutes—it has directly raised the rate it pays banks on reserves held at the Fed and used large-scale reverse repurchase agreements (repos) to alter repo rates  In 2008, Congress granted the Fed the authority to pay interest on reserves  Because banks can earn interest on excess reserves by lending them in the federal funds market or by depositing them at the Fed, raising the interest rate on bank reserves should also raise the federal funds rate  In this way, the Fed can lock up excess liquidity to avoid any potentially inflationary effects because reserves kept at the Fed cannot be put to use by banks to finance activity in the broader economy  In practice, the interest rate that the Fed has paid banks on reserves has been slightly higher than the federal funds rate, which some have criticized as a subsidy to banks  Reverse repos are another tool for draining liquidity from the system and influencing short-term market rates  They drain liquidity from the financial system because cash is transferred from market participants to the Fed  As a result, interest rates in the repo market, one of the largest short-term lending markets, rise  The Fed has long conducted open market operations through the repo market, but since 2013 it has engaged in a much larger volume of reverse repos with a broader range of nonbank counterparties, including the government-sponsored enterprises (such as Fannie Mae and Freddie Mac) and certain money market funds, through a new Overnight Reverse Repurchase Operations Facility  The Fed is currently not capping the amount of overnight reverse repos offered through this facility  There has been some concern about the potential ramifications of the Fed becoming a dominant participant in this market and expanding its counterparties  For example, will counterparties only be willing to transact with the Fed in a panic, and will the Fed be exposed to counterparty risk with nonbanks that it does not regulate? The Fed has distinct roles as a central bank and a regulator  Its main regulatory responsibilities are as follows: B ank regulation   The Fed supervises bank holding companies (BHCs) and thrift holding companies (THCs), which include all large and thousands of small depositories, for safety and soundness  The Dodd-Frank Act requires the Fed to subject BHCs with more than $50 billion in consolidated assets to enhanced prudential regulation (i e , stricter standards than are applied to similar firms) in an effort to mitigate the systemic risk they pose  The Fed is also the prudential regulator of U S  branches of foreign banks and state banks that have elected to become members of the Federal Reserve System  Often in concert with the other banking regulators, it promulgates rules and supervisory guidelines that apply to banks in areas such as capital adequacy, and examines depository firms under its supervision to ensure that those rules are being followed and those firms are conducting business prudently  The Fed's supervisory authority includes consumer protection for banks under its jurisdiction that have $10 billion or less in assets  P rudential regulat ion of nonbank systemically important financial institutions   The Dodd-Frank Act allows the Financial Stability Oversight Council (FSOC) to designate nonbank financial firms as systemically important (SIFIs)  Designated firms are supervised by the Fed for safety and soundness  Since enactment, the number of designated firms has ranged from four, initially, to none today  R egulation of the payment system   The Fed regulates the retail and wholesale payment system for safety and soundness  It also operates parts of the payment system, such as interbank settlements and check clearing  The Dodd-Frank Act subjects payment, clearing, and settlement systems designated as systemically important by the FSOC to enhanced supervision by the Fed (along with the Securities and Exchange Commission and the Commodity Futures Trading Commission, depending on the type of system)  M argin requirements   The Fed sets margin requirements on the purchases of certain securities, such as stocks, in certain private transactions  The purpose of margin requirements is to mandate what proportion of the purchase can be made on credit  The Fed attempts to mitigate systemic risk and prevent financial instability through these regulatory responsibilities, as well as through its lender of last resort activities and participation on the FSOC (whose mandate is to identify risks and respond to emerging threats to financial stability)  The Fed has focused more on attempting to mitigate systemic risk through its regulations since the financial crisis, and has also restructured its internal operations to facilitate a macroprudential approach to supervision and regulation 

ground_truth: In 2015, 3.8 million Americans reported misusing prescription drugs within the last month, and deaths from prescription opioids have more than quadrupled since 1999. About half of the people who reported misusing prescription drugs in 2015 received them from a friend or relative. One way to help prevent this kind of diversion and potential misuse is by providing secure and convenient ways to dispose of unused, unneeded, or expired prescription medications. The Secure and Responsible Drug Disposal Act of 2010 authorizes pharmacies and other entities already authorized by DEA to handle controlled substances to also collect unused prescription drugs for disposal. In 2014, DEA finalized regulations for the implementation of the Act, establishing a voluntary process for eligible entities to become authorized collectors of unused prescription drugs using disposal bins. GAO was asked to review participation among authorized collectors that maintain disposal bins. In this report GAO describes (1) participation rates among entities eligible to collect unused prescription drugs and (2) factors that affect participation. GAO analyzed the most currently available DEA data from April 2017 on entities eligible to participate and those participating as authorized collectors. GAO also conducted interviews with DEA officials and a nongeneralizable sample of 11 stakeholder organizations selected to illustrate different types of authorized collectors and long-term care facilities. GAO is not making any recommendations. DEA provided technical comments, which GAO incorporated as appropriate. GAO found that about 3 percent of pharmacies and other entities eligible to collect unused prescription drugs for disposal have volunteered to do so. The Drug Enforcement Administration (DEA) authorizes these entities to dispose of unused drugs to help reduce their potential misuse. Analysis of DEA data shows that as of April 2017, 2,233 of the 89,550 (2.49 percent) eligible entities—that is, certain entities already authorized by DEA to handle controlled substances—had registered with DEA to use disposal bins to collect unused prescription drugs. Most—about 81 percent—of the authorized collectors were pharmacies, followed by hospitals or clinics. GAO also found that participation rates varied by state, though in 44 states less than 5 percent of the state's pharmacies and other eligible entities had registered to become authorized collectors. Stakeholders cited several factors that may explain why relatively few pharmacies and other eligible entities have registered with DEA as authorized collectors of unused drugs. Most notably, stakeholders representing authorized collectors told GAO that because participation is voluntary, the cost associated with maintaining a disposal bin—which includes purchasing and installing the bin according to DEA requirements and paying for the destruction of its contents—is an important factor to weigh against potential benefits. DEA noted that availability of disposal by law enforcement agencies also contributes to low participation.