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



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



Report 2: State is the lead agency involved in implementing American foreign policy and representing the United States abroad  According to State and USAID’s joint strategic plan for fiscal years 2018 through 2022, State’s goals are to (1) protect America’s security at home and abroad, (2) renew America’s competitive advantage for sustained economic growth and job creation, (3) promote American leadership through balanced engagement, and (4) ensure effectiveness and accountability to the American taxpayer  State’s Foreign Service employees serve in a variety of functions at overseas posts as either generalists or specialists  Foreign Service generalists help formulate and implement U S  foreign policy and are assigned to work in one of five career tracks: consular, economic, management, political, or public diplomacy  Generalists at overseas posts collect information and engage with foreign governments and citizens of foreign countries and report the results of these interactions back to State headquarters in Washington, D C , among other functions  Foreign Service specialists abroad support and maintain the functioning of overseas posts and serve in one of 25 different skill groups, in positions such as security officer or information management  Specialists at overseas posts play a critical role in ensuring the security and maintenance of the posts’ facilities, computer networks, and supplies as well as the protection of post staff, their family members, and local staff, among other functions  State may require Foreign Service employees to be available for service anywhere in the world, as needed, and State has the authority to direct Foreign Service employees to any of its posts overseas or to its headquarters in Washington, D C  However, as noted in our 2012 report, State generally does not use this authority, preferring other means of filling high-priority positions, according to State officials  The process of assigning Foreign Service employees to their positions typically begins when they receive a list of upcoming vacancies for which they may compete  Foreign Service employees then submit a list of positions for which they would like to be considered, known as bids, to the Office of Career Development and Assignments and consult with their career development officer  The process varies depending on an officer’s grade and functional specialty, and State uses a variety of incentives to encourage Foreign Service employees to bid on difficult-to-fill posts  State groups countries of the world—and corresponding U S  overseas posts in these countries—into areas of responsibility under six geographic regional bureaus: Bureau of African Affairs Bureau of East Asian and Pacific Affairs Bureau of European and Eurasian Affairs Bureau of Near Eastern Affairs Bureau of South and Central Asian Affairs Bureau of Western Hemisphere Affairs Overseas posts report to State headquarters through their respective regional bureaus  For example, because the Bureau of African Affairs has responsibility for developing and managing U S  policy concerning parts of the African continent, U S  overseas posts in Nigeria report through the bureau to State headquarters  According to State officials, State maintains personnel data on State employees in its GEMS database  GEMS includes information on Foreign Service and Civil Service positions; in particular, it shows the total number of authorized Foreign Service positions at State and whether each position is currently filled or vacant  As displayed in figure 1, the GEMS data show that the majority of Foreign Service employees (73 percent) work in positions at overseas posts  However, some Foreign Service staff (27 percent) are assigned to positions in the United States, where they may complete required language or other training, serve as desk officers for the regional bureaus, or work in other functions at State headquarters  According to State data, the number of both staffed and vacant overseas Foreign Service positions increased between 2008 and 2018  As shown in figure 2, the number of positions staffed grew from 6,979 in 2008 to 8,574 in 2018—a more than 20 percent increase  Despite the increase in the number of positions staffed, our analysis found that as of March 31, 2018, overall, 13 percent of State’s overseas Foreign Service positions were vacant  This vacancy percentage is similar to the percentages of vacancies in overseas Foreign Service positions that we reported in 2012 and 2008  In 2012, we reported that 14 percent of State’s overseas Foreign Service positions were vacant as of October 31, 2011, and we reported that the same percentage of overseas Foreign Service positions—14 percent—were vacant as of September 30, 2008  According to State officials, State’s ability to hire Foreign Service employees to fill persistent vacancies has been affected by factors such as reduced appropriations  For instance, according to State officials and State’s Five Year Workforce Plan, because of funding cuts enacted in fiscal year 2013, State could only hire one employee for every two leaving the Foreign Service  From fiscal years 2014 to 2016, funding for State’s annual appropriations supported hiring to replace Foreign Service employees projected to leave the agency, according to State officials  These officials indicated, however, that Foreign Service hiring was again impacted from January 2017 through May 2018 by a hiring freeze  As a result, State hired below levels required to replace full projected attrition of Foreign Service employees  While State’s data show persistent vacancies in both generalist and specialist positions at overseas posts, specialist positions remain vacant at a higher rate  State’s data show that 12 percent (680 of 5,660) of overseas Foreign Service generalist positions were vacant as of March 31, 2018, a slight decrease from the 14 percent of overseas Foreign Service generalist positions that we reported vacant in 2012  State’s data also show that 14 2 percent (594 of 4,188) of all overseas Foreign Service specialist positions were vacant, close to the 14 8 percent vacancy rate that we reported in 2012  State’s data show persistent vacancies in Foreign Service generalist positions responsible for analysis, engagement, and reporting at overseas posts  As shown in table 1, among Foreign Service generalist career tracks, the political, economic, and “other” tracks had the largest percentage of vacant positions, with, respectively, 20 percent, 16 percent, and 14 percent of positions vacant as of March 31, 2018  Our 2012 report noted vacancies in the same three career tracks  Political officers at overseas posts are responsible for collecting and analyzing information on political events, engaging with foreign governments, and reporting back to State headquarters  Economic officers at overseas posts work with foreign governments and other U S  agencies on technology, science, economic, trade, and environmental issues  The “other” generalist career track includes positions designated as “Executive” or “International Relations,” which, according to State officials, may be filled by generalists from any of State’s five career tracks  State’s data show persistent vacancies in Foreign Service specialist positions that support and maintain the functioning of overseas posts  Among the 10 largest Foreign Service specialist skill groups, security officer, office management specialist, and information management had the largest percentages of vacant positions  As shown in figure 3, in these three groups, respectively, 16 percent, 16 percent, and 14 percent of positions were vacant  The vacancies in these three specialist skill groups are persistent; in 2012, we reported that the same three groups had the largest numbers of vacant positions  Security officers are typically responsible for responding to various threats to the physical security of overseas posts and for ensuring the protection of post staff, their family members, and local staff  Office management specialists provide professional management and administrative support  Information management staff are typically responsible for maintaining and ensuring the security of State’s computer networks and communications systems at overseas posts  State officials said that State has had difficulty in recruiting and hiring Foreign Service employees to fill specialist positions in some skill groups at overseas posts  According to State officials and staff at overseas posts, some vacant specialist positions are more difficult to fill than others because candidates for these positions must often possess skills in fields such as medicine or information technology that tend to be highly sought after in the private sector  According to staff at overseas posts, it is not uncommon for specialist candidates in these fields to choose higher- paying jobs in the private sector rather than specialist positions in the Foreign Service  Additionally, in some circumstances, State must compete with other federal agencies to recruit specialists from the same limited pool of talent  Consequently, according to State officials, State has been unable to attract and retain personnel with the skills necessary to fill some Foreign Service specialist positions, which has led to persistent vacancies in specialist positions  Vacancies in Foreign Service specialist positions at overseas posts present additional challenges because specialized skills and competencies are often required to perform the work of these positions  According to State officials, because Foreign Service generalists may be assigned to work outside of their career tracks, in some circumstances, State has more flexibility in filling a generalist vacancy than a specialist vacancy  For example, generalists outside the consular career track can serve as a consular officer for one or more tours of duty  However, specialist positions often require specialized skills or experience that generalists may not possess  In addition, according to staff at overseas posts, it is generally not possible for a Foreign Service specialist from one skill group to perform the work of a Foreign Service specialist from a different skill group  For instance, a Foreign Service specialist assigned to the medical section at a post will not be able to help address the workload of a vacant position in the information management section  Thus, according to staff at overseas posts, vacancies in specialist positions at the posts may create greater challenges than vacancies in generalist positions  According to State’s data, as of March 31, 2018, overseas posts with State’s highest foreign policy priorities had the highest percentages of vacant Foreign Service positions  Using its Overseas Staffing Model process, State assigns each embassy to one of seven categories based primarily on the level and type of work required to pursue the U S  government’s diplomatic relations with the host country at post  As we previously reported, the rankings are closely associated with the department’s foreign policy priorities; the higher the category, the greater the resources needed to conduct the work of the overseas post and the higher the post’s foreign policy priority  For example, the highest-level category, level 5+, includes the largest, most comprehensive full-service posts, where the host country’s regional and global role requires extensive U S  personnel resources  The lowest-level category includes small embassies with limited requirements for advocacy, liaison, and coordination in the host country’s government  As shown in table 2, according to State’s data, as of March 31, 2018, overseas posts in the “Embassy 5+” category had the highest percentage of vacant positions  The results of this analysis were similar to those we reported in 2012  While State has Foreign Service vacancies worldwide, as of March 31, 2018, the highest percentages of vacancies were in the South and Central Asian Affairs Bureau (SCA) and Near Eastern Affairs Bureau (NEA)—bureaus representing regions with heightened security risks that could threaten U S  foreign policy interests, according to State  SCA, which includes countries such as Afghanistan, Pakistan, and India, faces a host of security and stability challenges that could threaten U S  interests, according to a February 2018 report from State’s Office of Inspector General  NEA includes countries, such as Egypt, Iraq, and Saudi Arabia, which have faced numerous security threats in recent years that could also threaten U S  interests overseas  As shown in figure 4, among State’s regional bureaus, as of March 31, 2018, SCA and NEA had the highest percentages of overseas Foreign Service vacancies at 21 percent (238 of 1,115 positions) and 18 percent (234 of 1,279 positions), respectively  In 2012, we reported that these two bureaus also had the highest percentages of overseas Foreign Service vacancies among regional bureaus  Vacancies in Foreign Service positions at overseas posts increase workloads and adversely affect the morale of Foreign Service employees  According to State officials in headquarters and staff at overseas posts, when a Foreign Service position at an overseas post is vacant, Foreign Service employees at that post are generally responsible for covering the workload of the vacant position  Further, Foreign Service employees at some posts—particularly posts with fewer Foreign Service staff—may be responsible for covering the workload of multiple vacant positions  For example, at two African posts we heard examples of Foreign Service employees covering the workload of multiple vacant Foreign Service positions  As a result of increased workloads, Foreign Service employees are also more likely to have less time available to perform some important functions, according to staff at overseas posts  According to staff at overseas posts, such functions include training and supervising entry- level Foreign Service employees, local staff, and eligible family members (EFM); reducing the risk of fraud, waste, and abuse; improving and innovating processes at post that could reduce inefficiencies; initiating and implementing projects that could enhance various diplomatic efforts; and conducting maintenance of systems  In addition, according to staff at overseas posts, vacancies adversely affect staff morale  Staff at multiple posts said that vacancies and the resulting increased workloads had created substantial stress and increased “burnout” of Foreign Service employees at the posts  They noted that these levels of stress and burnout had contributed to Foreign Service employees’ ending their overseas assignments early for medical or personal reasons  These curtailments, in turn, had increased the overall vacancies and their effects at overseas posts  According to staff at overseas posts, vacancies in Foreign Service generalist positions at overseas posts adversely affect State’s diplomatic readiness  Among Foreign Service generalist career tracks, the political and economic career tracks had the two largest percentages of vacant positions—20 percent and 16 percent, respectively—as of March 31, 2018  According to staff at overseas posts, vacancies in political and economic positions at overseas posts—particularly posts with fewer Foreign Service employees—limit the amount of reporting on political and economic developments that posts are able to submit back to State headquarters  For example, Foreign Service employees from three posts in Africa told us that persistent, long-term vacancies in those posts’ political and economic positions had constrained their abilities to provide full reporting on political and economic developments in their host countries  According to staff at overseas posts, reporting on political and economic developments in other countries—submitted by overseas posts back to State headquarters—is essential for State to make informed foreign policy decisions  Foreign Service employees from two posts in large countries in East and South Asia also told us that vacancies in these sections had limited their capacity to engage with host government officials on important, strategic issues for the United States, such as reducing nuclear proliferation or enhancing trade and investment relationships with the United States  Vacancies in the political and economic career tracks at overseas posts could adversely affect State’s ability to achieve two of the goals in State and USAID’s joint strategic plan for fiscal years 2018 through 2022—(1) renew America’s competitive advantage for sustained economic growth and job creation and (2) promote American leadership through balanced engagement  According to staff at overseas posts, vacancies in Foreign Service specialist positions at overseas posts may heighten the level of security risk at the posts and disrupt post operations  Among Foreign Service specialist skill groups with the highest number of vacant positions, security officer, office management specialist, and information management had the largest percentages of vacant positions—16 percent, 16 percent, and 14 percent, respectively—as of March 31, 2018  According to staff at overseas posts, vacancies in security officer positions at overseas posts reduce the amount of time that security staff can spend identifying, investigating, and responding to potential security threats to the post  Security officers are also responsible for identifying and analyzing host-country intelligence-gathering efforts at their respective overseas posts—and post staff told us that, because of vacancies in these positions, some security officers had been unable to complete this work for their posts, potentially increasing the risk of foreign government officials gaining access to sensitive information  Also, post staff told us that security officer vacancies limit the amount of time that security officers present at posts can devote to important security oversight activities, including regular training, drilling, and supervising of local guard forces and security contractors  Post staff noted, for example, that security officers at overseas posts should conduct regular training and drilling exercises to evaluate their local guard force’s effectiveness in searching a vehicle entering the post compound for explosive devices  According to post staff, when these important security oversight activities are not properly and regularly conducted, the level of security risk at these overseas posts may increase  According to State officials in headquarters and staff at overseas posts, as well as reporting by State’s OIG, vacancies in information management positions at overseas posts have increased the vulnerability of posts’ computer networks to potential cybersecurity attacks and other malicious threats  State officials told us that the Foreign Service had faced chronic shortages of information management staff available to fill these positions worldwide  According to State officials, because of ongoing information management vacancies, some required tasks—such as conducting planned network maintenance—were performed infrequently or not at all  In another example, staff at overseas posts said that because of vacancies, information management staff had been unable to regularly check their computer system logs to ensure that security breaches had not taken place  Post staff added that, if a breach did occur, vacancies could increase the amount of time needed to identify an attack and deploy countermeasures, further increasing the risks to posts’ computer networks  Inspections conducted by State’s OIG from fall 2014 to spring 2016 found that information management staff at 33 percent of overseas posts had not performed various required information management duties  According to State’s OIG, neglect of these duties may leave the department vulnerable to increased cybersecurity attacks  According to staff at overseas posts, the office management specialist position at overseas posts has evolved considerably over time; these specialists increasingly play a critical role in ensuring that the work of overseas posts is effectively completed  Post staff said that office management specialists provide administrative and other support services to other Foreign Service employees and are assigned to various sections of post  For example, staff at one post noted that office management specialists assigned to the Security Officer sections at overseas posts reduce the workload of security officers by completing more routine security tasks and allowing the security officers to focus on more challenging or involved tasks necessary to secure overseas posts  Post staff told us that vacancies in office management specialist positions reduce the amount of work that can be completed by other Foreign Service employees at overseas posts  For example, when office management specialist positions assigned to the Security Officer or Information Management sections of posts are vacant, these vacancies further exacerbate the higher number of vacancies that already exist in these sections  According to staff at overseas posts, higher numbers of office management specialist vacancies require other Foreign Service employees to spend a significant amount of time on administrative tasks, reducing the amount of time these staff can spend on mission-critical activities  Officials in headquarters and at overseas posts described various State efforts to help address overseas Foreign Service vacancies  According to State officials, Foreign Service vacancies at overseas posts are a complex problem that multiple offices within State address on an individual basis  State’s various efforts to address overseas Foreign Service vacancies are not guided by an integrated action plan to reduce persistent vacancies  Our 2017 High-Risk Series report calls for agencies to, among other things, design and implement action plan strategies for closing skills gaps  The action plan should (1) define the root cause of all skills gaps within an agency and (2) provide suggested corrective measures, including steps necessary to implement solutions  This report also emphasizes the high risk that mission-critical skills gaps in the federal workforce pose to the nation  While various State offices have implemented the efforts we identified, State lacks an action plan that is integrated—or consolidated—across its relevant offices to guide its efforts to address persistent overseas Foreign Service vacancies  Moreover, some staff at overseas posts acknowledged that the efforts State has taken to help address vacancies have not reduced persistent Foreign Service vacancies, notably in specialist positions  In response to our inquiry about an action plan, State officials said that the agency does not have a single document that addresses Foreign Service staffing gaps at overseas posts  Instead, State officials directed us to State’s Five Year Workforce Plan: Fiscal Years 2016-2020, stating that it was the most comprehensive document that outlines State’s efforts to address Foreign Service vacancies at overseas posts  The workforce plan notes that it provides a framework to address State’s human capital requirements and highlights State’s challenges and achievements in recruiting, hiring, staffing, and training Foreign Service staff  However, in reviewing the portions of the workforce plan that State indicated were most relevant, we found that the workforce plan does not include an integrated action plan that defines the root causes of the persistent overseas Foreign Service vacancies we identified or suggest corrective measures to reduce vacancies in these positions, including steps necessary to implement solutions  State officials also noted that they frequently meet to discuss and address workforce issues  For example, they said they convene a multi-bureau planning group that meets biweekly to discuss strategic workforce issues such as hiring needs based on attrition and other issues  However, according to State officials, this group has not developed an action plan to reduce persistent Foreign Service vacancies at overseas posts  State lacks an integrated action plan to guide its efforts to address persistent Foreign Service vacancies that includes corrective measures to address the root causes of the vacancies  Without defining the root causes of persistent Foreign Service vacancies at overseas posts and identifying appropriate corrective measures, overseas vacancies may persist and continue to adversely affect State’s ability to achieve U S  foreign policy goals  Foreign Service generalists and specialists at overseas posts are critical to advancing U S  foreign policy and economic interests abroad  However, for at least a decade, the Foreign Service has had persistent vacancies in both generalist and specialist positions at overseas posts  In particular, large numbers of vacant positions have persisted over time in certain overseas Foreign Service positions, such as information management and security officer positions  These vacancies in critical positions at overseas posts have adversely affected State’s ability to carry out its mission effectively and threaten State’s ability to ensure the security and safety of its employees, their families, and post facilities  While State has made some efforts to address Foreign Service vacancies, addressing chronic vacancies in critical positions at overseas posts requires a thoughtful, coherent, and integrated action plan that defines the root causes of persistent Foreign Service vacancies at overseas posts along with suggested corrective measures to reduce such vacancies, following what was called for in our 2017 High-Risk Series report  Developing such an action plan would help State address its persistent staffing gaps, improve its ability to achieve U S  foreign policy goals, and help ensure secure and efficient operations  The Secretary of State should develop an integrated action plan that defines the root causes of persistent Foreign Service vacancies at overseas posts and provides suggested corrective measures to reduce such vacancies, including steps necessary to implement solutions  (Recommendation 1) We provided a draft of this report to State for review and comment  In its comments, reproduced in appendix III, State concurred with our recommendation  State also noted that it has taken actions and identified some causes of vacancies, but acknowledged that it lacks an integrated action plan and will take steps to develop such a plan  State also provided technical comments, which we incorporated as appropriate  We are sending copies of this report to the appropriate congressional committees, the Secretary of State, and other interested parties  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-6881 or bairj@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix IV  This report examines (1) vacancies in the Department of State’s (State) Foreign Service staffing at overseas posts, (2) reported effects of Foreign Service vacancies on diplomatic readiness, and (3) State’s efforts to address Foreign Service vacancies  To address these three objectives, we interviewed State officials from the department’s Bureau of Human Resources and Bureau of Consular Affairs as well as State officials representing the Offices of the Executive Director for State’s six regional bureaus  We also interviewed staff at 10 overseas posts  We conducted in-person interviews with staff at 3 of these posts—the U S  Embassy in Beijing and the U S  Consulate in Shanghai, China, and the U S  Embassy in New Delhi, India  We conducted telephone interviews with staff at the other 7 posts—the U S  Embassies in Abuja, Nigeria; Bogota, Colombia; Kinshasa, Democratic Republic of the Congo; Kabul, Afghanistan; Mexico City, Mexico; and N’Djamena, Chad; and the U S  Consulate in Frankfurt, Germany  We used the following criteria to select overseas posts for interviews: (1) posts with larger numbers of Foreign Service vacancies; (2) posts with diversity in the types of Foreign Service positions that were vacant; (3) posts with higher relative importance to U S  economic, national security, and other foreign policy interests; and (4) posts in a range of geographic locations by State region  To examine vacancies in State’s Foreign Service staffing at overseas posts, we analyzed State’s personnel data on Foreign Service staffing at overseas posts from the department’s Global Employment Management System (GEMS), as of March 2018  Our analysis of the GEMS data includes Foreign Service positions filled by permanent Foreign Service employees as well as positions filled by nonpermanent Foreign Service employees, such as Consular Fellows  This analysis does not include the number of staffed and vacant positions at overseas posts in Libya, Syria, and Yemen, which, at the time of our review, were in suspended operations status, as well as U S  Mission Somalia, which was operating under special circumstances at a different location  To calculate vacancy rates, we divided the total number of positions by the number of positions listed as vacant in GEMS  For example, a post with 10 positions and 2 vacancies would have a vacancy rate of 20 percent  We calculated vacancy rates for each of the following categories: type (i e , generalist or specialist), function (e g , consular or information management), regional bureau (i e , Bureau of African Affairs or Bureau of Western Hemisphere Affairs), and embassy and nonembassy rankings from State’s Overseas Staffing Model (i e , Embassy 3+ or 5)  According to State officials, the data in GEMS have a number of limitations: The number of vacant positions at overseas posts listed in GEMS may be overstated, because State has not yet decided to remove some of these positions from its database  Some of the vacancies in GEMS are short-term or temporary  Foreign Service employees periodically rotate out of their positions at their overseas posts, sometimes creating temporary vacancies until the positions are filled by incoming Foreign Service employees  The GEMS data show larger numbers of vacant Foreign Service positions at posts in Afghanistan, Iraq, and Pakistan than actually were unstaffed at these posts  According to State officials, this discrepancy results from State’s relying heavily on shorter-term assignments to fill Foreign Service positions at these locations  These shorter-term assignments are not reflected in GEMS, and the positions therefore appear vacant  The GEMS data may not reflect Foreign Service employees who have been temporarily reassigned from one overseas post to another  The GEMS data may show positions as filled although the Foreign Service employee filling the position has not yet arrived at post  To assess the reliability of the GEMS database, we asked State officials whether State had made any major changes to the database since our 2012 report, when we assessed the GEMS data to be sufficiently reliable  State officials indicated that no major changes had been made  We also tested the data for completeness, confirmed the general accuracy of the data with officials at selected overseas posts, and interviewed knowledgeable officials from State’s Office of Resource Management and Organizational Analysis concerning the data’s reliability  We found the GEMS data to be reliable for the purpose of determining the numbers and percentages of vacant Foreign Service positions at overseas posts  We did not validate whether the total number of authorized overseas Foreign Service positions was appropriate or met State’s needs  We also reviewed State workforce planning documents and budget documents, such as State’s Five Year Workforce and Leadership Succession Plan: Fiscal Years 2016-2020 and Quadrennial Diplomacy and Development Review  In addition, we reviewed State Office of Inspector General reports as well as our previous reports on human capital challenges at State and effective strategic human capital management across the federal government  In particular, our report High-Risk Series: Progress on Many High-Risk Areas, While Substantial Efforts Needed on Others notes that strategic human capital management is a high-risk issue across the federal government and lists five key elements as a road map for agency efforts to improve and ultimately address such issues  For our third objective, we assessed whether State’s efforts to address vacancies were guided by a corrective action plan that identifies the root causes of persistent Foreign Service vacancies at overseas posts and suggests corrective measures to reduce such vacancies, including steps necessary to implement solutions  We conducted this performance audit from August 2017 to March 2019 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  The “Economic” generalist career track includes positions from the “Science Officer” staffing skill group in the GEMS data  170 Foreign Service employees were not staffed to one of the six regional bureaus  In addition to the contact named above, Godwin Agbara (Assistant Director), Ian Ferguson (Analyst-in-Charge), Anthony Costulas, Natalia Pena, Debbie Chung, Chris Keblitis, Reid Lowe, Justin Fisher, and Alexander Welsh made key contributions to this report 
Report 2:  We also estimated that, given the additional time needed to do compliance inspections, the CFATS program would likely be implemented in 8 to 10 years  We did not make any recommendations for DHS to improve its procedures for reviewing facilities’ security plans because DHS officials reported that they were exploring ways to expedite the process, such as reprioritizing resources and streamlining inspection requirements  In July 2015, we reported that DHS had made substantial progress in addressing the backlog—estimating that it could take between 9 and 12 months for DHS to review and approve security plans for the approximately 900 remaining facilities  DHS officials attributed the increased approval rate to efficiencies in DHS’s review process, updated guidance, and a new case management system  Subsequently, DHS reported in its December 2016 semi-annual report to Congress that it had eliminated its approval backlog  Finally, we found in our 2017review that DHS also took action to implement an Expedited Approval Program (EAP)  The CFATS Act of 2014 required that DHS create the EAP as another option that tier 3 and tier 4 chemical facilities may use to develop and submit security plans to DHS  Under the program, facilities may develop a security plan based on specific standards published by DHS (as opposed to the more flexible performance standards using the standard, non-expedited process)  DHS issued guidance intended to help facilities prepare and submit their EAP security plans to DHS, which includes an example that identifies prescriptive security measures that facilities are to have in place  According to committee report language, the EAP was expected to reduce the regulatory burden on smaller chemical companies, which may lack the compliance infrastructure and the resources of large chemical facilities, and help DHS to process security plans more quickly  If a tier 3 or 4 facility chooses to use the expedited option, DHS is to review the plan to determine if it is facially deficient, pursuant to the reporting requirements of the CFATS Act of 2014  If DHS approves the EAP site security plan, it is to subsequently conduct a compliance inspection  In 2017, we found that DHS had implemented the EAP and had reported to Congress on the program, as required by the CFATS Act of 2014  In addition, as of June 2018 according to DHS officials, only 18 of the 3,152 facilities eligible to use the EAP opted to use it  DHS officials we interviewed attributed the low participation to several possible factors including: DHS had implemented the expedited program after most eligible facilities already submitted standard (non-expedited) security plans to DHS; facilities may consider the expedited program’s security measures to be too strict and prescriptive, not providing facilities the flexibility of the standard process; and the lack of an authorization inspection may discourage some facilities from using the expedited program because this inspection provides useful information about a facility’s security  We also found in 2017 that recent changes made to the CFATS program could affect the future use of the expedited program  As discussed previously, DHS has revised its methodology for determining the level of each facility’s security risk, which could affect a facility’s eligibility to participate in the EAP  DHS continues to apply the revised methodology to facilities regulated under the CFATS program and but it is too early to assess the impact on participation in the EAP  In our July 2015 report, we found that DHS began conducting compliance inspections in September 2013, and by April 2015, had conducted inspections of 83 of the 1,727 facilities that had approved security plans  Our analysis showed that nearly half of the facilities were not fully compliant with their approved site security plans and that DHS had not used its authority to issue penalties because DHS officials found it more productive to work with facilities to bring them in compliance  We also found that DHS did not have documented processes and procedures for managing the compliance of facilities that had not implemented planned measures by the deadlines outlined in the plans  We recommended that DHS document processes and procedures for managing compliance to provide more reasonable assurance that facilities implement planned measures and address security gaps  DHS agreed and has taken steps toward implementing this recommendation  DHS updated its CFATS Enforcement Standard Operating Procedure (SOP) and has made progress on the new CFATS Inspections SOP  Once completed these two documents collectively are expected to formally document the processes and procedures currently being used to track noncompliant facilities and ensure they implement planned measures as outlined in their approved site security plans, according to ISCD officials  DHS officials stated they expect to finalize these procedures by the end of fiscal year 2018  We are examining compliance inspections as part of our ongoing work and will report on the results of our work in our report later this summer  In April 2013, we reported that DHS took various actions to work with facility owners and operators, including increasing the number of visits to facilities to discuss enhancing security plans, but that some trade associations had mixed views on the effectiveness of DHS’s outreach  We found that DHS solicited informal feedback from facility owners and operators in its efforts to communicate and work with them, but did not have an approach for obtaining systematic feedback on its outreach activities  We recommended that DHS take action to solicit and document feedback on facility outreach consistent with DHS efforts to develop a strategic communication plan  DHS agreed and implemented this recommendation by developing a questionnaire to solicit feedback on outreach with industry stakeholders and began using the questionnaire in October 2016  Chairman Shimkus, Ranking Member Tonko, and Members of the Subcommittee, this completes my prepared statement  I would be pleased to respond to any questions that you may have at this time  If you or your staff members have any questions about this testimony, please contact me at (404) 679-1875 or curriec@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement  Other individuals making key contributions to this work include John Mortin, Assistant Director; and Brandon Jones, Analyst-in-Charge; Michael Lennington, Ben Emmel, and Hugh Paquette  This is a work of the U S  government and is not subject to copyright protection in the United States  The published product may be reproduced and distributed in its entirety without further permission from GAO  However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately 

ground_truth: Puerto Rico has roughly $70 billion in outstanding debt and $50 billion in unfunded pension liabilities and since August 2015 has defaulted on over $1.5 billion in debt. The effects of Hurricanes Irma and Maria will further affect Puerto Rico's ability to repay its debt, as well as its economic condition. In response to Puerto Rico's fiscal crisis, Congress passed the Puerto Rico Oversight, Management, and Economic Security Act (PROMESA) in 2016, which included a provision for GAO to review Puerto Rico's debt. This report describes the factors that contributed to Puerto Rico's financial condition and levels of debt and federal actions that could address these factors. Consistent with PROMESA, GAO focused on actions that would not increase the federal deficit. To address these objectives, GAO reviewed documents and interviewed officials from the Puerto Rico and federal governments and conducted a review of relevant literature. GAO also interviewed former Puerto Rico officials and experts in Puerto Rico's economy, the municipal securities markets, and state and territorial budgeting, financial management, and debt practices, as well as officials from the Financial Oversight and Management Board for Puerto Rico (created by PROMESA). GAO is not making recommendations based on the federal actions identified because policymakers would need to consider challenges and tradeoffs related to implementation. The Puerto Rico government generally agreed with the factors we identified and provided additional information. GAO incorporated technical comments from SEC as appropriate. The factors that contributed to Puerto Rico's financial condition and levels of debt relate to (1) the Puerto Rico government running persistent annual deficits—where expenses exceed revenues—and (2) its use of debt to cope with deficits. Based on a literature review and interviews with current and former Puerto Rico officials, federal officials, and other relevant experts, GAO identified factors that contributed to Puerto Rico's persistent deficits: The Puerto Rico government's inadequate financial management and oversight practices. For example, the Puerto Rico government frequently overestimated the amount of revenue it would collect and Puerto Rico's agencies regularly spent more than the amounts Puerto Rico's legislature appropriated for a given fiscal year. Policy decisions by Puerto Rico's government. For example, Puerto Rico borrowed funds to balance budgets and insufficiently addressed public pension funding shortfalls. Puerto Rico's prolonged economic contraction. Examples of factors contributing to the contraction include outmigration and the resulting diminished labor force, and the high cost of importing goods and energy. Additional factors enabled Puerto Rico to use debt to finance its deficits, such as high demand for Puerto Rico debt. One cause of high demand was that under federal law, income from Puerto Rico bonds generally receives more favorable tax treatment than income from bonds issued by states and their localities. Based on an assessment of relevant literature and input from current and former Puerto Rico officials, federal officials, and other relevant experts, GAO identified three potential federal actions that may help address some of these factors. GAO also identified considerations for policymakers related to these actions. Modify the tax exempt status for Puerto Rico municipal debt. Making interest income from Puerto Rico bonds earned by investors residing outside of Puerto Rico subject to applicable state and local taxes could lower demand for Puerto Rico debt. However, reduced demand could hinder Puerto Rico's ability to borrow funds for capital investments or liquidity. Apply federal investor protection laws to Puerto Rico. Requiring Puerto Rico investment companies to disclose risks with Puerto Rico bonds and adhere to other requirements could lower demand for the bonds. However, this action could also limit Puerto Rico's ability to borrow funds. Modify the Securities and Exchange Commission's (SEC) authority over municipal bond disclosure requirements. SEC could be allowed to require timely disclosure of materials—such as audited financial statements—associated with municipal bonds. Over the past decade, Puerto Rico often failed to provide timely audited financial statements related to its municipal bonds. Timely disclosure could help investors make informed decisions about investing in municipal bonds. However, a broad requirement could place additional burdens on all U.S. municipal issuers, such as the costs of standardizing reporting.

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



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

Report 1: Puerto Rico, which has approximately 3 3 million residents according to U S  Census Bureau (Census) estimates, is the largest and most populous territory of the United States  As a territory, Puerto Rico is subject to congressional authority, though Congress has granted it broad authority over matters of internal governance—notably, by approving Puerto Rico’s constitution in 1952  Individuals born in Puerto Rico are U S  citizens and can migrate freely to the states  Puerto Rico and its residents are generally subject to the same federal laws as the states and their residents, except in cases where specific exemptions have been made, such as with certain federal programs  For example, Puerto Rico residents generally have full access to Social Security and unemployment insurance; however, for some programs, such as Medicaid, federal funding in Puerto Rico is restricted as compared to funding in the states  Residents of Puerto Rico are exempt from paying federal income tax on income from sources in Puerto Rico  Residents are required to pay federal income tax on income from sources outside of Puerto Rico  They are also required to pay federal employment taxes, such as Social Security and Medicare taxes, on their income regardless of where it was earned  Puerto Rico residents are also ineligible for certain federal tax credits  Corporations located in Puerto Rico are generally subject to the same federal tax laws as corporations located in a foreign country  Corporations in Puerto Rico are generally exempt from federal taxes on profits except as such profits are effectively connected to a trade or business in the states, and so long as those profits remain held outside of the states  Additionally, these corporations were subject to a withholding tax on certain investment income from the United States not connected to a trade or business  Under the 2017 Public Law 115-97, starting in 2018 U S  corporations that are shareholders in foreign corporations, such as those organized under Puerto Rico law, generally do not owe tax on dividends received from those foreign corporations  Prior to this law, dividend payments to U S  corporate shareholders were considered taxable interest for the U S  parent corporation  Prior to 1996, a federal corporate income tax credit—the possessions tax credit—was available to certain U S  corporations that located in Puerto Rico  In general, the credit equaled the full amount of federal tax liability related to an eligible corporation’s income from its operations in a possession—including Puerto Rico—effectively making such income tax- free  In 1996, the tax credit was repealed, although corporations that were existing credit claimants were eligible to claim credits through 2005  Puerto Rico’s economy is in a prolonged period of economic contraction  According to data from Puerto Rico’s government, Puerto Rico’s economy grew in the 1990s and early 2000s  However, between 2005 and 2016— the latest year for which data were available as of March 1, 2018—Puerto Rico’s economy experienced year-over-year declines in real output in all but two years, as measured by real gross domestic product (GDP)  From 2005 to 2016, Puerto Rico’s real GDP fell by more than 9 percent (from $82 8 billion to $75 0 billion in 2005 dollars)  Puerto Rico’s gross national product (GNP) followed a similar pattern over the same period, declining by more than 11 percent from 2005 to 2016 (from $53 8 billion to $47 7 billion in 2005 dollars)  Figure 1 shows Puerto Rico’s real GDP and GNP growth rates from 1991 through 2016  The decline in Puerto Rico’s output has, in more recent years, occurred in conjunction with a decline in Puerto Rico’s population  According to Census estimates, Puerto Rico’s population declined from a high of approximately 3 8 million people in 2004 to 3 3 million people in 2017, a decline of 12 8 percent  This population loss closely matched the decline in real output  From 2004 to 2016, Puerto Rico’s real GNP fell by 9 5 percent, while its real GNP per capita increased by 1 6 percent over the same time period  In addition to Puerto Rico’s declining population, the territory also has a lower share of employed persons compared to the United States as a whole  As of 2017, approximately 37 percent of Puerto Rico residents were employed compared to approximately 60 percent for the United States as a whole  Puerto Rico’s employment-to-population ratio reached highs in 2005 and 2006 when it was approximately 43 percent, according to data from the Federal Reserve Bank of St  Louis  According to data from the Bureau of Labor Statistics (BLS), between 2005 and 2017, Puerto Rico’s unemployment rate fluctuated between 10 2 percent and 17 0 percent, with an average of 13 1 percent  During the same period, the nationwide unemployment rate fluctuated between 4 1 percent and 10 0 percent, with an average of 6 5 percent  These factors have combined to leave Puerto Rico with a small and declining labor force  From January 2006 to December 2017—the latest month for which data were available as of March 1, 2018—Puerto Rico’s labor force decreased from approximately 1 4 million persons to 1 1 million persons, according to data from BLS  Puerto Rico’s government has operated with a deficit—where expenses exceed revenues—in each fiscal year since 2002, and its deficits grew over time (see figure 2)  Puerto Rico’s governmental activities can be divided among the primary government and component units  Puerto Rico’s primary government provides and funds services such as public safety, education, health care, and economic development  Puerto Rico’s component units are legally separate entities for which its government is nonetheless financially accountable, and provide services such as public transportation, highways, electricity, and water  In fiscal year 2014, the latest for which audited financial data are available, the Puerto Rico government collected $32 5 billion in revenue, of which $19 3 billion was collected by the primary government, and $13 2 billion was collected by the component units  That year Puerto Rico’s government spent $38 7 billion, of which $22 0 billion was spent directly by the primary government, while $16 7 billion was spent by the government’s various component units  The Puerto Rico Electric Power Authority (PREPA), which operates the territory’s electricity generation and distribution infrastructure, represented the largest component unit expenditure in fiscal year 2014  Figures 3 and 4 show a breakdown of expenses for Puerto Rico’s primary government and its component units, respectively  Puerto Rico’s government spending accounts for more than a third of the territory’s GDP  In fiscal year 2014—the latest year for which audited spending data were available as of March 1, 2018—primary government expenditures of $22 0 billion represented 21 percent of the territory’s GDP  Including component spending, total public expenditures were $38 7 billion, which represented 38 percent of the territory’s GDP  By comparison, our prior work has shown that in 2014, total state and local government expenditures represented about 14 percent of GDP for the United States as a whole, excluding territories  Federal government expenditures were 20 percent of GDP for the United States as a whole in 2014  Puerto Rico’s total public debt as a share of its economy has grown over time  In 2002, the value of its debt was 42 percent of the territory’s GDP, and 67 percent of its GNP  Both of these ratios grew over time such that by 2014, Puerto Rico’s total public debt was 66 percent of the territory’s GDP and 99 percent of its GNP  Figure 5 compares Puerto Rico’s total public debt to its GDP and GNP, in both aggregate and per capita  As of the end of fiscal year 2014, the last year for which Puerto Rico issued audited financial statements, Puerto Rico had $67 8 billion in net public debt outstanding, or $68 1 billion excluding accounting adjustments that are not attributed in the financial statements to specific agencies  Of the $68 1 billion, $40 6 billion was owed by Puerto Rico’s primary government, and $27 6 billion was owed by its component units, as shown in figure 6 (these amounts do not sum to $68 1 billion because of rounding)  The growth of Puerto Rico’s total debt resulted in greater annual debt servicing obligations  In fiscal year 2002, it cost Puerto Rico $2 7 billion to service its debt, representing about 12 percent of Puerto Rico’s $21 6 billion in total public revenue for that year  By fiscal year 2014, Puerto Rico’s annual debt service cost rose to $5 0 billion, representing just over 15 percent of Puerto Rico’s $32 5 billion in total public revenue for that year  Following years of expenditures that exceeded revenue, and a growing debt burden, in August 2015, Puerto Rico failed to make a scheduled bond payment  Since then, Puerto Rico has defaulted on over $1 5 billion in debt  In June 2016, Congress enacted and the President signed PROMESA in response to Puerto Rico’s fiscal crisis  PROMESA established a Financial Oversight and Management Board for Puerto Rico (Oversight Board), and granted it broad powers of fiscal and budgetary control over Puerto Rico  PROMESA also established a mechanism through which the Oversight Board could petition U S  courts on Puerto Rico’s behalf to restructure debt  Under federal bankruptcy laws, Puerto Rico is otherwise prohibited from authorizing its municipalities and instrumentalities from petitioning U S  courts to restructure debt  The Oversight Board petitioned the U S  courts to restructure debt on behalf of Puerto Rico’s Highways and Transportation Authority and the Government Employees Retirement System on May 21, 2017 and on behalf of PREPA on July 2, 2017  In addition to its debt obligations, Puerto Rico also faces a large financial burden from its pension obligations for public employees  Puerto Rico’s public pension systems had unfunded liabilities of approximately $49 billion as of the end of fiscal year 2015, the most recent year for which data are available  Unfunded pension liabilities are similar to other kinds of debt because they constitute a promise to make a future payment or provide a benefit  Based on interviews with current and former Puerto Rico officials, federal officials, and other relevant experts, as well as a review of relevant literature, the factors that contributed to Puerto Rico’s financial condition and levels of debt related to: (1) Puerto Rico’s government running persistent deficits and (2) its use of debt to cope with deficits  As previously mentioned, Puerto Rico’s government has operated with a deficit in all years since 2002, and deficits grew over time  To cope with its deficits, Puerto Rico’s government issued debt to finance operations, rather than reduce its fiscal gap by cutting spending, raising taxes, or both  Through interviews with current and former Puerto Rico officials; federal officials; experts in Puerto Rico’s economy, the municipal securities markets, and state and local budgeting and debt management; as well as a review of relevant literature, we identified three groups of factors that contributed to Puerto Rico’s persistent deficits: (1) inadequate financial management and oversight practices, (2) policy decisions, and (3) prolonged economic contraction  Some of the factors in these groups may be interrelated  To cope with its persistent deficits, Puerto Rico issued debt to finance operations  In reviewing 20 of Puerto Rico’s largest bond issuances from 2000 to 2017, totaling around $31 billion, we found that 16 were issued exclusively to repay or refinance existing debt and to fund operations  According to ratings agency officials and experts in state and local government, states rarely issue debt to fund operations, and many states prohibit this practice  According to former Puerto Rico officials and experts on Puerto Rico’s economy, high demand for Puerto Rico debt and the Government Development Bank for Puerto Rico (GDB) facilitating rising debt levels enabled Puerto Rico to continue to use debt to finance operations  Puerto Rico issued a relatively large amount of debt, given the size of its population  Based on an analysis of fiscal year 2014 comprehensive annual financial reports of the 50 states and Puerto Rico, Puerto Rico had the second highest amount of outstanding debt among states and territories, while its population falls between the 29th and 30th most populous states  By comparison, California, the state with the largest amount of outstanding debt, is the most populated state  Various factors drove demand for Puerto Rico municipal bonds, even as the government’s financial condition deteriorated  Triple tax exemption: According to a former Puerto Rico official, Federal Reserve Bank of New York officials, and an expert on Puerto Rico’s economy, Puerto Rico’s municipal bonds were attractive to investors because interest on the bonds was not subjected to federal, state, or local taxes, regardless of where the investors resided  In contrast, investors may be required to pay state or local taxes on interest income earned from municipal securities issued by a state or municipality in which they do not reside  Investment grade bond ratings: Puerto Rico maintained investment grade bond ratings until February 2014, even as its financial condition was deteriorating  Credit ratings inform investment decisions by both institutional investors and broker dealers  According to a current Puerto Rico official and an expert on Puerto Rico’s economy, investment grade ratings for Puerto Rico municipal bonds may have driven demand for these securities in the states  Based on interviews with ratings agency officials and a review of rating agency criteria, we found that Puerto Rico may have maintained its investment grade rating for two reasons  First, Puerto Rico could not seek debt restructuring under federal bankruptcy laws, prior to the passage of PROMESA in 2016  According to rating agency officials, bonds with assumed bankruptcy protection tend to rate higher than those without such protection  Second, legal frameworks that prioritize debt service are often viewed as positive for credit ratings, according to rating agency criteria  In the event that the Puerto Rico government does not have sufficient resources to meet appropriations for a given fiscal year, Puerto Rico’s constitution requires that the government pay interest and amortization on the public debt before disbursing funds for other purposes in accordance with the order of priorities established by law  The prior Puerto Rico Governor cited this constitutional provision as providing the authority to redirect revenue streams from certain entities to the payment of general obligation debt  This redirection of revenue streams is commonly known as a clawback  Lack of transparency on its financial condition: Municipal market analysts told us that untimely financial information made it difficult for institutional and individual investors to assess Puerto Rico’s financial condition, which may have resulted in investors not being able to fully take the investment risks into account when purchasing Puerto Rico debt  According to one report, between 2010 and 2016 municipal issuers issued their audited financial statements an average of 200 days after the end of their fiscal years  However, between fiscal years 2002 and 2014, Puerto Rico issued its statements an average of 386 days after the end of its fiscal year, according to our analysis of Puerto Rico’s audited financial statements  Moreover, Puerto Rico had not issued its fiscal years 2015 and 2016 audited financial statements as of March 1, 2018, or 975 and 609 days after the end of those fiscal years, respectively  Estate tax structures: Puerto Rico residents had incentive to invest in municipal bonds issued in Puerto Rico over those issued in the United States because of federal and Puerto Rico estate tax structures  Current and former Puerto Rico officials told us that this incentive drove demand among Puerto Rico residents for bonds issued in Puerto Rico  For federal estate tax purposes, Puerto Rico residents are generally considered non-U S  residents and non-citizens for all of their U S -based property, including investments  Estates of Puerto Rico residents are required to pay the prevailing federal estate tax— which ranges from 18 percent to 40 percent depending on the size of an estate—for any U S -based property valued over $60,000  In contrast, prior to 2017, all Puerto Rico-based property was only subject to the Puerto Rico estate tax of 10 percent  Puerto Rico’s estate tax was repealed in 2017  In addition to financing from the municipal bond markets, GDB also provided an intragovernmental source of financing  Prior to April 2016, GDB acted as a fiscal agent, trustee of funds, and intergovernmental lender for the Government of Puerto Rico  GDB issued loans to Puerto Rico’s government agencies and public corporations to support their operations  GDB provided loans to government entities valued at up to 60 percent of GDB’s total assets, as shown in Figure 11  In general, these entities did not fulfill the terms of their borrowing agreements with GDB, while they independently accessed the municipal bond market  Additionally, according to GDB’s audited financial statements, GDB did not reflect loan losses in its audited financial statements until 2014 because it presumed that Puerto Rico’s legislature would repay loans through the general fund or appropriations, as generally required by the acts that approved such loans  Facing non-repayment of public sector loans, GDB took on debt to maintain liquidity  According to GDB documents, repayment of amounts owed to GDB was a main reason for the creation of the Puerto Rico Sales Tax Financing Corporation (COFINA), an entity backed by a new sales tax, through which Puerto Rico issued some of its debt  Though initially intended as a means to repay GDB and other debt, COFINA bonds were also used to finance operations  Through our interviews and an assessment of relevant literature, we identified three potential federal actions that could help address some of the factors that contributed to unsustainable indebtedness in Puerto Rico  Consistent with the provision in PROMESA that was the statutory requirement for this work, we focused on actions that were non-fiscal in nature—that is, actions that would not increase the federal deficit  There are tradeoffs for policymakers to consider when deciding whether or how to implement any policy  For each action, we describe a specific challenge as it relates to debt accumulation in Puerto Rico, identify a possible federal response to the challenge, and describe other considerations for policymakers  To help address the factors that contributed to the high demand for Puerto Rico debt relative to other municipal debt, legislative and executive branch policymakers could further ensure that municipal securities issuers provide timely, ongoing, and complete disclosure materials to bondholders and the public  Specifically, Congress could authorize SEC to establish requirements for municipal issuers on the timing, frequency, and content of initial and continuing disclosure materials  In general, the municipal securities market is less regulated and transparent than other capital markets, such as equity markets  For example, SEC’s authority to directly establish or enforce initial and continuing disclosure requirements for issuers—including those in Puerto Rico—is limited  SEC requires that underwriters (sellers of municipal securities) reasonably determine that issuers have undertaken continuing disclosure agreements (CDA) to publicly disclose ongoing annual financial information, operating data, and notices of material events  However, federal securities laws do not provide SEC with the authority to impose penalties on municipal issuers for noncompliance with CDAs, which may limit any incentive for issuers to comply with SEC disclosure and reporting guidance  As a result, SEC has limited ability to compel issuers to provide continuing disclosure information  As previously discussed, the Puerto Rico government often issued its audited financial statements in an untimely manner, thus failing to meet its contractual obligations to provide continuing disclosures for securities it issued  SEC could not directly impose any consequences on Puerto Rico’s government for failing to adhere to the terms of, or enforce compliance with, the CDAs  Additionally, as previously discussed, municipal market analysts told us that untimely financial information made it difficult for institutional and individual investors to assess Puerto Rico’s financial condition  Timely disclosure of information would help investors make informed decisions about investing in municipal securities and help protect them against fraud involving the securities  These disclosures would be made to investors at the time of purchasing securities and throughout the term of the security, including when material changes to an issuer’s financial condition occur  According to SEC staff, enhanced authority could prompt more municipal issuers to disclose financial information, including audited financial statements, in a timelier manner  For example, SEC staff said that if the agency had required that issuers provide timely financial statements at the time of issuing a municipal security, this may have precluded Puerto Rico from issuing its $3 5 billion general obligation bond in 2014  However, any rulemaking SEC would or could take as a result of enhanced authority would depend on a number of factors, such as compliance with other SEC guidance and related laws  Since this action would apply to all U S  municipal securities issuers, it has policy and implementation implications that extend well beyond Puerto Rico  For example, establishing and enforcing initial and continuing disclosure requirements for municipal securities issuers could place additional burdens on state and local issuers, and not all municipal issuers use standardized accounting and financial reporting methods  As a result, state and local governments may need to spend resources to adjust financial reporting systems to meet standardized reporting requirements  However, in a 2012 report proposing this action, SEC said it could mitigate this burden by considering content and frequency requirements that take into account, and possibly vary by, the size and nature of the municipal issuer, the frequency of issuance of securities, the type of municipal securities offered, and the amount of outstanding securities  To help address the factors that contributed to the high demand for Puerto Rico debt relative to other municipal debt, Congress could ensure that investors residing in Puerto Rico receive the same federal investor protections as investors residing in states  Specifically, Congress could subject all investment companies in Puerto Rico to the Investment Company Act of 1940, as amended (1940 Act)  In recent years, the House and Senate separately have passed legislation that would achieve this action  Certain investment companies in Puerto Rico and other territories— specifically, those whose securities are sold solely to the residents of the territory in which they are located—are exempt from the 1940 Act’s requirements  The 1940 Act regulates investment companies, such as mutual funds that invest in securities of other issuers and issue their own securities to the investing public  It imposes several requirements on investment companies intended to protect investors  For example, it requires that investment companies register with SEC and disclose information to investors about the businesses and risks of the companies in which they invest, and the characteristics of the securities that they issue  It also restricts investment companies from engaging in certain types of transactions, such as purchasing municipal securities underwritten by affiliated companies  According to a former Puerto Rico official, some broker-dealers in Puerto Rico underwrote Puerto Rico municipal securities issuances and investment companies managed by affiliated companies of these underwriters purchased the securities, packaged them into funds, and marketed the funds to investors residing in Puerto Rico  This practice would be prohibited or restricted for investment companies subject to the 1940 Act, as it might result in investment companies not acting in the best interests of their investors  If all Puerto Rico investment companies had been subject to the 1940 Act, they would have been prohibited or restricted from investing in Puerto Rico municipal bonds underwritten by affiliated companies  Also, these investment companies may have further disclosed the risks involved in Puerto Rico municipal bonds to Puerto Rico investors  As a result, demand for Puerto Rico municipal bonds from Puerto Rico investment companies and residents may have been lower had the 1940 Act requirements applied to all Puerto Rico investment companies, and it may have been more difficult for the Puerto Rico government to issue debt to finance deficits  SEC staff told us that industry groups had raised objections to extending the 1940 Act provisions to all investment companies in Puerto Rico  These industry groups noted that, among other things, certain investment companies would have difficulty meeting the 1940 Act’s leverage and asset coverage requirements and adhering to some restrictions on affiliated transactions  However, SEC staff noted that under certain legislation that passed the House or Senate separately, as described above, Puerto Rico investment companies would have three years to come into compliance if they were newly subject to the 1940 Act  Further, under that legislation, after three years, investment companies in Puerto Rico could also request an additional three years to come into compliance  Regarding affiliated company restrictions, SEC has previously waived some requirements for investment companies if they are unable to obtain financing by selling securities to unaffiliated parties with an agreement to repurchase those securities at a higher price in the future, known as repurchase agreements  According to SEC staff, SEC would consider allowing companies in Puerto Rico to enter into reverse repurchase agreements with their affiliates if the 1940 Act applied to them  To help address the factors that contributed to the high demand for Puerto Rico debt relative to other municipal debt, Congress could remove the triple tax exemption for Puerto Rico’s municipal securities  This action would mean that interest income from Puerto Rico municipal securities earned by investors residing outside of Puerto Rico could be taxed by states and local governments, while still being exempt from federal income taxes, similar to the current tax treatment of municipal bond income in the states  As mentioned previously, former Puerto Rico officials and experts in municipal securities told us that the triple tax exemption fueled investor demand and enabled Puerto Rico to continue issuing bonds despite deteriorating financial conditions  Some of the demand for Puerto Rico municipal securities came from certain U S  municipal bond funds  These funds concentrated their investments in one state to sell to investors within that state, but also included Puerto Rico bonds in their portfolios  Puerto Rico bond yields generally were higher than state bonds yields, according to industry experts  When added to a fund, the higher yields from Puerto Rico bonds would increase the overall return on investment yield of a fund  Modifying the triple tax exemption for Puerto Rico’s municipal securities might result in reduced demand for Puerto Rico’s debt  In response to reduced demand for its debt, Puerto Rico’s government may need to address any projected operating deficits by decreasing spending, raising revenues, or both  According to U S  Treasury officials, this action could increase the proportionate share of investors in Puerto Rico debt that reside in Puerto Rico, because of reduced demand from investors in the states  In the event of a future debt crisis, this could result in a concentration of financial losses within Puerto Rico  Also, debt financing allows governments to make needed capital investments and provides liquidity to governments, and can be a more stable funding source to manage fiscal stress  Reduced market demand for Puerto Rico’s bonds could make access to debt financing difficult, as the Puerto Rico bond market may not support the Puerto Rico government’s future borrowing at reasonable interest rates, according to Treasury officials  Alternately, a variant of this action would be to retain the triple tax exemption for Puerto Rico debt only for bonds related to capital investments rather than for deficit financing, according to Treasury officials  Various provisions in PROMESA were intended to help Puerto Rico improve its fiscal condition  PROMESA requires that the Oversight Board certify fiscal plans for achieving fiscal responsibility and access to capital markets  The intent of the fiscal plans is to eliminate Puerto Rico’s structural deficits; create independent revenue estimates for the budget process; and improve Puerto Rico’s fiscal governance, accountability, and controls, among other things  From March 2017 to April 2017, the Oversight Board certified the fiscal plans the Government of Puerto Rico developed for the primary government and certain component units, such as PREPA  As a result of the effects of Hurricanes Irma and Maria, the Oversight Board requested that the Government develop updated fiscal plans  Although the Government of Puerto Rico developed and submitted updated fiscal plans, the Oversight Board did not certify them, with the exception of the plan for GDB  Instead, in April 2018, the Oversight Board certified fiscal plans it developed itself, as PROMESA allows  PROMESA also requires the Oversight Board to determine whether or not Puerto Rico’s annual budgets, developed by the Governor, comply with the fiscal plans prior to being submitted to Puerto Rico’s legislature for approval  Technical assistance is another area where the federal government has taken action to help Puerto Rico address its fiscal condition  In 2015, Congress first authorized Treasury to provide technical assistance to Puerto Rico, and has continued to reauthorize the technical assistance, most recently through September 30, 2018  For example, Treasury officials told us that they helped Puerto Rico’s Planning Board develop a more accurate macroeconomic forecast, which should enable Hacienda to develop more accurate revenue estimates and receipt forecasts  Treasury officials also told us that the agency began helping Puerto Rico improve its collection of delinquent taxes—for example, by helping Hacienda develop an office dealing with Puerto Rico’s largest and most sophisticated taxpayers, which are often multinational corporations  With Puerto Rico focused on hurricane recovery efforts, Treasury and the Puerto Rico government are reassessing the types of assistance that Treasury might provide in the future, according to Treasury officials  Current and former Puerto Rico government officials and experts on Puerto Rico’s economy also told us that the federal government could further help Puerto Rico address its persistent deficits through federal policy changes that are fiscal in nature  For example, it could change select federal program funding rules—at a cost to the federal government—such as eliminating the cap on Medicaid funding and calculating the federal matching rate similar to how the rate is calculated in the states  Likewise, the Congressional Task Force on Economic Growth in Puerto Rico (Congressional Task Force), as established by PROMESA, issued a report in December 2016 that recommended changes to federal laws and programs that would spur sustainable long- term economic growth in Puerto Rico, among other recommendations  In addition to federal actions that could address the factors that contributed to Puerto Rico’s fiscal condition and debt levels, the Puerto Rico government plans to take various actions  For example, according to current Puerto Rico officials and the Puerto Rico government’s April 2018 fiscal plan, the government is: Planning to implement an integrated new information technology system for financial management, to include modernized revenue management and accounting and payroll systems  Hacienda officials stated that they are in the process of developing a project schedule for this long-term effort  Developing a new public healthcare model in which Puerto Rico’s government pays for basic services and patients pay for premium services  The government will begin implementing the new healthcare model in fiscal year 2019 and expects to achieve annual savings of $841 million by fiscal year 2023  Collaborating with the private sector for future infrastructure and service projects, including for reconstruction efforts related to Hurricanes Irma and Maria, which it expects will stimulate Puerto Rico’s weakened economy  We also asked Puerto Rico officials about progress made toward addressing many of the factors we identified  However, they did not provide us this information  We provided a draft of this report for review to Treasury, SEC, the Federal Reserve Bank of New York, the Government of Puerto Rico, and the Oversight Board  Treasury and SEC provided technical comments, which we incorporated as appropriate  The Federal Reserve Bank of New York and the Oversight Board had no comments  We received written comments from the Government of Puerto Rico, which are reprinted in appendix II  In its comments, the Government of Puerto Rico generally agreed with the factors we identified that contributed to Puerto Rico’s financial condition and levels of debt  It also provided additional context on Puerto Rico’s accumulation of debt, such as Puerto Rico’s territorial status and its effect on federal programs in Puerto Rico and outmigration  The Government of Puerto Rico also noted that the federal actions we identified to address factors contributing to Puerto Rico’s unsustainable debt levels did not include potential actions that were fiscal in nature or that addressed Puerto Rico’s long-term economic viability  As we note in the report, we excluded fiscal actions from our scope, consistent with the provision in PROMESA that was the statutory requirement for this work  We excluded potential actions that could promote economic growth in Puerto Rico because these actions would address debt levels in Puerto Rico only indirectly and because the Congressional Task Force on Economic Growth in Puerto Rico already recommended actions for fostering economic growth in Puerto Rico in its December 2016 report  We are sending copies of the report to the appropriate congressional committees, the Government of Puerto Rico, the Secretary of the Treasury, the Chairman of the Securities and Exchange Commission, and other interested parties  In addition, this report is available at no charge on the GAO website at http://gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-6806 or krauseh@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 III  Our objectives were to describe (1) the factors that contributed to Puerto Rico’s financial condition and levels of debt; and (2) federal actions that could address the factors that contributed to Puerto Rico’s financial condition and levels of debt  Consistent with the provision in the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) that was the statutory requirement for this work, we focused on actions that would not increase the federal deficit  For both objectives we interviewed current Puerto Rico officials from several agencies—the Puerto Rico Department of Treasury (Hacienda in Spanish), Government Development Bank for Puerto Rico (GDB), the Puerto Rico Office of Management and Budget (Spanish acronym OGP), Fiscal Agency and Financial Advisory Authority (FAFAA), and the Puerto Rico Electric Power Authority  We also interviewed 13 former Puerto Rico officials that held leadership positions at Hacienda, GDB, or OGP, or a combination thereof  These former officials served between 1997 and 2016 for various gubernatorial administrations associated with the two political parties in Puerto Rico that held the governorship during that period  We also interviewed officials from the U S  Department of the Treasury (Treasury), the Securities and Exchange Commission (SEC), the Federal Reserve Bank of New York, and the Financial Oversight and Management Board for Puerto Rico (created by PROMESA)  Additionally, we conducted another 13 interviews with experts on Puerto Rico’s economy, the municipal securities markets, state and territorial budgeting and debt management—including credit rating agencies—and with select industry groups in Puerto Rico  We selected the experts we interviewed based on their professional knowledge closely aligning with our engagement objectives, as demonstrated through published articles, congressional testimonies, and referrals from agency officials or other experts  To describe the factors that contributed to Puerto Rico’s financial condition and levels of debt, we reviewed our prior work related to Puerto Rico’s financial condition and levels of public debt  We also collected and analyzed additional financial data from Puerto Rico’s audited financial statements for the fiscal years 2002 to 2014, the last year for which audited financial statements were available  To determine how the Puerto Rico government used bond proceeds, we reviewed a nongeneralizable sample of Puerto Rico bonds prospectuses issued between 2000 and 2017 from the Electronic Municipal Market Access database of the Municipal Securities Rulemaking Board  We reviewed literature—including academic reports, congressional hearing transcripts, and credit rating agency reports—that described Puerto Rico’s economy and factors that contributed to Puerto Rico’s levels of debt  We also reviewed credit rating agency reports that described Puerto Rico’s municipal debt and the agencies’ methodologies for rating municipal debt  We also collected and reviewed Puerto Rico government documents related to budget formulation and execution, debt issuance, and financial management  We considered factors to include, but not be limited to, macroeconomic trends, federal policies, and actions taken by Puerto Rico government officials  Our review focused largely, though not exclusively, on conditions that contributed to the debt crisis during those years for which we collected financial data on Puerto Rico, fiscal years 2002 to 2014  Finally, we also conducted a thematic analysis of the summaries of our interviews to identify common patterns and ideas  Although these results are not generalizable to all current and former officials and experts with this subject-matter expertise, and do not necessarily represent the views of all the individuals we interviewed, the thematic analysis provided greater insight and considerations for the factors we identified  To describe federal actions that could address the factors that contributed to Puerto Rico’s financial condition and levels of debt, we reviewed our prior reports and documents from Treasury and SEC, conducted a literature review, and conducted various interviews  Specifically, we met with federal agencies with subject-matter expertise or whose scope of responsibilities related to these actions, as well as with current and former Puerto Rico officials and municipal securities experts  Consistent with PROMESA, we omitted from our scope: (1) actions that could increase the federal deficit (i e , fiscal options), (2) actions that could be taken by the Puerto Rico government, (3) actions that could infringe upon Puerto Rico’s sovereignty and constitutional parameters, and (4) actions that would imperil America’s homeland and national security  We considered actions that could promote economic growth in Puerto Rico as outside of scope, as they could address debt levels in Puerto Rico indirectly, rather than directly, and because a study issued by the Congressional Task Force on Economic Growth in Puerto Rico already identified actions that Congress and executive agencies could take to foster economic growth in Puerto Rico  We also considered actions that could address Puerto Rico’s unfunded pension liability as outside of our scope  The actions we identified may also help avert future unsustainable debt levels in other territories; however, we did not assess whether and how each action would apply to other territories  We conducted this performance audit from January 2017 to May 2018 in accordance with generally accepted government auditing standards  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives  In addition to the contact named above, Jeff Arkin (Assistant Director), Amy Radovich (Analyst in Charge), Pedro Almoguera, Karen Cassidy, Daniel Mahoney, A J  Stephens, and Justin Snover made significant contributions to this report 


Report 2:  We also estimated that, given the additional time needed to do compliance inspections, the CFATS program would likely be implemented in 8 to 10 years  We did not make any recommendations for DHS to improve its procedures for reviewing facilities’ security plans because DHS officials reported that they were exploring ways to expedite the process, such as reprioritizing resources and streamlining inspection requirements  In July 2015, we reported that DHS had made substantial progress in addressing the backlog—estimating that it could take between 9 and 12 months for DHS to review and approve security plans for the approximately 900 remaining facilities  DHS officials attributed the increased approval rate to efficiencies in DHS’s review process, updated guidance, and a new case management system  Subsequently, DHS reported in its December 2016 semi-annual report to Congress that it had eliminated its approval backlog  Finally, we found in our 2017review that DHS also took action to implement an Expedited Approval Program (EAP)  The CFATS Act of 2014 required that DHS create the EAP as another option that tier 3 and tier 4 chemical facilities may use to develop and submit security plans to DHS  Under the program, facilities may develop a security plan based on specific standards published by DHS (as opposed to the more flexible performance standards using the standard, non-expedited process)  DHS issued guidance intended to help facilities prepare and submit their EAP security plans to DHS, which includes an example that identifies prescriptive security measures that facilities are to have in place  According to committee report language, the EAP was expected to reduce the regulatory burden on smaller chemical companies, which may lack the compliance infrastructure and the resources of large chemical facilities, and help DHS to process security plans more quickly  If a tier 3 or 4 facility chooses to use the expedited option, DHS is to review the plan to determine if it is facially deficient, pursuant to the reporting requirements of the CFATS Act of 2014  If DHS approves the EAP site security plan, it is to subsequently conduct a compliance inspection  In 2017, we found that DHS had implemented the EAP and had reported to Congress on the program, as required by the CFATS Act of 2014  In addition, as of June 2018 according to DHS officials, only 18 of the 3,152 facilities eligible to use the EAP opted to use it  DHS officials we interviewed attributed the low participation to several possible factors including: DHS had implemented the expedited program after most eligible facilities already submitted standard (non-expedited) security plans to DHS; facilities may consider the expedited program’s security measures to be too strict and prescriptive, not providing facilities the flexibility of the standard process; and the lack of an authorization inspection may discourage some facilities from using the expedited program because this inspection provides useful information about a facility’s security  We also found in 2017 that recent changes made to the CFATS program could affect the future use of the expedited program  As discussed previously, DHS has revised its methodology for determining the level of each facility’s security risk, which could affect a facility’s eligibility to participate in the EAP  DHS continues to apply the revised methodology to facilities regulated under the CFATS program and but it is too early to assess the impact on participation in the EAP  In our July 2015 report, we found that DHS began conducting compliance inspections in September 2013, and by April 2015, had conducted inspections of 83 of the 1,727 facilities that had approved security plans  Our analysis showed that nearly half of the facilities were not fully compliant with their approved site security plans and that DHS had not used its authority to issue penalties because DHS officials found it more productive to work with facilities to bring them in compliance  We also found that DHS did not have documented processes and procedures for managing the compliance of facilities that had not implemented planned measures by the deadlines outlined in the plans  We recommended that DHS document processes and procedures for managing compliance to provide more reasonable assurance that facilities implement planned measures and address security gaps  DHS agreed and has taken steps toward implementing this recommendation  DHS updated its CFATS Enforcement Standard Operating Procedure (SOP) and has made progress on the new CFATS Inspections SOP  Once completed these two documents collectively are expected to formally document the processes and procedures currently being used to track noncompliant facilities and ensure they implement planned measures as outlined in their approved site security plans, according to ISCD officials  DHS officials stated they expect to finalize these procedures by the end of fiscal year 2018  We are examining compliance inspections as part of our ongoing work and will report on the results of our work in our report later this summer  In April 2013, we reported that DHS took various actions to work with facility owners and operators, including increasing the number of visits to facilities to discuss enhancing security plans, but that some trade associations had mixed views on the effectiveness of DHS’s outreach  We found that DHS solicited informal feedback from facility owners and operators in its efforts to communicate and work with them, but did not have an approach for obtaining systematic feedback on its outreach activities  We recommended that DHS take action to solicit and document feedback on facility outreach consistent with DHS efforts to develop a strategic communication plan  DHS agreed and implemented this recommendation by developing a questionnaire to solicit feedback on outreach with industry stakeholders and began using the questionnaire in October 2016  Chairman Shimkus, Ranking Member Tonko, and Members of the Subcommittee, this completes my prepared statement  I would be pleased to respond to any questions that you may have at this time  If you or your staff members have any questions about this testimony, please contact me at (404) 679-1875 or curriec@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement  Other individuals making key contributions to this work include John Mortin, Assistant Director; and Brandon Jones, Analyst-in-Charge; Michael Lennington, Ben Emmel, and Hugh Paquette  This is a work of the U S  government and is not subject to copyright protection in the United States  The published product may be reproduced and distributed in its entirety without further permission from GAO  However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately 

ground_truth: State staffs Foreign Service employees to more than 270 embassies and consulates worldwide to advance U.S. foreign policy and economic interests. In 2009 and 2012, GAO identified ongoing Foreign Service staffing gaps. GAO was asked to review State's Foreign Service staffing. This report examines (1) vacancies in State's Foreign Service staffing at overseas posts, (2) reported effects of Foreign Service vacancies on diplomatic readiness, and (3) State's efforts to address Foreign Service vacancies. To address these objectives, GAO analyzed State's Global Employment Management System data as of March 2018. The system includes information on Foreign Service and Civil Service positions, including the total number of authorized Foreign Service positions and whether each position is filled or vacant. GAO also reviewed its relevant prior reports and State workforce planning documents. In addition, GAO interviewed State staff at 10 overseas posts, selected on the basis of large numbers of Foreign Service vacancies and diversity in the types of Foreign Service positions that were vacant at these posts, among other factors. The Department of State's (State) data show persistent Foreign Service vacancies at overseas posts since 2008. According to the data, 13 percent of overseas Foreign Service positions were vacant as of March 2018. This percentage is similar to the percentages GAO reported for 2008 and 2012, when 14 percent of these positions were vacant. In addition, State's data show persistent vacancies at overseas posts in generalist positions that help formulate and implement U.S. foreign policy and in specialist positions that support and maintain the functioning of overseas posts. State's data also show persistent Foreign Service vacancies at overseas posts with State's highest foreign policy priorities and in regions with security risks that could threaten U.S. foreign policy interests. According to staff at overseas posts, Foreign Service vacancies adversely affect State's ability to carry out U.S. foreign policy. Staff at overseas posts told us that vacancies increase workloads, contributing to low morale and higher stress for Foreign Service staff and that vacancies in Political and Economic positions—20 percent and 16 percent, respectively—limit the reporting on political and economic issues that posts are able to provide to State headquarters. Notably, officials also stated that vacancies in specialist positions may heighten security risks at overseas posts and disrupt post operations. For instance, some overseas post staff said that vacancies in Information Management positions had increased the vulnerability of posts' computer networks to potential cybersecurity attacks and other malicious threats. State described various efforts—implemented by multiple offices in the department —to help address overseas Foreign Service vacancies, but these efforts are not guided by an integrated action plan to reduce persistent vacancies. An example of State's efforts is the “Hard-to-Fill” program, which allows Civil Service staff an opportunity to fill a Foreign Service vacancy on a single overseas tour. According to GAO's 2017 High-Risk Series report, an agency should design and implement an action plan—integrated across its relevant offices—that defines the root causes of all skills gaps and suggests corrective measures. However, State has not developed such an action plan for reducing persistent overseas Foreign Service vacancies. Without developing an integrated action plan, overseas Foreign Service vacancies may persist. As a result, State's ability to achieve U.S. foreign policy goals and help ensure secure and efficient operations could be adversely impacted. GAO recommends that State develop an integrated action plan that defines the root causes of persistent Foreign Service vacancies at overseas posts and suggests corrective measures to reduce such vacancies. State concurred with our recommendation and noted that it will take steps to develop an integrated action plan.