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February 17, 2000

GAO/T-AIMD-00-96

CONGRESSIONAL

OVERSIGHT

Opportunities to Address

Risks, Reduce Costs, and

Improve Performance

Statement of David M. Walker

Comptroller General of the United States

Testimony

Before the Committee on the Budget, House of

Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

I appreciate the opportunity to be here this morning to discuss our views

on targets of opportunities that you and other members of the Congress

can consider when addressing the budget and oversight challenges before

you. The Committee is to be commended for holding these hearings and

emphasizing that—surplus or no surplus—poor performance, waste, and

inefficiency cannot be ignored. No matter how large the projected

surpluses may be, they do not absolve the government of its responsibility

to make prudent use of taxpayer dollars. Rather, the surplus provides an

opportunity to rise out of the 1-, 3-, or 5-year budget horizons of recent

deficit debates and to focus on how to restore the public’s trust and

confidence in their government.

After a decade of deficit reduction, we know there are pent-up demands

for using projected surpluses. However, if careful scrutiny is given only to

new spending or tax proposals, policymakers will have missed a critical

window to address known performance problems in government. Left

unresolved, these problems can expose federal programs and operations

to unnecessary risk, excessive costs, and chronic performance shortfalls.

Resolving some of these problems offers the potential to save billions of

dollars and dramatically improve the delivery of services to the American

public. For instance, nine federal agencies estimated improper payments

of $19.1 billion for fiscal year 1998 and we continue to highlight 26 major

areas as being highly vulnerable to fraud, waste, abuse, and

mismanagement.

These persistent problems suggest that we cannot afford to be any less

vigilant in our attention to programs at high risk of fraud, waste, abuse,

and mismanagement in a time of surplus. In fact, it is our obligation to

safeguard benefits for those that deserve them by preventing the diversion

of scarce federal resources for inappropriate, unauthorized, or illegal

purposes. The activities that GAO has identified as high-risk areas warrant

vigilant and persistent oversight and attention by executive agencies and

the Congress alike. Significant opportunities exist to reduce waste and

improve the economy and efficiency of federal activities in other areas as

well, as I will discuss in my statement today.

Mr. Chairman, we also have an obligation to modernize government to

more effectively address the needs of a changing society. As we enter a

new century, we have been reminded about how much things change. Yet

many of our programs—their goals, organizations, and processes—were

designed long ago. Given this context, it shouldn’t be insulting or

threatening to any federal program or activity to question its relevance or

“fit” in today’s world. In fact, it is wholly appropriate and prudent to do so.
Page 2 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Examining the legacy of existing activities and programs can yield

important benefits. First, we can provide for much needed flexibility to

address looming cost pressures and emerging needs by weeding out

wasteful and inefficient programs that have proven to be outdated and no

longer relevant to our changing society. As the baby boom retires,

enhancing budgetary flexibility will be even more critical as the projected

growth of Social Security and health care outlays threaten to crowd out

other priorities. Second, we can update and modernize those activities that

remain relevant by improving their targeting and efficiency through such

actions as redesigning formulas, enhancing cost sharing by beneficiaries,

consolidating facilities and programs, and streamlining and reengineering

operations and activities.

All of our work reaffirms that with billions of dollars at risk and

notwithstanding our current budget surplus environment, the Congress

and federal agencies need to devote sustained attention to oversight and

reexamination of existing programs and activities to improve the

performance of government and reduce the potential for fraud, waste,

abuse, and mismanagement. Let me hasten to add that federal agencies

have taken the high-risk areas seriously and are making progress in

addressing them, and the Congress has also acted to provide oversight and

needed legislative changes. However, more needs to be done by executive

agencies and the Congress to accelerate progress. Many of these problems

are deeply rooted and complex. Although plans have been conceived to

address many of these issues, the more difficult implementation task of

successfully translating those plans into day-to-day management reality

lies ahead for many of these areas. Vigilant congressional oversight will be

absolutely critical to promoting and sustaining a high level focus on these

problems and support for appropriate actions to address them.

Mr. Chairman, I don’t need to tell you that sorting through existing

programs is a serious, if often unglamorous, task that is nonetheless vital.

This task is made particularly difficult because existing programs and

commitments are “in the base” in budgetary terms and can have an

advantage over new initiatives and demands.

In my testimony today I draw on the full breadth of GAO work to highlight

numerous examples of significant performance problems in federal

agencies and programs, each drawn from the key findings and issues
Page 3 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

developed in our audits and evaluations.1 To facilitate our discussion, the

examples are organized around the following four broad themes:

• Attack activities at risk of fraud, waste, abuse, and

mismanagement: focus on minimizing risks and costs associated with the

delivery of major federal programs and activities.

• Improve the economy and efficiency of federal operations: capture

opportunities to reduce costs through restructuring and streamlining

federal activities.

• Reassess what the federal government does: reconsider whether to

terminate or revise outdated programs or services provided.

• Redefine the beneficiaries of federal government programs:

reconsider who is eligible for, pays for, and/or benefits from a particular

program to maximize federal investments.

Mr. Chairman, in selecting priorities for oversight, major attention should

be given to addressing the vulnerability of many critical federal programs

and operations to the risk of fraud, waste, abuse, and mismanagement.

Over the years, our work has shown that central functions and programs

critical to personal and national security, ranging from Medicare to

weapons acquisitions, have been hampered by daunting financial and

program management problems. These problems result in persistent

exposure of these activities to waste and abuse.

These weaknesses have real consequences with large stakes that are

important and visible to many Americans. Some of the problems involve

the waste or improper use of scarce federal resources: federal funds are

diverted from their intended uses or beneficiaries, revenues owed are not

effectively identified or collected, or excessive inventories and

procurement costs drive federal costs higher than they need to be for

some areas. Other problems compromise the ability of the federal

government to deliver critically needed services: systemic information

management weaknesses undermine the nation’s ability to modernize our

technology for tax processing, airline safety, and weather forecasting; and

systemic procurement problems hamper the development of weapons

1Many of the examples discussed in this testimony were developed as part of our annual effort to

describe the budgetary implications of our work. See Budget Issues: Budgetary Implications of

Selected GAO Work for Fiscal Year 2000 (GAO/OCG-99-26, Apr. 16, 1999). We expect to update and

issue this product to this Committee and others next month and are currently working with the

Congressional Budget Office and the Joint Committee on Taxation to develop estimates of budget

savings or revenue gains for these and other examples.

Attacking Activities at

Risk of Fraud, Waste,

Abuse, and

Mismanagement
Page 4 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

systems and the cleanup of hazardous wastes at DOE sites. Perhaps of

greatest importance is the impact of these problems on our ability to

safeguard critical assets and operations from theft and misuse, whether it

is critical national security information or private tax return information.

In January 1999, we reported on specific federal activities and functions

that are particularly vulnerable to fraud, waste, abuse, and

mismanagement—an update to a series on high-risk activities begun in the

last decade and provided at the start of each new Congress.2 Since 1990,

six of our high-risk designations have been removed as a result of

sustained, tangible improvements by the affected agencies; at the time of

our last update, however, 26 high-risk areas remained, as shown in table 1.

We have also recently reported on estimates of the range and magnitude of

improper payments within specific federal programs—several of which

have also been identified as high-risk areas—as disclosed in agency

financial statements reports.

2GAO has issued update reports on the status of high-risk areas every other year since 1993. Our latest

report was High-Risk Series: An Update (GAO/HR-99-1, Jan. 1999).

Areas at High Risk and

Programs Vulnerable to

Improper Payments
Page 5 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Table 1: 1999 High-Risk Areas and The Year Designateda

Reducing Inordinate Program Management Risks

Medicare 1990

Supplemental Security Income 1997

Internal Revenue Service (IRS) Tax Filing Fraud 1995

Department of Defense (DOD) Infrastructure Management 1997

Department of Housing and Urban Development (HUD) Programs 1994

Student Financial Aid Programs 1990

Farm Loan Programs 1990

Asset Forfeiture Programs 1990

The 2000 Census 1997

Managing Large Procurement Operations More Efficiently

DOD Inventory Management 1990

DOD Weapon Systems Acquisition 1990

DOD Contract Management 1992

Department of Energy Contract Management 1990

Superfund Contract Management 1990

National Aeronautical and Space Administration Contract Management 1990

Ensuring Major Technology Investments Improve Services

Air Traffic Control Modernization 1995

Tax Systems Modernization 1995

National Weather Service Modernization 1995

DOD Systems Development and Modernization Efforts 1995

Providing Basic Financial Accountability

DOD Financial Management 1995

Forest Service Financial Management

Federal Aviation Administration Financial Management

1999

1999

IRS Financial Management 1995

IRS Receivables 1990

Resolving Serious Information Security Weaknesses 1997

a

Note: Our most recent update to the high-risk list in January 1999 also included “Addressing the

Urgent Year 2000 Computing Challenge.” Given the progress that has been made on this issue, we

have not included it in this summary table. See Year 2000 Computing Challenge: Leadership and

Partnerships Result in Limited Rollover Disruptions (GAO/T-AIMD-00-70, Jan. 27, 2000).

The high-risk areas shown in table 1 as well as other improper payments

reflect serious and continuing problems with financial, information, and

program management across many federal functions and agencies.

Collectively, these areas affect almost all of the government’s annual
Page 6 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

$1.7 trillion in revenue and span critical government programs and

operations from benefit programs to large lending operations, major

military and civilian agency contracting, and defense infrastructure.

Lasting solutions to these problems offer the potential to save billions of

dollars, dramatically improve services to the public, and strengthen

confidence in the accountability and performance of the national

government.

In these areas, more needs to be done to achieve real and sustained

improvements. GAO has made many recommendations to address and

correct these problems. However, these problems will take time to fully

resolve because they reflect deep-rooted, difficult problems in very large

programs and organizations. Real improvements in performance and

management will require persistent and sustained attention, and some

areas may in fact need targeted and well-chosen investments in systems

and human capital in order to achieve recurring savings.

I will now turn to a discussion of selected areas, which illustrate the

problems facing us, and the need for increased and sustained

congressional oversight and management attention.

With annual payments of about $200 billion, Medicare is one of the fastest

growing major social programs in the federal budget and is projected to

almost double its size in the next 10 years alone. With responsibility for

financing health care delivered by hundreds of thousands of providers on

behalf of tens of millions of beneficiaries, Medicare is inherently

vulnerable to fraud, waste, and abuse. The program has proven to be a

perpetually attractive target for exploitation, requiring constant vigilance

and increasingly sophisticated approaches to protect the system from

wrongdoing and abuse.

The Department of Health and Human Services (HHS) has begun to

identify improper payments in its financial statements for the $176 billion

Medicare Fee-for-Service program. Spotlighting the program’s payment of

claims has led to a number of actions to help prevent improper payments.

Between fiscal years 1996 and 1998, the estimated total of payments made

in error in this program dropped from $23.2 billion to $12.6 billion. The

reductions in erroneous payments were attributable largely to better

claims documentation by providers rather than a reduction in improper

billing practices. The HHS Inspector General’s methodology was not

designed to identify or measure the full extent of fraud and abuse in the

Medicare
Page 7 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Medicare program or to detect all fraudulent schemes such as kickbacks

or false claims for services not provided.3

Problems with abuse partly stem from the program’s oversight structure.

The Health Care Financing Administration (HCFA) delegates the review of

claims to its contractors, yet its oversight of these contractors does not

provide assurance that claims are paid appropriately. HCFA’s contractors

have allowed Medicare to pay claims that should have been paid by other

insurers and have engaged in other prohibited practices such as falsifying

claims and reports to HCFA.

Medicare Contractor Problems

In 1998, a major Medicare contractor settled a claim for $140 million and pled guilty to

eight felony counts because it was alleged to have

• allowed Medicare claims payments that should have been paid by private

insurance,

• destroyed Medicare claims that should have been submitted by another contractor,

• periodically disconnected the required toll-free phone lines used for beneficiary

inquiries,

• automatically paid claims under $50, without checking whether services were

uncovered or unnecessary,

• rushed claims through its processing system, shutting off computer edits designed

to screen claims, and

• deleted, instead of suspending for review, claims with incorrect claim numbers

HCFA has taken steps to address management problems, but they remain

hampered by financial management and information systems weaknesses.

Moreover, the agency is limited by statute from increasing competition

among contractors to enhance performance. For instance, the agency

cannot choose nonhealth insurance companies to process outpatient

physician and other practitioners’ claims and is constrained to using

contractors nominated by providers to process inpatient hospital and

other institutional provider claims.

Medicare has also proven to be vulnerable to fraud by career criminal and

organized crime groups posing as health care providers.4 These groups

created sham medical clinics or other entities or used the names of

3Medicare: Methodology to Identify and Measure Improper Payments in the Medicare Program Does

Not Include All Fraud (GAO/AIMD-00-69R, Feb. 4, 2000).

4Health Care: Fraud Schemes Committed by Career Criminals and Organized Criminal Groups and

Impact on Consumers and Legitimate Health Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).
Page 8 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

legitimate providers to bill for services not provided or not medically

necessary.

Medicare Fraud: “Rent-a-Patient” Scheme

In two South Florida cases, recruiters organized thousands of beneficiaries from,

among other places, retirement communities and drove them to area clinics for rote

examinations and unnecessary testing and treatment. Recruiters received a fee that

they shared with each beneficiary. Beneficiaries understood that they should go

elsewhere if they needed a “real doctor.” Several licensed physicians participated in the

scheme, in which they signed medical records for services they neither performed nor

supervised. The clinics then billed Medicare and Medicaid or private insurance for

services either not necessary or not performed. In one of the two cases, the clinics filed

over $120 million in fraudulent Medicare claims and $1.5 million in fraudulent Medicaid

claims.

Besides managing the fee-for-service program, HCFA has been grappling

with the challenge of implementing the new managed care program—

Medicare+Choice. Although the new program is premised on providing

expanded choice to consumers, HCFA cannot ensure that the information

provided to beneficiaries is timely, accurate, complete, or comparable or

that beneficiaries receive the benefits to which they are entitled. For

instance, one plan provided a drug benefit substantially less generous than

what the plan had originally agreed to furnish, denying about 130,000

Medicare beneficiaries part of the benefit that Medicare paid for under the

contract.

Strengthening business practices, controls, and oversight can mitigate

program risks. Numerous initiatives are underway that promise to make

progress. For instance, the HHS Inspector General and other federal and

state agencies have banded together to fight fraud in five states in an effort

called Operation Restore Trust. After the first year of operation, the effort

yielded more than $40 million in recoveries of payments for claims that

were not allowed under Medicare rules, as well as convictions for fraud,

imposition of civil monetary penalties, and the exclusion of providers from

the program. Over the long term, techniques developed by Operation

Restore Trust will be applied in all 50 states. Moreover, 1996 legislation

provided HCFA with increased funding for program safeguard activities,

such as pre- and post-review of medical claims and fraud investigation

units. These activities historically return more than $10 in savings for each

dollar spent. Clearly more needs to be done, but HCFA’s use of financial

statements and performance targets shows how appropriate management

attention can help in measuring the extent and addressing the causes of

improper payments.
Page 9 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Related program design problems further complicate Medicare service

delivery and make costs more difficult to control. The following are two

illustrations.

• Medicare payments for medical equipment and supplies may not reflect

market prices when providers’ costs for some procedures, equipment, and

supplies have declined over time due to competition and increased

efficiency. For example, Medicare payments for such items as walkers,

catheters, and glucose test strips are based on supplier charges allowed in

1986 and 1987; prices for these items have dropped significantly since that

time. The agency also does not have an effective system to know the

specific products it is paying for. HCFA requires suppliers to identify on

Medicare claims HCFA billing codes—most of which cover a broad range

of products of various types, qualities, and market prices—rather than the

specific items billed. For example, one Medicare billing code is used for

more than 200 different urological catheters, even though some of these

catheters sell at a fraction of the price of others billed under the same

code.5 We have recommended that HCFA require suppliers to identify

specific items by including universal product numbers on claims forms.

• Efforts to control Medicare home health care spending need to be

designed such that payment levels are adequate and that appropriate

benefits are being provided. Between 1990 and 1997, Medicare spending

for home health care rose at an annual rate of 25.2 percent, making it one

of Medicare’s fastest growing benefits. By 1997, home health care

consumed about $1 of every $11 of Medicare outlays, or about

$17.8 billion. To begin to control spending, the Balanced Budget Act of

1997 mandated a prospective payment system (PPS), which will be

implemented on October 1, 2000. The PPS will pay a fixed, pre-determined

rate for each 60-day episode of care. The rate will be varied by a case-mix

adjustment method that aims to adequately pay for patients with high

services needs, yet not overpay for others with lower needs. Designing this

mechanism requires detailed information, some of which is not yet

available, about services and beneficiary characteristics. Currently, there

are large unexplained variations in patients’ needs and services provided.

Until necessary information on home health standards is available and the

large variations in home health use are better understood, placing limits

on the profits that agencies can earn under the new PPS will prevent

Medicare from paying excessively for services delivered to beneficiaries. If

the PPS rate is set too high relative to the actual cost of providing services,

5Medicare: Need to Overhaul Costly Payment System for Medical Equipment and Supplies

(GAO/HEHS-98-102, May 12, 1998).
Page 10 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

a profit limit would prevent a windfall from occurring for some home

health agencies.6

Supplemental Security Income (SSI) is the largest cash assistance program

for the poor. In 1998, about 6.5 million SSI recipients received more than

$29 billion in benefits. Concern about the SSI program’s vulnerability to

fraud, waste, abuse, and mismanagement has increased congressional

interest in ensuring that the SSI program focuses on individuals who have

limited resources with which to meet their needs and that, to the extent

possible, individuals rely on their own resources before turning to the SSI

program for support.

Since its inception in 1974, the SSI program has been fraught with

problems. These enduring management challenges—including program

abuses and mismanagement, increasing SSI overpayments, and an inability

to recover outstanding debt—continue. In fiscal year 1998 current and

former recipients owed the Social Security Administration (SSA) more

than $3.3 billion—including over $1 billion in newly detected

overpayments for that year. Prior experience suggests that SSA is likely to

recover about 15 percent of all outstanding overpayments. As we reported

in prior work, SSI represents less than 8 percent of SSA’s program

expenditures but 37 percent of the calls to the fraud hotline and 24 percent

of fraud convictions.

SSI Fraud and Abuse Problems

• SSA has estimated that overpayments to recipients in nursing homes may exceed

$100 million per year.

• In 1998, we reported that about $648 million in SSI overpayments occurred

because clients did not disclose their earnings or financial account information.

• In 1996 SSI erroneously paid $5 million to 3,000 current and former prisoners in 13

county and local jails because the incarceration was not reported to SSA.

• Between 1990 and 1994, about 3,500 SSI recipients admitted transferring

ownership of resources such as cars, cash, houses, and land valued at an

estimated $74 million in order to qualify for benefits.

• Medical providers suspected of defrauding health insurance companies, Medicare,

or Medicaid furnished a portion of the supporting medical evidence for 6 percent of

208,000 SSI disabled recipients in six states that we examined.

6Medicare: Better Information Can Help Insure that Refinements to BBA Reforms Lead to Appropriate

Payments (GAO/T-HEHS-00-14, Oct. 1, 1999).

Supplemental Security Income
Page 11 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

SSA has taken steps to improve the financial integrity of the SSI system.

For instance, to identify illegal use of benefits by prisoners, incentive

payments have been provided to correctional institutions for information

on inmate benefits. In December 1999, the Foster Care Independence Act

of 1999 was enacted and now provides SSA with several additional tools to

improve program performance and integrity. These tools include the

authority to obtain applicant income and resource information from

financial institutions, access state databases for essential eligibility

information, impose a period of ineligibility for applicants who transfer

assets in order to qualify for SSI benefits, and use credit bureaus, private

collection agencies, interest levies, and other means to recover delinquent

debt. The act’s provisions respond to many of our prior recommendations.

To a large extent, many of the problems facing the SSI program are the

result of more than 20 years of inattention to payment controls. Although

many of the changes enacted by the Congress or implemented internally

by SSA should result in improvements, additional changes will be

necessary to reduce the vulnerability of the program to waste, fraud,

abuse, and mismanagement. Much of the problem has its source in an

organizational culture that treats the SSI welfare program much the same

way as its “earned benefit” programs, disability insurance and old age and

survivors insurance. As a result, program staff have focused more on

quickly processing claims than on controlling program expenditures and

verifying eligibility. For instance, the agency’s work credit measurement

system rewards cases processed, not verification of eligibility and

attention to fraud and abuse. Continued congressional oversight and top

management commitment will be necessary to ensure that the agency

diligently implements the new tools provided for in the Foster Care

Independence Act of 1999. The agency has been proven reluctant to use

some tools provided by the Congress in the past; for example, they

received authority to do tax refund offsets in 1984 to recover

overpayments but just started using it in 1998.

SSA should also continue to work with the Congress in addressing other

vulnerable areas not directly addressed in the legislation. For example,

SSA should move forward in developing options for addressing complex

SSI living arrangement and in-kind support and maintenance policies,

which our prior work has found to be a major source of SSI overpayments.

Consistent with our recent report recommendation, SSA should also

intensify its efforts to identify and track suspicious medical providers and

other middlemen who abuse the SSI program. This information could help

SSA identify claims that should receive increased scrutiny and better

target its investigations of current beneficiaries to determine if they should

be removed from the program.
Page 12 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Mr. Chairman, many other federal programs in addition to Medicare and

SSI are vulnerable to improper payments. I would like to highlight for you

today a recent report we issued which addresses a number of specific

programmatic weaknesses brought to light in our high-risk series and in

agency financial statement audits.7 We noted that fiscal year 1998 financial

statement reports from nine agencies reported estimated improper

payments of $19.1 billion—including $14.9 billion in improperly paid

expenses and an additional $4.2 billion of receivables that these agencies

expect to collect. These estimates related to 17 federal programs that

expended $870 billion. The programs and related improper payment

estimates include the following.

• Medicare Fee-for-Service ($12.6 billion),

• Supplemental Security Income ($1.6 billion),

• Food Stamps ($1.4 billion),

• Old Age and Survivors Insurance ($1.2 billion),

• Disability Insurance ($941 million),

• Housing subsidies ($857 million), and

• Veterans Benefits, Unemployment Insurance, and others ($514 million).

GAO and agency inspectors general have identified many instances of

fraud and internal control deficiencies which can lead to improper

payments among these and other programs. Improper payments can arise

from erroneous payments to beneficiaries as well as fraudulent or abusive

practices by providers of services.

7Financial Management: Increased Attention Needed to Prevent Billions in Improper Payments

(GAO/AIMD-00-10, Oct. 1999).

Other Improper Payments
Page 13 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Improper Payment Problems

HUD assisted housing – A minister conspired with a real estate agent to defraud

federal housing officials. The minister made false statements in applying for a

$5.4 million HUD-insured mortgage for Bethel Village, a failed project of a religious

affiliation to build an assisted living retirement development. The false statements

included a letter, with the forged signature of the affiliation general secretary, that was

sent to federal housing officials guaranteeing $750,000 in conventional funding for the

project in order to obtain FHA mortgage insurance for the loan. (Source: Department of

Housing and Urban Development, Office of Inspector General Semiannual Report to

the Congress, Apr. 1, 1999-Sept. 30, 1999)

Food Stamps – 147 out of 230 statistically selected Food Stamp participants whose

social security numbers appeared in more than one state received food stamp benefits

in more than one state simultaneously. This resulted in food stamp overissuances of

$43,000 for this group. In another case, from 1993 through 1998, a Cleveland, Ohio,

grocer organized the illegal redemption of $8.6 million in food stamps for himself and

other Cleveland area grocers. (Source: U.S. Department of Agriculture, Office of

Inspector General Semiannual Report to the Congress, Apr. 1, 1999-Sept. 30, 1999)

Veterans benefits – The spouse of a veteran, who had been collecting disability

benefits for injuries sustained during his military service, failed to report her husband’s

death in 1983. VA benefits continued to be sent in the husband’s name for more than

15 years. The widow converted more than $243,000 of her deceased husband’s benefit

payments for her own use. VA computer records discovered this case eventually.

(Source: Department of Veterans Affairs, Office of the Inspector General, Semiannual

Report to the Congress, Apr. 1, 1999-Sept. 30, 1999)

Social security benefits – A husband and wife embezzled Social Security benefits

intended for the wife’s deceased parents whose deaths were not reported to the Social

Security Administration. Benefits of $100,357 continued to be paid into the deceased

couple’s bank account. After their deaths, the daughter and her husband assumed the

identities of the deceased parents and continued to access the funds for their own

uses. (Source: Social Security Administration, Office of the Inspector General, Report to

the Congress Oct. 1, 1998-Sept. 30, 1999, as incorporated in the Social Security

Accountability Report for Fiscal Year 1999)

While financial statement disclosures draw attention to the need to

address this problem, the amount of improper payments is greater than

that disclosed thus far in agency financial statements. Audit reports from

GAO and agency inspectors general have identified other agencies that

have made improper payments but did not include estimates in their

financial statements. For the Earned Income Tax Credit (EITC) program,

in fiscal year 1998 when IRS examined a subset of returns with suspected

EITC errors, it found that over two-thirds were invalid. This subset was

not generalizable to all EITC claimants and IRS’ financial statements did

not contain any estimate of EITC error rates for the universe of returns

claiming the credit.
Page 14 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

In some cases, information is insufficient to provide systematic estimates

of improper payments for other important programs. For instance, HHS

has not estimated improper payments for the Medicaid program, which

had $108 billion in federal outlays for fiscal year 1999. However, in recent

work, we have concluded that the size and structure of this program

makes it inherently vulnerable to exploitation. As a third-party payer,

Medicaid reimburses for services provided by others and cannot, as a

practical matter, police each claim for reimbursement. The program relies

on providers, some of whom have incentives to exploit third-party payers

like Medicaid, and program administrators, who are sometimes reluctant

to impose controls perceived as burdensome for fear of discouraging

provider participation. Common Medicaid fraud and abuse schemes fall

into three broad groups: improper billing practices, misrepresentations of

professional qualifications, and improper business practices such as

kickbacks, self-referrals, or collusion.

Medicaid Fraud and Abuse Problems

Billing Fraud – A psychiatrist operated a “psychotherapy mill” where parents were

enticed to enroll their children in “free” enrichment programs such as after-school

tutoring, field trips, and supervised recreation in exchange for their children’s Medicaid

numbers. The psychiatrist then billed Medicaid for services not provided. In concert with

another doctor, Medicaid was fraudulently charged $421,000. The defendants pled

guilty, paid fines and restitution, and received probation. (Source: Georgia State Health

Care Fraud Control Unit)

Misrepresentation – A woman who never attended, graduated, or received a degree

from a nursing school, presented a false nursing license to several nursing homes that

employed her for at least 5 years. Her substandard care prompted an investigation,

which led to her conviction of felony Medicaid fraud and other charges. She was

sentenced to probation and either restitution or community service. (Source: Ohio

Attorney General’s Health Care Fraud Section)

Business practices fraud – Claims submitted by two businessmen netted $10 million

in excess Medicaid payments related to phony contracts with nursing homes to a shell

company. They were both imprisoned and fined, and the pair agreed to restitution of

$6 million to the state Medicaid program. (Source: Georgia State Health Care Fraud

Control Unit)

Illicit diversion of Medicaid covered prescription drugs has proven to be a

chronic problem. Such diversion can involve pharmacists who routinely

add drugs to legitimate prescriptions and keep the extra for sale to others;

individuals who provide recipients with abusable drugs in exchange for

subsequent illicit use of their Medicaid recipient numbers; and clinics that

provide inappropriate prescriptions to Medicaid recipients who trade them

for cash or merchandise or have them filled and then sell the drugs
Page 15 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

themselves on the street. The Congress could encourage HHS to increase

its efforts as a partner with states to ensure that states’ efforts to prevent

and detect fraud in the Medicaid program are as effective as possible. 8

Medicaid Prescription Drug Fraud Problems

A criminal ring that included a doctor and others bilked the New Jersey Medicaid

program out of hundreds of thousands of dollars. One scheme involved (1) doctors who

wrote bogus prescriptions to Medicaid recipients in exchange for cash payments, (2)

other recipients who served as the drug “buyers,” purchasing drugs using their own or

false Medicaid cards and then selling them back to the ring, and (3) “runners” who

brought the pills to a stash house for “packagers” who boxed the pills for resale to

pharmacists in New York and New Jersey. The pharmacists would then use the

repackaged pills to restock inventory. Sales of the drugs in New York yielded the ring

$30,000 or more in cash on a single trip. This case was the first health care fraud case

prosecuted under New Jersey’s racketeering statute—one of a number of steps the

state has taken to prevent fraud against Medicaid, Medicare, and private insurance.

With billions of dollars at risk, agencies need to continually and closely

safeguard resources entrusted to them and assign a high priority to

reducing improper payments. The incidence of improper payments can be

reduced by strengthening business practices and developing targets or

goals for mitigating the problem. A first step for some agencies involves

the development of reliable estimates and reporting of the nature and

extent of improper payments. Without this fundamental knowledge,

agencies cannot be fully informed about their magnitude or trends, nor

can they systematically pinpoint or target mitigation strategies. We noted

in this report that it was through the discipline of annual audited financial

statements and the development of performance goals—key components

of the management reforms prompted by the Chief Financial Officers Act

and the Government Performance and Results Act—that some agencies

are taking steps to mitigate the risk of improper payments.

In 1994, we designated HUD programs as a high-risk area because our

work, and that of others, such as the HUD Inspector General, had

identified four serious, longstanding, departmentwide management

problems that, taken together, placed the integrity and accountability of

HUD’s programs at high risk. These deficiencies included weak internal

controls, an ineffective organizational structure, an insufficient mix of

staff with the proper skills, and inadequate information and financial

management systems. We concluded that, while HUD had efforts

8Medicaid: Federal and State Leadership Needed to Control Fraud and Abuse (GAO/T-HEHS-00-30,

Nov. 9, 1999).

HUD Programs
Page 16 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

underway to address the numerous and severe problems impacting

program management, billions of dollars across most of the agency’s

programs were at risk.

Since 1995, we have reported that HUD has taken a number of actions to

address its management deficiencies and has made credible progress

towards improving its management. For example, the department

improved its financial reporting to the extent that its Inspector General

was able to provide qualified opinions on its financial statements for fiscal

years 1996 and 1997 and an unqualified opinion for fiscal year 1998. In

1999, we noted that HUD’s Secretary and leadership team have given top

priority to addressing the department’s management deficiencies. A major

contributor to HUD’s progress was the June 1997 2020 Management

Reform Plan, which called for reducing the number of programs,

retraining staff, reorganizing the field offices, consolidating processes and

functions into specialized centers, and modernizing and integrating

information and financial management systems. However, in 1999 we also

noted that internal control weaknesses—such as inadequate monitoring of

contractors, developers, and other agents implementing HUD programs—

and problems with information and financial management systems—such

as inaccurate and untimely data—persisted. And, we reported it was too

soon to tell whether HUD’s reforms to address organizational and staff

problems would resolve the major deficiencies that others and we had

identified.

Since then, we have undertaken a number of assignments to examine

HUD’s efforts to improve its programs. For example, we have reported

that HUD is likely to spend millions of dollars, miss milestones, and still

not meet its objective of developing and fully deploying an integrated

financial management system because it had not yet finalized detailed

project plans or cost and schedule estimates for this effort. Also, both our

office and HUD’s Office of the Inspector General have reported

weaknesses in HUD’s oversight of its single-family inventory, which are

properties acquired by HUD when borrowers default on single-family

mortgages insured by HUD. In 1998, we reported that HUD did not have

adequate systems in place to oversee contractors who were responsible

for managing its inventory of properties.9 Our physical inspection of

selected properties identified serious problems including vandalism,

maintenance problems, and safety hazards that may have decreased

marketability, increased HUD’s holding costs and, in some cases,

threatened the health and safety of neighbors and potential buyers.

9 Single-Family Housing: Improvements Needed in HUD’s Oversight of Property Management

Contractors (GAO/RCED-98-65, Mar. 27, 1998).
Page 17 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

HUD’s inventory of properties grew from about 39,000 in 1998 to about

50,000 properties in 1999. In 1999, HUD implemented a new approach to

managing its acquired properties, under which contractors assumed full

responsibility for the inventory. HUD awarded contracts to these

contractors totaling $927 million over 5 years and divided the country into

16 contract areas. One contractor, InTown Management Group, received 7

of the 16 contracts covering 28 states and comprising about 11,000

homes—in other words, almost 40 percent of the total workload.

Because InTown failed to adequately maintain properties or make them

available for sale, HUD was forced to terminate all seven of InTown’s

contracts before the end of 1999. InTown filed for bankruptcy, while

owing money to many of its subcontractors and these subcontractors now

have filed liens against properties that InTown was responsible for

managing and marketing. According to an official in HUD’s Single-Family

Housing Office, HUD has decided to pay off some of the liens. HUD also

has awarded contracts to dispose of properties in 22 of the 28 states

InTown had responsibility for. According to the Single-Family Housing

Official, HUD issued a request for bids to obtain contractors for the

remaining six states and expects to award these contracts by April 2000.

We are presently reviewing the status of the contracts and HUD’s

inventory of acquired properties. We will report the results of our work

this spring.

Six of our 26 high-risk areas relate to longstanding DOD management

problems. The department’s size, the complexity of its mission, and the

far-flung breadth and scope of its operations present major management

challenges in a number of areas.

Despite recent steps to improve financial management, DOD continues to

face serious weaknesses. These weaknesses undermine DOD’s ability to

manage an estimated $280 billion budget and $1 trillion in assets. No major

part of DOD is able to pass the test of an independent financial statement

audit. These continuing financial management problems have real

consequences for program management and resource allocation. For

instance, DOD’s records do not consistently reflect the number or location

of its inventories and weapons systems. Auditors reported that DOD’s

records for F-4 engines and service craft were unreliable and that on-hand

inventory quantities differed by 23 percent from inventory records at

selected locations. These problems increase the risk that inventory

managers may request funds for items that may already be on hand.

DOD cannot properly account for billions of dollars of basic transactions,

leaving the agency vulnerable to the misuse of appropriated funds. DOD

DOD Management
Page 18 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

has not been able to reconcile its records with Treasury’s records—with a

$9.6 billion difference at the end of fiscal year 1998. Auditors reported that

the Air Force Depot Management Activity—a component of one of the

department’s working capital funds—may have obligated $1.1 billion more

than it had available as of September 30, 1998. Also at the end of fiscal

year 1998, $4.3 billion in expired budget authority was cancelled, another

possible consequence of this inability to track obligations and

expenditures.

Financial management weaknesses are reflected in DOD’s procurement

process where the agency spends more than $100 billion a year

contracting for goods and services. DOD continues to overpay contractors,

although the full extent of overpayments is not known. However, we do

know that from fiscal year 1994 through 1998, defense contractors

returned about $4.6 billion in overpayments, an average of about

$920 million a year. According to the Defense Finance and Accounting

Services’ Columbus Center, contractors returned about $670 million in

fiscal year 1999.

DOD Contracting Problems

In a July 1999, study at 13 contractor locations, we found that these contractors took

about a year, on average, before refunding overpayments of $56.2 million. Four of the

13 contractors were retaining overpayments totaling about $1.1 million, which they

subsequently refunded due to our work. Under current law, however, there is no

requirement for contractors who have been overpaid to notify the government of

overpayments or return overpayments prior to the government issuing a written

demand for their return. In response to recommendations we made, DOD said it would

amend the regulations and contract payment clauses to add a requirement that

contractors notify the contracting officer when overpayments are discovered.

We have identified DOD’s management of inventories (spare and repair

parts, clothing, medical supplies, and other items to support the operating

forces) as a high-risk area because levels of inventory were too high and

management systems and procedures were ineffective. Ensuring the

accuracy of inventory requirements, providing adequate visibility over

operating materials and supplies, and reducing the vulnerability of intransit inventory to waste, fraud and abuse remain areas of concern. The

Congress has enacted legislation that requires DOD to implement best

commercial practices in its acquisition and distribution of inventory items,

and the Secretary of Defense has identified reengineered business

practices as a key component of the Defense Reform Initiative. While

these actions hold promise for the future, our recent work indicates that

general areas of concern still exist.
Page 19 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

DOD Inventory Problems

In November 1999, we reported that the Air Force did not always cancel purchases that

exceeded current operating requirements. The Air Force canceled contracts for

$5.5 million of the $162.4 million excess inventory that we reviewed—including such

things as thermal insulation tiles for the B-2 aircraft and turbine nozzles for the F-110

engine—but it could have canceled more. For example, a requirement for a rotor blade

used on the T-33 engine protected over 4 years of supply, thus preventing an additional

13,192 blades from being considered for cancellation.

Lastly, DOD’s weapons systems acquisitions exhibit pervasive problems

that lead to wasteful and ineffective systems. The agency spends over

$80 billion annually to research, develop, and acquire weapon systems.

Although DOD has many acquisition reform initiatives in process, key

weapon system problems persist arising from (1) questionable

requirements and solutions that are not the most cost-effective;

(2) unrealistic cost, schedule, and performance estimates; (3) questionable

program affordability; and (4) the use of high-risk acquisition strategies.

Weapon systems acquisitions remains a high-risk area, as indicated by

some of the following examples from our work in the last year.

DOD Weapons Acquisitions Problems

The Navy and Air Force plan to acquire 4,200 of the antiarmor Joint Standoff

Weapon—a medium-range aircraft-delivered missile for attacking tanks and other

armored vehicles—even though it is not effective against moving targets. The Air Force

and Navy are implementing acquisition reform measures in the development of the

Joint Air-to-Surface Standoff Missile that may not achieve their full cost and schedule

benefits because of the services’ historical practice of moving to the next stage of

development prematurely.

The Army’s Comanche Helicopter development program is being restructured for the

fifth time in 10 years, due to uncertain and changing requirements and unattainable

cost and schedule estimates. This latest restructured development plan still contains

significant risks of further cost overruns, schedule delays, and degraded performance.

The Army procured 6,550 High Mobility Trailers that are not useable or suitable

because it awarded a multiyear production contract without first demonstrating that the

design would meet its requirements.

Although the number of armored targets (e.g., tanks) in current Defense plans is 80

percent less than in 1990, the military services plan to spend $17 billion to acquire more

new and improved antiarmor weapons. This would be in addition to the billions spent

since the end of the Cold War to maintain and improve their large inventory of 40

different types of weapons for attacking tanks and other armored vehicles.
Page 20 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

These are common examples that are the predictable consequences of the

acquisition environment. The competition for funding when a program is

launched encourages aspiring DOD program managers to include

performance features that rely on immature technologies. In this

environment, risks in the form of ambitious technology advancements and

tight cost and schedule estimates are accepted as necessary for a

successful program start. Problems or indications that the estimates are

decaying do not help sustain programs in later years, and thus admission

of them is implicitly discouraged. There are few rewards for discovering

and recognizing potential problems early in program development.

Acquisition reforms underway by DOD have the potential for improving

weapon system outcomes and DOD’s leadership is genuinely committed to

making a difference in the status quo. However, lasting improvements in

program outcomes will not come until the incentives that drive the

process are changed. Such changes will have to come in the form of the

decisions made on individual programs.

The Department of Education is responsible for collecting more than

$150 billion in outstanding student loans. Its data systems track about

93 million student loans and 15 million grants. In fiscal year 1998 more

than 8.5 million students received more than $48 billion in federal student

financial aid through programs administered by the department.

By their very nature these programs are vulnerable to waste, fraud, abuse,

and mismanagement. Not only do they target a high-risk population, but

also the programs have been designed to operate separately with different

rules, processes, and data systems. Further adding to the vulnerability of

these programs is the number of participants—not just millions of

students and thousands of schools, but also thousands of lenders,

guaranty agencies, third-party servicers, and contractors. The federal

government bears most of the risk when students default on loans.

Moreover, mismanagement by the Department of Education exacerbated

the potential for abuses—weak gatekeeping allowed proprietary trade

schools with poor educational programs and high student default rates to

remain in the program.

Student Financial Aid
Page 21 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Student Loan Problems

The Education Office of Inspector General reported that, between July 1, 1994, and

December 31, 1996, 708 borrowers had loans totaling $3.89 million discharged

because guaranty agencies received a notice of their death. These borrowers were

reported to have subsequently earned wages. For example, in 1997, 367 of these

borrowers earned reported wages up to $30,000, 191 borrowers between $30,000 and

$50,000, and 150 borrowers more than $50,000.

One borrower had student loans of $8,517 forgiven because the guaranty agency

determined, based on certification by the borrower’s doctor, that he was totally and

permanently disabled for work or school. There was no requirement for the agency to

verify the borrower’s disability or employment status with the state’s employment

agency. However, about 6 months later, the borrower received the first of four

additional student loans totaling $9565.

Between 1996 and 1999, an individual allegedly submitted 37 applications falsely

claiming enrollment at four schools in Mexico, while he was on federal supervised

release. (He had previously been convicted of defrauding the education program of

$160,000 by falsely claiming attendance at a foreign medical school.) The 37

applications, which he allegedly submitted to four guaranty agencies, resulted in the

disbursement of $319,680. (Source: U.S. Department of Education, Office of Inspector

General Semiannual Report to the Congress, No. 39, Apr. 1, 1999-Sept. 30, 1999)

Proprietary school owners mailed forged documents to loan servicing agencies in an

effort to fraudulently reduce their school’s student loan default rate to remain in the

Federal Family Education Loan (FFEL) Program. The owners pleaded guilty to mail

fraud, student financial aid fraud, money laundering and obstruction of justice. The

3-year scheme defrauded the Department of Education out of $846,000 while the

school avoided its eligibility from being terminated. (Source: U.S. Department of

Education, Office of Inspector General Semiannual Report to Congress, No. 38, Oct. 1,

1998-Mar. 31, 1999)

Progress has been made. The department has made strides to improve its

management of the program and has worked to effectively screen out

schools with bad default records. Prior to the 1998 Higher Education Act

amendments, students underreporting their income in applying for student

aid had a better chance of never being caught. Over 300 students receiving

Pell grants underreported their adjusted gross income by over $100,000

each. Fortunately, the 1998 amendments directed Education and IRS to

cooperate in verifying student income, but the effectiveness of this

provision will be largely dependent on how well the two agencies work

together. The default rate has declined from a high of 22.4 percent in fiscal

year 1990 to 8.8 percent in fiscal year 1997. Nonetheless, in fiscal year 1997

the federal government paid out $3.3 billion in defaulted loans.
Page 22 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

The Department of Education lacks the financial information necessary to

effectively budget for and manage its student aid programs and needs to

work on improving the accuracy and completeness of its grant payments

system. In addition, its lack of an integrated information management

system means officials often lack accurate, complete, and timely data to

manage and oversee aid programs.

GAO continues to have three concerns with agencies’ management of the

Superfund hazardous waste cleanup program. First, some agencies do not

have a strategy for allocating resources according to risk. Since the

Department of Energy (DOE) does not require facilities to compete for

cleanup dollars, it may fund cleanups addressing a lower risk at one

facility while a higher risk site at another facility goes unfunded. Another

agency, the Bureau of Land Management (BLM), does not have a complete

inventory of sites or a cleanup strategy in place and as a result potential

hazards may expose the public to needless risks. For instance, BLM was

not aware of one hazardous site until a child wandered onto the

abandoned manufacturing site, came into contact with a contaminated

rock, and fell ill.

Second, although the Environmental Protection Agency (EPA) has

succeeded in getting responsible parties to pay for 70 percent of

Superfund long-term cleanups, it has been less successful in recovering its

full costs from parties when it conducts the cleanup. Figure 1 shows the

problem.

Superfund Management
Page 23 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Figure 1: EPA Could Lose the Chance to Recover Billions It Has Spent on Superfund (Dollars in billions)

Source: GAO’s presentation of data from EPA.

At the end of fiscal year 1998, EPA had agreements to recover only

$2.4 billion, about 22 percent, of about $11 billion it had spent on the

Superfund program.10 EPA’s method for calculating indirect costs caused

it to lose the chance to recover $1.9 billion of the $11 billion in settlement

agreements already reached. This problem could lose the agency up to an

additional $1.3 billion in recoveries in cases under negotiation. EPA has

updated the methodology for calculating and recovering indirect costs but

has yet to implement it. The agency estimates that, with this new

methodology, it could recover nearly half of the indirect costs that it

currently excludes from settlements under negotiation.

Finally, EPA also needs to improve its contract management. The agency

does not always negotiate the best contract price for the government.

Although EPA is now using more independent estimating methodologies

10 EPA had spent another $5 billion that it considers unrecoverable for reasons such as the lack of a

financially viable party to cover the costs.

Costs EPA has not yet

tried to recover($ 3)

28%

Indirect costs excluded by

EPA and no longer

recoverable because cases

have been settled ($1.9)

17%

Costs EPA is currently

trying to recover ($2.3)

21%

Costs parties have agreed

to pay ($2.4)

22%

Indirect costs excluded by

EPA and potentially

recoverable because cases

have not yet been settled

($1.3)

12%
Page 24 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

to help it negotiate contract prices than in the past, some of its regional

staff still lacked the necessary cost estimating experience and training to

help them negotiate best prices. In addition, EPA has more contract

capacity in place than work available for the contractors. For example,

EPA was reluctant to close out one contractor with high program support

costs due to excess staff and facilities, even though it did not have

sufficient cleanup work for the contractor. EPA has not effectively limited

contractors’ costs for program support, such as rent and managers’

salaries. In April 1999, we reported that such costs ranged from 16 to 76

percent of total cleanup costs for new contracts, exceeding EPA’s target of

11 percent. The agency is beginning to take additional steps to address this

problem.

High-risk areas and improper payment problems reflect deeply rooted

weaknesses in federal financial and program management, as well as more

fundamental tensions associated with conflicting statutory goals and

complex program delivery systems and mechanisms. The government’s

financial systems are all too often unable to perform the most rudimentary

bookkeeping for federal entities, many of which are engaged in financial

transactions whose magnitude, complexity, and risk exceeds those of

large private companies. Weaknesses in underlying financial systems make

agencies vulnerable by undermining their ability to safeguard assets,

account for appropriated resources, or measure the costs of their

activities. The agencies’ inability to account for substantial liabilities,

assets, net costs, or improper payments were among the factors that

prevented us from being able to form an opinion on the U.S. government’s

consolidated financial statements for the two years that we have been

performing this audit.11 The lack of reliable financial information limits the

capacity to even understand the dimensions of the risks the government

faces—the first step in pinpointing strategies to mitigate problems. Agency

efforts to implement the Chief Financial Officers (CFO) Act are prompting

steady improvements, but, as shown in table 2, many federal agencies

were still unable to obtain a clean audit opinion on their financial

statements in fiscal year 1998.

11Financial Audit: 1998 Financial Report of the United States Government (GAO/AIMD-99-130,

Mar. 31, 1999).

Reducing and Resolving

Risk in Federal Programs
Page 25 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Table 2: Audit Opinions for the 24 CFO Agencies’ Fiscal Year 1998

Financial Statements

Opinons Agencies

•Department of Housing and Urban

Development

•Department of the Interior

•Department of Labor

•Department of State

•Environmental Protection Agency

•Federal Emergency Management Agency

•General Services Administration

•National Aeronautics and Space

Administration

•National Science Foundation

•Nuclear Regulatory Commission

•Small Business Administration

Unqualified audit opinions:

The financial statements are reliable in all

material respects.

•Social Security Administration

•Department of Health and Human Services

•Department of Energy

•Department of the Treasury

Qualified audit opinions:

Except for some item(s), which are

mentioned in the auditor’s report, the

financial statements are reliable in all

material respects. •Department of Veterans Affairs

•Department of Agriculture

•Department of Defense

•Department of Education

•Department of Justice

•Department of Transportation

Disclaimers:

The auditor does not know if the financial

statements are reliable in all material

respects.

•U.S. Agency for International Development

•Department of Commerce received an

unqualified opinion on its balance sheet and a

disclaimer on its other financial statements.

Other:

•Office of Personnel Management’s Retirement

Program, Life Insurance Program, and Health

Benefits Insurance Program received

unqualified opinions; the Revolving Funds and

the Salaries and Expenses Accounts received

disclaimers.

Source: Individual agency reports on results of audits of fiscal year 1998 financial statements, as of

October 1999.

While audited financial statements are essential to identify serious

financial management problems and to ensure, and provide an annual

public scorecard on, accountability, an unqualified audit opinion is not an

end in itself. The CFO Act is focused on providing accurate, timely, and

relevant financial information needed for management decisionmaking

and accountability, on a systematic basis, throughout the year. Efforts to
Page 26 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

obtain reliable year-end data that are not backed up by fundamental

improvements in underlying financial management systems and operations

that ensure the routine production of accurate, timely, and relevant data to

support ongoing program management and accountability will not achieve

the intended results of the CFO Act over the long-term.

For example, after several years of concerted effort by IRS and GAO, for

fiscal year 1997 we were able to conclude for the first time that IRS’

custodial financial statements, covering over $1.6 trillion in tax revenue,

were reliable. Prior to fiscal year 1997, weaknesses in IRS’ internal

controls and financial management systems prevented it from producing

reliable year-end financial information. Our conclusion that the fiscal year

1997 statements were reliable was accomplished only after extensive use

of ad hoc programming by IRS to extract data from its systems, followed

by numerous adjustments to these data totaling tens of billions of dollars

to produce final financial statements.

Serious and chronic financial management problems will continue to make

agencies’ programs and activities vulnerable to risk, waste, and

mismanagement. Accordingly, we have added financial management at

selected agencies to our high-risk list in recent years. Financial

management at DOD and IRS were both added in 1995. The U.S. Forest

Service and the Federal Aviation Administration (FAA) were added in

1999. These agencies face substantial challenges in producing reliable

financial statements and reports due to serious deficiencies in financial

systems and cost accounting. Although these agencies are making

progress in addressing their financial management weaknesses, much

remains to be done before full accountability can be achieved. Full

accountability includes not only obtaining a clean audit opinion but also

addressing internal control weaknesses which hamper their ability to keep

track of their assets, liabilities, revenues, and expenses on an ongoing

basis. For example, both Forest Service and FAA need to implement

systems that are capable of properly recording, tracking, and depreciating

property and equipment from acquisition to disposition.

Pervasive deficiencies in oversight, monitoring, and information systems

by federal agencies and by their agents in state and local governments and

in the private sector also contribute to high-risk problems. In such areas as

HUD’s assisted housing programs and Education’s student loans, local

providers had primarily based eligibility on applicants’ self-reported

income, with little independent verification. These weaknesses in verifying

the eligibility of beneficiaries have contributed to improper payments and

are reinforced by fragmented organizational responsibilities and persistent

human capital deficiencies. Organizational fragmentation, for instance,
Page 27 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

inhibits the systems integration necessary to prevent the needless

duplicate entry of data in DOD’s payment process that increases the

probability of errors. Persistent staff skills mismatches have undermined

HUD’s capacity to effectively mitigate losses from foreclosures on its

properties, manage troubled assets and prevent losses due to impending

defaults on insured mortgages.

Resolving federal management deficiencies is particularly important due

to the complex delivery systems used in most federal programs. The

federal government often relies on a network of third parties—state and

local governments, nonprofit agencies and businesses—to implement

federal goals. Third parties bring substantial advantages to the

implementation of federal initiatives by engaging local interests and

resources. However, “third party government” poses challenges as well,

since federal programs rely on the integrity, skill, and support of

independent agents with their own goals and constituencies. Transferring

the responsibility for the delivery of services to third parties does not

relieve federal officials from being accountable for their performance.

Many of our high-risk and improper payment areas are vulnerable due to

the known challenges of federal agency oversight of third parties that play

a critical role in program implementation, including insurance contractors

for Medicare; facilities management contractors at DOE; banks and state

guaranty agencies for student loans; public housing authorities, mortgage

lenders and contractors for HUD’s housing programs; or states for food

stamps and Medicaid.

Federal executive agencies are critical actors, but they operate within a

broader statutory environment that can also play a role in promoting or

mitigating risk. The design and incentives associated with federal

programs can often lay the groundwork for subsequent program

vulnerability and delivery problems, while improvements can protect

programs. For instance, the farm loan program reduced its delinquencies

from 41 to 28 percent of its outstanding loan principal in 1997, due partly

to earlier legislative changes prohibiting delinquent borrowers from

obtaining further loans. However, recent legislation easing these reforms,

along with deterioration in the farm economy, threaten to reverse this

trend. In another area, high student loan default rates were brought down

when legislation provided for risk sharing by participating lending

institutions and greater agency control over the certification of schools for

participation in the program. Conflicting statutory goals can also

complicate program administration; for example, programs emphasizing

speed of service—such as mandates placed on IRS to process tax refunds

within 45 days, or the urgency for the Federal Emergency Management
Page 28 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

Administration to provide disaster relief quickly—can confound the efforts

of program administrators to reduce improper payments.

Mr. Chairman, the deep-seated nature of many of these problems does not

mean they are immutable. In fact, we have noted substantial

improvements in many of these areas. The point I want to make is that

change is possible, but only with concerted and sustained attention of

both executive agencies and often the Congress itself. Persistent

improvements in information, systems, human capital, and program design

are typically essential for progress to be made. Congressional oversight in

particular is critical to stimulate and support the initiatives of agencies to

address these problems.

The experience of the U.S. Customs Service (Customs) in overcoming its

vulnerability to high risk is instructive. In 1991, we added Customs to our

high-risk list due to major weaknesses in its management and

organizational structure that diminished its ability to detect trade

violations on imported cargo; collect applicable duties, taxes, and fees;

control financial resources; and report on financial operations. Since then,

Customs has made considerable progress in addressing its financial

management weaknesses, receiving unqualified audit opinions for the past

three fiscal years. Coupled with a major reorganization, Customs has also

made major improvements in focusing on enforcement efforts and

measuring noncompliance with trade laws, preventing or detecting any

duplicate or excessive refunds, and collecting delinquent receivables.

Sustained management commitment was essential for progress. It will be

important for such management commitment and congfressional oversight

to continue in order to prevent these weaknesses from recurring. We will

continue to monitor Customs' efforts.

Addressing high-risk areas promises to diminish the vulnerability of

federal programs to fraud and abuse and reduce waste. In addition, other

opportunities are present to increase the economy and efficiency of

federal programs and activities. Effective congressional oversight can

improve performance accountability and financial integrity of existing

programs by addressing the delivery strategies and structures used to

implement federal programs. Such an initiative can pursue opportunities

for the consolidation or coordination of programs with similar objectives;

the reengineering and streamlining of federal processes; the application of

market-based models and prices to encourage the best use of federal

resources and the full collection of owed revenues and debts; and the

integration of performance measurement with program management to

Improving the

Economy and

Efficiency of Federal

Activities
Page 29 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

identify more efficient and effective approaches to achieve federal

objectives.

The following examples from our work provide illustrations of programs

and activities that could be considered for reform to address costly and

inefficient delivery approaches, fragmented and duplicative organizational

facilities and locations, or outmoded management structures.

• DOD’s efforts at streamlining, consolidating, and possibly privatizing

infrastructure activities should continue to be encouraged. For fiscal year

1998, DOD estimated that about $147 billion, or 58 percent of its budget,

was spent for infrastructure requirements. Recognizing that it must make

better use of its scarce resources, DOD announced the Defense Reform

Initiative (DRI) in November 1997. Through this program, DOD hoped to

create a revolution in business affairs that would streamline and

substantially improve the economy and efficiency of its business

operations. A major thrust of the DRI was to reduce unneeded

infrastructure, primarily through a number of initiatives designed to

reduce the cost of DOD’s operations and support activities. Included in

these initiatives were (1) demolishing and disposing 80 million square feet

of excess space at military facilities, (2) reducing the number of Defense

Information System Agency major data processing centers from 16 to 6,

(3) reducing the number of Defense Finance and Accounting Service

operating locations from 19 to 11, (4) closing unneeded research,

development, and test facilities, and (5) avoiding hundreds of millions of

dollars in future capital expenditures by privatizing utility systems

(electric, natural gas, water, and sewer) at military bases. The results of

DOD’s efforts in reducing infrastructure are mixed, but continued progress

on this initiative can help DOD save significant amounts of operations and

support money.12

• The Department of State maintains a physical presence—embassies,

consulates, and other offices in the capital and other cities—in over 160

countries. About 18,000 direct-hire employees—over 6,400 from State and

the rest from at least 27 other federal agencies—and over 35,000 locally

hired and contract staff work overseas at a total of more than 250

diplomatic posts. It costs over $200,000 annually to station an American

overseas, which is about two times as much as for Washington-based staff.

In November 1999, the Overseas Presence Advisory Panel, established by

the Secretary of State to review how the United States carries out its

overseas activities, concluded that there is no process in place to

“rightsize” posts as missions change. Although the panel did not specify

12Defense Reform Initiative: Organization, Status, and Challenges (GAO/NSIAD-99-87, Apr. 21, 1999).
Page 30 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

the amount of savings that could be achieved through streamlining posts,

it expressed the belief that the savings would be substantial and

recommended the formation of an interagency committee to review and

restructure every overseas post. State has not said how it will respond to

the panel’s recommendations. Security and diplomacy requirements are

directly linked to the size of the overseas workforce, and the Congress

should be involved in any significant restructuring.13

• Since 1982, many panels, commissions, and task forces, and several GAO

studies have addressed how DOE could achieve operational efficiencies in

its research and development facilities. Recommendations have included

focusing unclear missions, aligning laboratory activities with DOE goals,

consolidating facilities, and replacing cumbersome, inefficient

management structures. In particular, with the end of the Cold War, DOE

may no longer need to maintain three nuclear weapons laboratories. For

example, Los Alamos officials have estimated that consolidating the

nuclear weapons functions of the Lawrence Livermore facility into the Los

Alamos Laboratory could save about $200 million in annual operating

costs. A DOE-chartered task force—the 1995 Task Force on Alternative

Futures for the Department of Energy National Laboratories—reported

that DOE’s entire laboratory system could be reduced productively by

eliminating obsolete and redundant missions and support infrastructure.14

Moreover, substantial portions of the laboratory budgets are being spent

on infrastructure.

• Duplication and overlap in federal land management could be reduced and

operations streamlined through a collaborative federal land management

strategy. The four major federal land management agencies—the National

Park Service, the Fish and Wildlife Service, and BLM within the

Department of Interior, and the Forest Service within the U.S. Department

of Agriculture (USDA)—have grown increasingly similar over time, while

federal land management missions have become more complex. Budgetary

constraints and better understanding of natural ecosystems, whose

boundaries are often not consistent with existing jurisdictional and

administrative boundaries of the separate agencies, demand that the

agencies find ways to refocus, combine, or eliminate certain functions,

systems, programs, activities, and field locations. To improve the

efficiency and effectiveness of federal land management, the Congress

13State Department: Major Management Challenges and Program Risks (GAO/T-NSIAD/AIMD-99-99,

Mar. 4, 1999) and Overseas Presence: Staffing at U.S. Diplomatic Posts (GAO/NSIAD-95-50FS,

Dec. 28, 1994).

14Department of Energy: Need to Address Longstanding Management Weaknesses

(GAO/T-RCED-99-255, July 13, 1999) and Department of Energy: A Framework for Restructuring DOE

and Its Missions (GAO/RCED-95-197, Aug. 21, 1995).
Page 31 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

might consider either reorganizing the current organizational structures or

streamlining these structures by integrating and coordinating current

functions and programs.15

• The federal system to ensure the safety and quality of the nation’s food is

inefficient and outdated. The current food safety system suffers from

overlapping and duplicative inspections, poor coordination, and inefficient

allocation of resources. For example within USDA, the Food Safety and

Inspection Service (FSIS) is responsible for the safety of meat, poultry,

and some eggs and egg products, while the Food and Drug Administration

(FDA) is responsible for the safety of most other foods. FSIS, FDA, and 10

other federal agencies administer over 35 different laws that oversee food

safety. Given this environment, the Congress could consider consolidating

federal food safety agencies and activities under a single food safety

inspection agency with a uniform set of food safety laws.16

• The USDA Farm Service Agency (FSA) should continue to consolidate its

county office field structure by closing more of its small county offices. In

response to the Agriculture Reorganization Act, FSA has closed over 370

county offices and reduced its county office staff by about 28 percent.

However, FSA still has nearly 2,400 county offices, including 673 small

county offices that have three or fewer permanent full-time employees.

These smaller offices generally cannot take advantage of certain

economies of scale. For example, USDA’s workload data indicate that

small county offices spend about 46 percent of their time on such fixed

administrative activities as obtaining and managing office space and

processing paperwork related to payroll. In comparison, larger county

offices spend only 32 percent of their time on these administrative

activities.17

• USDA’s Rural Utilities Service (RUS) finances the construction,

improvement, and repair of electrical, telecommunications, and water and

waste disposal systems through direct loans and repayment guarantees on

loans made by other lenders. Given demographic changes, the operating

environment of today’s utilities industry, and weaknesses in RUS loan

management operations, the Congress could reconsider the role of RUS in

the development of the utility infrastructure for the nation’s rural areas.

We have identified various steps RUS could take to increase the

15Federal Land Management: Streamlining and Reorganization Issues (GAO/T-RCED-96-209,

June 27, 1996).

16Food Safety: U.S. Needs a Single Agency to Administer a Unified, Risk-Based Inspection System

(GAO/T-RCED-99-256, Aug. 4, 1999).

17Farm Service Agency: Characteristics of Small County Offices (GAO/RCED-99-162, May 28, 1999).
Page 32 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

effectiveness and reduce the costs of its loan programs. From a financial

standpoint, RUS has successfully operated the telecommunications loan

program, but the agency has had, and continues to have, significant

financial problems with the electricity loan program. For example, during

fiscal years 1992 through July 31, 1997, RUS wrote off the debt of four

electricity loan borrowers totaling more than $1.5 billion. Since then, the

agency has written off $0.3 billion and is in the process of writing off an

additional $3.0 billion, and it is probable that the agency will continue to

incur losses in the future.18

• Closing, consolidating or privatizing Coast Guard training and operating

facilities could provide significant budgetary savings. In fiscal year 1996,

we reported that the Coast Guard could save $6 million by closing or

consolidating over 20 small boat stations. Also in 1996, we recommended

that the Coast Guard consider other alternatives—such as privatization—

to operate its vessel traffic service centers, which cost about $20 million in

fiscal year 1999 to operate. In fiscal year 1995, we recommended that the

Coast Guard close one of its large training centers in Petaluma, California,

at a savings of $9 million annually. The Coast Guard has faced, however,

significant opposition to closing facilities.19

• The Commissioned Corps of the Public Health Service (PHS) was

established in the late 1800s to provide medical care to sick and injured

merchant seamen. As a result of temporary service with the armed forces

during World Wars I and II, members of the Corps were authorized to

assume military ranks and receive military-like compensation. Today,

Corps officers continue to receive virtually the same pay and benefits as

military officers, including retirement eligibility (at any age) after 20 years.

However the functions of the Corps have become essentially civilian in

nature, and, in fact, some civilian PHS employees carry out the same

functions as Corps members. Further, the Corps has not been

incorporated into the armed forces since 1952. Based on 1994 costs, when

all of the components of personnel costs—including basic pay and

salaries; special pay, allowances, and bonuses; retirement; health care; life

insurance; and Corps members’ tax advantages—were considered, PHS

personnel costs could have been reduced by converting the Commissioned

Corps to civilian status.20

18Rural Utilities Service: Opportunities to Operate Electricity and Telecommunications Loan Programs

More Effectively (GAO/RCED-98-42, Jan. 21, 1998).

19Coast Guard: Review of Administrative and Support Functions (GAO/RCED-99-62R, Mar. 10, 1999)

and Coast Guard: Challenges for Addressing Budget Constraints (GAO/RCED-97-110, May 14, 1997).

20Federal Personnel: Issues on the Need for the Public Health Service’s Commissioned Corps

(GAO/GGD-96-55, May 7, 1996).
Page 33 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

• The Department of Veterans Affairs (VA) owns 4,700 buildings and 18,000

acres of land, which it uses to operate 181 major health care delivery

locations. VA spends about $1 out of every $4 of its $18.4 billion budget to

operate, maintain, and improve its delivery locations—in effect, the cost of

its asset ownership. VA’s delivery locations operate in 106 health care

markets, and in 40 of these markets multiple VA facilities compete with

each other to serve veterans—for example, 4 major VA facilities are

located in the Chicago market. However, all VA delivery locations project

a declining veteran population base, and two-thirds expect declines

greater than 33 percent in the next 20 years. Without major restructuring

over the next several years, billions of dollars will be used to operate

hundreds of unneeded VA buildings. For example, a VA study projected

annual savings ranging from $132 million to $189 million by consolidating

medical and administrative services at its major delivery locations in the

Chicago area. VA needs to develop and implement realignment plans for

all of its health care markets, and the Congress could consider a variety of

options, such as greater reliance on community-based, integrated

networks of VA and non-VA providers, to meet the health care needs of

veterans in the most cost-effective manner.21

Addressing high-risk activities and pursuing opportunities to improve

economy and efficiencies in government operations can yield significant

improvements and cost savings and, hence, should be important targets

for congressional oversight. However, it is also important to periodically

examine whether current programs and activities remain relevant,

appropriate and effective. Our work suggests that congressional oversight

could usefully address three fundamental questions.

• Has a program succeeded, or persistently failed in accomplishing its

intended objective(s)?

• Have underlying conditions that prompted federal intervention changed

such that original objectives are no longer valid?

• Have cost estimates risen significantly above those associated with the

original objective(s), or have benefits fallen substantially below original

expectations?

21VA Health Care: Challenges Facing VA in Developing an Asset Realignment Process

(GAO/T-HEHS-99-173, July 22, 1999).

Reassessing What the

Federal Government

Does
Page 34 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

The following examples are illustrative of programs and activities that

could be considered for reform, reduction, or termination because of

fundamental changes affecting original objectives and purposes.

• DOD plans to develop and procure several aircraft, including the

F/A-18E/F, the F-22, and the multi-service Joint Strike Fighter, to replace

various types of tactical fighter and ground attack aircraft. As the nation

proceeds to the next century with the prospect of a flat defense budget,

DOD’s plan to modernize its tactical aircraft fleet will be a significant issue

confronting the Congress. DOD’s planned investment in these aircraft,

estimated by the Congressional Budget Office to exceed $350 billion, is

likely to be significantly greater than probable future budgets. Moreover,

questions have been raised about the need for, and cost-benefit of, all

these systems given likely threats. The traditional practices of approving

all requested programs and then reducing procurement quantities within

each program lowers acquisition costs but exacerbates the problem of

aging equipment and associated operating and support costs. The

Congress and DOD will need to carefully consider tactical aircraft

investment options to ensure balance among bona fide national security

needs based on realistic threat assessments, the desires of individual

services, and what can be afforded given likely future budgets.22

• The Army plans to invest over $13 billion dollars to develop and procure

the Crusader self-propelled howitzer and its resupply vehicle to be used by

the Army’s rapidly deployable and forward-deployed forces. The Crusader

program has experienced a number of problems that have delayed its

development by 12 to 18 months, and a number of technical uncertainties

remain. The Army has recently proposed changes to the Crusader artillery

system to make it more affordable and relevant to future war plans. The

new program reduces the planned procurement quantity, changes the

armor, and cuts the system’s weight to about 90 tons. Such changes,

however, will likely reduce some of the Crusader’s originally planned

capabilities. Given the Crusader program’s high acquisition costs and

uncertain capabilities and requirements, other less costly alternatives—

such as upgrading the Army’s current Paladin system or procuring the

German PzH 2000 self-propelled howitzer—could be investigated.23

• The Army National Guard’s combat structure, with 42 combat brigades,

exceeds projected requirements for two major regional conflicts,

22Fiscal Year 2000 Budget: DOD’s Procurement and RDT&E Programs (GAO/NSIAD-99-233R,

Sept. 23, 1999).

23Army Armored Systems: Meeting Crusader Requirements Will Be a Technical Challenge

(GAO/NSIAD-97-121, June 6, 1997).
Page 35 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

according to war planners and DOD and Army studies. Although the

National Guard has state missions in addition to its federal role, a 1995

RAND study of the use of Guard forces for state missions concluded that,

even in a peak year, such missions would not require a large portion of the

Guard and should not be used a basis for sizing the Guard’s force.

However, DOD has not yet addressed critical issues regarding the Guard’s

combat structure or eliminating any excess forces. As a result, the combat

structure is left in place but has no valid war-fighting mission. Although

the Army National Guard agreed to reduce its forces by 17,000 through

fiscal year 2000, it did not agree to reduce overall force structure.24

• The need for the Selective Service System could be reassessed. No one has

been drafted in the United States since 1973 and the advent of an allvolunteer force. Since 1980, males between the ages of 18 and 26 have

continued registering with the Selective Service System for a potential

draft in the event a national emergency occurs. However, it would require

congressional action to actually draft men into the military, and a return to

a military draft seems unlikely, even under the current recruiting

difficulties the military services are facing. One reason for this is that the

recruiting shortfalls represent only a minute percentage of the over

13 million males of draft age and it would be very difficult to ensure a fair

and equitable draft to cover such shortfalls. The likelihood of the United

States engaging in a manpower-intensive conflict in the future is very

remote, so alternative approaches to a draft could be devised to fill

personnel needs. It has been estimated that it would take a little more than

one year and funding equal to about one year’s appropriation to bring the

Selective Service System back from a “deep standby” status.25

• The Uniformed Services University of the Health Sciences (USUHS) is a

medical school operated by DOD. Those who propose closing the

university assert that DOD’s need for physicians could be met at a lower

cost using physicians educated at civilian medical schools under the DOD

scholarship program. USUHS is a more costly source of military

physicians on a per graduate basis when DOD’s and total federal costs are

considered. With DOD education and retention costs of about $3.3 million

over the course of a physician’s career, the cost of a USUHS graduate is

24Army National Guard: Planned Conversions Are a Positive Step, But Unvalidated Combat Forces

Remain (GAO/NSIAD-97-55BR, Jan. 29, 1997).

25Selective Service: Cost and Implications of Two Alternatives to the Present System

(GAO/NSIAD-97-225, Sept. 10, 1995).
Page 36 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

more than 2 times greater than the $1.5 million cost for a DOD scholarship

program graduate.26

• The National Aeronautics and Space Administration (NASA) has estimated

that the annual cost to operate the International Space Station (ISS) will

average $1.3 billion, or $13 billion over a 10-year mission life. However,

this estimate does not include risks associated with international partner

commitments or other funding requirements, such as (1) costs associated

with necessary upgrades due to component obsolescence, (2) end-ofmission costs to either extend or decommission the ISS, and (3) a variety

of support costs (space shuttle flights, personnel, space communications,

etc.) that are currently shown in other portions of NASA’s budget.27

Although assembly of the ISS is well under way, congressional oversight is

vital to ensure that NASA’s other priorities are not sacrificed in the

agency’s annual budget request to primarily fund ISS operations.

• DOE has lacked an investment strategy to assure that supercomputer

acquisitions are fully justified and represent the best use of funds among

competing priorities. From fiscal years 1994 through 1997, DOE spent

about $300 million to purchase 35 supercomputers and about $526 million

to operate them. Since fiscal year 1998, DOE has spent an estimated

$257 million to acquire additional supercomputers, most associated with

the Strategic Computing Initiative. However, DOE used only about

59 percent of its available supercomputer capacity in fiscal year 1997 and

was missing opportunities to share supercomputer resources. The largest

supercomputers—those justified as needed to run very large programs

across hundreds or even thousands of processors—were seriously

underutilized. Less than 5 percent of the jobs run on those

supercomputers used more than one-half of the supercomputers’ available

processors.28

• The USDA Market Access Program (MAP) subsidizes the promotion of

U.S. agricultural products in overseas markets. Despite changes made to

the program between 1993 and 1998, its results remain uncertain. For

example, our work has noted several unresolved questions, including

whether subsidized promotions generate positive net economic returns,

increase exports that would not have occurred without the program, and

26Military Physicians: DOD’s Medical School and Scholarship Program (GAO/HEHS-95-244,

Sept. 29, 1995).

27Space Station: Cost to Operate After Assembly is Uncertain (GAO/NSIAD-99-177, Aug. 6, 1999).

28Nuclear Weapons: DOE Needs to Improve Oversight of the $5 Billion Strategic Computing Initiative

(GAO/RCED-99-195, June 28, 1999) and Information Technology: Department of Energy Does Not

Effectively Manage its Supercomputers (GAO/RCED-98-208, July 17, 1998).
Page 37 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

supplement rather than supplant private sector spending.29 Moreover, MAP

promotions can have significant spin-off effects. For example, a 1996 study

of U.S. apple exports to the United Kingdom and Singapore found that U.S.

market share and export value increased in the United Kingdom, but that

foreign competitors mainly benefited from MAP promotions in Singapore;

Chilean and French apple producers experienced increases in export

shares 3 to 10 times greater than U.S. producers. The Congress could

reassess MAP and consider terminating or significantly reducing the

program.

• The Coast Guard needs to develop a realistic estimate of needs based on

the capabilities of its current fleet of ships and aircraft for its Deepwater

Project, the largest acquisition project in the agency’s history. The initial

justification did not accurately or fully depict the need to replace or

modernize its fleet of deepwater ships and aircraft. The agency’s initial

estimate that the project may cost $9.8 billion, or about $500 million

annually over 20 years, would consume more than the agency now spends

for all capital projects and leave little funding for other critical capital

needs.30

• To improve Amtrak’s financial performance and potentially reduce federal

subsidies, the Congress must make fundamental choices between

expectations for intercity passenger rail service and the federal financial

assistance that can be provided. These decisions involve determining the

appropriate scope of Amtrak’s route network and restructuring it

accordingly, which could impact the need for financial assistance. Like

other intercity passenger rail systems outside the United States, Amtrak

receives substantial government support. Since 1971, the federal

government has provided over $23 billion in operating and capital

assistance. Ridership in many areas is light: in 13 states, fewer than 100

passengers, on average, boarded an Amtrak train on a given day in 1997. A

number of Amtrak’s routes lost large sums of money in 1997; of the 40

Amtrak routes, 13 routes each lost over $30 million and 14 each lost more

than $100 for every passenger. Overall in 1999, Amtrak lost $907 million. In

1994, at the request of the administration and later at the direction of the

Congress, Amtrak pledged to eliminate the need for federal operating

subsidies by the end of 2002. However, Amtrak has made relatively little

progress in reducing its need for federal operating subsidies; in fact, it

must make nearly 4 times the progress in the coming 3 years (through

29Agricultural Trade: Changes Made to Market Access Program, but Questions Remain on Economic

Impact (GAO/NSIAD-99-38, Apr. 5, 1999).

30Coast Guard’s Acquisition Management: Deepwater Project’s Justification and Affordability Need to

Be Addressed More Thoroughly (GAO/RCED-99-6, Oct. 26, 1998).
Page 38 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

2002) than it has made over the previous 5 years. If Amtrak continues to

require federal operating subsidies after 2002, the Amtrak Reform and

Accountability Act of 1997 provides for the Congress to consider either

restructuring or liquidating the railroad.31

• Cargo preference laws require that certain government-owned or -financed

cargo shipped internationally be carried on U.S.-flagged vessels. The laws

were intended to guarantee a minimum amount of business for the U.S.-

flagged vessels that are crewed by U.S. mariners, generally built in U.S.

shipyards, and are encouraged to be maintained and repaired in U.S.

shipyards. The effect of cargo preference laws has been mixed. Although

the laws appear to have had a substantial impact on the U.S. merchant

marine industry by providing an incentive for vessels to remain in the U.S.

fleet, cargo preference laws have increased the government’s

transportation costs because U.S.-flagged vessels often charge higher rates

to transport cargo than foreign-flagged vessels. Cargo preference laws

increased federal agencies’ transportation costs by an estimated

$578 million per year in fiscal years 1989 through 1993 over the cost of

using foreign-flagged vessels.32

• The Medicare Incentive Payment program was developed to provide a

bonus payment for Medicare services provided in areas identified as

having a shortage of primary care physicians. About 60 percent of the

payments, about $65 million, was made to specialists; two-thirds of those

payments—and many of the substantial bonus payments, such as $69,000

to a dermatologist and $57,000 to a neurosurgeon—were made to

specialists in urban areas, rather than to primary care physicians in

medically underserved areas. The bonus payments do not appear to have a

significant impact on physician recruitment and retention, and recent

beneficiary survey information indicates that access problems arise for

reasons other than the unavailability of physicians.33

• The Government Printing Office (GPO), which receives over $100 million

in annual appropriations, effectively has a statutory monopoly over

printing for the federal government.34 GPO’s monopoly-like role in

31Intercity Passenger Rail: Amtrak Faces Challenges in Improving its Financial Condition

(GAO/T-RCED-00-30, Oct. 28, 1999).

32Maritime Industry: Cargo Preference Laws—Estimated Costs and Effects (GAO/RCED-95-34,

Nov. 30, 1994).

33Physician Shortage Areas: Medicare Incentive Payment Not an Effective Approach to Improve

Access (GAO/HEHS-99-36, Feb. 26, 1999).

34Government Printing: Legal and Regulatory Framework Is Outdated for New Technological

Environment (GAO/NSIAD-94-157, Apr. 15, 1994).
Page 39 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

providing printing services perpetuates inefficiency because it permits

GPO to be insulated from market forces and does not provide incentives to

improve operations and processes that will ensure quality services at

competitive prices. Federal agencies could be given the authority to make

their own printing policies, requiring GPO to compete with private sector

printing service providers. If GPO is unable to provide quality service at

competitive prices, the need for retaining a government printing office

could then be re-examined.

The Congress originally defines the intended audience for any program or

service based on a certain perception of eligibility and/or need. To better

reflect changing conditions and target limited resources, these definitions

should be periodically reviewed and revised. Our work has identified

eligibility rules and subsidies to states, businesses and individuals that are

no longer needed or that could be better targeted without changing the

basic objectives of the program. As presently designed, a variety of grants,

tax expenditures, loans and loan guarantees that provide subsidies to

recipients who would have undertaken the activity without federal subsidy

and thus avoid bearing their fair share of risks and program finances. The

following examples illustrate programs and activities that could be

considered for reform, reduction, or termination because of changing

conditions and perceptions of need.

• Many federal grant programs with formula-based distributions of funds to

state and local governments are not well targeted to jurisdictions with high

programmatic needs but comparatively low funding capacity. As a result, it

is not uncommon that program recipients in areas with greater wealth and

relatively lower needs enjoy a higher level of funding than that which is

available in harder pressed areas. For example, under the Community

Development Block Grant (CDBG), Greenwich, Connecticut received five

times more funding per person in poverty in 1995 than that provided to

Camden, New Jersey, even though Greenwich, with per capita income six

times greater than Camden, could more easily afford to fund its own

community development needs. Better targeting of formula-based grant

awards offers a strategy to bring down federal outlays by concentrating

reductions in wealthier communities with comparatively fewer needs and

greater capacity to absorb cuts, while holding harmless harder pressed

areas that are most vulnerable. For programs such as Medicaid, Foster

Care, and Adoption Assistance, which base reimbursements on the per

capita income of the state, the minimum federal share could be reduced or

the formula could be revised to better reflect relative need, geographic

differences in the cost of services, and state tax bases. For other formulabased grant programs, such as Federal Aid Highways or the CDBG, the

Redefine Who

Benefits From Federal

Government

Programs
Page 40 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

formula could be revised to reflect the differential fiscal capacities of

states.35

• The level and scope of the risks of the U.S. Export-Import Bank’s

(Eximbank) programs could be reduced by placing a ceiling on the

maximum subsidy rate allowed, reducing or eliminating program

availability in high-risk markets, and offering less than 100-percent risk

protection. The Eximbank was created to facilitate exports of U.S. goods

and services and is to absorb risks that the private sector is unwilling or

unable to assume. Higher-risk markets constitute a relatively small share

of the Eximbank’s total financing commitments yet absorb a relatively

large share of its subsidy costs. These changes would have only a slight

effect on the overall level of U.S. exports supported with Eximbank

financing. However, these options raise several trade and foreign policy

issues that decisionmakers would need to address before making any

changes in the Eximbank’s programs.36

• DOE and the private sector are involved in hundreds of cost-shared

projects aimed at developing a broad spectrum of cost-effective, energyefficiency technologies that protect the environment, support the nation’s

economic competitiveness, and promote the increased use of oil, gas, coal,

nuclear, and renewable energy resources. Generally, DOE does not require

repayment of its investment in technologies that are commercially

successful. The potential for repayment can be significant. For example,

we reported in 1996 that if only 50 percent of the funds planned for current

projects were subject to repayment, and if about 15 percent of research

and development funds result in commercialized technologies, then about

$400 million could be repaid to the federal government.37

• Three federal power marketing administration's (PMAs)—Southeastern,

Southwestern, and Western—receive annual appropriations to cover

operating and maintenance expenses and, if applicable, the capital

investment in transmission assets. The fourth PMA, Bonneville Power

Administration, does not receive annual appropriations. Federal law

requires the PMAs to repay their appropriations as well as the power35Formula Grants: Effects of Adjusted Population Counts on Federal Funding to States

(GAO/HEHS-99-69, Feb. 26, 1999) and Federal Grants: Design Improvements Could Help Federal

Resources Go Further (GAO/AIMD-97-7, Dec. 18, 1996).

36U.S. Export-Import Bank: Issues Raised by Recent Market Developments and Foreign Competition

(GAO/T-NSIAD-99-23, Oct. 7, 1999).

37Energy Research: Opportunities Exist to Recover Federal Investment in Technology Development

Projects (GAO/RCED-96-141, June 26, 1996).
Page 41 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

related appropriations expended by the operating agencies that generate

the federal power. The PMAs are to set power rates at levels that will

allow them to repay these costs. However for several reasons, the federal

government currently is not recovering the full cost of its power-related

activities from the beneficiaries of federal power. For example, the federal

government’s financing of power-related activities results in a net cost

because the interest rates on outstanding appropriated debt are lower than

the rates Treasury incurs in providing the financing. Second, as we

reported previously, the PMAs’ had not been recovering the full costs of

certain pension and other benefits for federal employees involved in

power-related activities. Currently, the PMAs are in varying stages of

addressing this issue and DOE is considering changing departmental

policy to ensure that these costs are recovered in the future. Third, the

PMAs are able to sell power more cheaply than other providers because

they market power generated almost exclusively at low-cost hydropower

facilities, are not required to earn a profit, and do not fully recover the

government's costs in their rates. For example, from 1990 through 1995,

these three PMAs sold wholesale power to their preference customers at

average rates from 40 to 50 percent below the rates nonfederal utilities

charged. If the PMAs were authorized to charge market rates for power,

some preference customers, who now purchase power from the PMAs at

rates that are less than those available from other sources, would see their

rates increase. However, slightly more than two-thirds of these preference

customers would experience small or no rate increases—increases of onehalf cent per kilowatt hour or less—if the PMAs charged market rates.

Directing the PMAs to more fully recover power-related costs and

requiring them to sell their power at market rates would better ensure the

full recovery of the appropriated and other debt—which totaled about

$22 billion at the end of fiscal year 1997—that is recoverable through the

PMAs' power sales, as well as lead to more efficient management of the

taxpayers' assets. 38

• Federal water programs to promote efficient use of finite water resources

for the nation’s agricultural and rural water systems have developed

inconsistencies that may cause the programs to work at cross-purposes. In

the area of irrigation the multiplicity of programs and approaches has

allowed for inconsistencies and potentially counterproductive outcomes.

For example, under the Reclamation Reform Act of 1982, as amended,

some farmers have reorganized large farming operations into multiple,

smaller landholdings to be eligible to receive additional federally

subsidized water. Due to the vague definition of the term “farm,” the

38Federal Power: The Role of Power Marketing Administrations in a Restructured Electricity Industry

(GAO/T-RCED/AIMD-99-229, June 24, 1999) and Power Marketing Administrations: Cost Recovery,

Financing, and Comparison to Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19, 1996).
Page 42 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

960-acre limit established by the act has not stopped the flow of subsidized

water to large holdings and the federal government is not collecting

revenues to which it is entitled. Also, the use of federally subsidized water

to produce federally subsidized crops results in the government paying

double subsidies. The Department of the Interior estimated irrigation

subsidies used to produce subsidized crops in the 17 western states to be

about $203 million in 1986; the Bureau of Reclamation placed the figure at

$830 million.39

• The Mining Law of 1872 allows holders of economically minable claims on

federal lands to obtain all rights and interests to both the land and the

hardrock minerals by patenting the claims for $2.50 or $5.00 an acre—

amounts that fall well short of today’s market value for such lands.

Furthermore, miners do not pay royalties to the government on hardrock

minerals they extract from federal lands. For example, in 1990 hardrock

minerals worth at least $1.2 billion were extracted from federal lands,

while known and economically recoverable reserves of hardrock minerals

remaining on federal lands were estimated to be worth almost $65 billion.

The Congress could consider revising the law to require the payment of

fair market value for a patent and to impose royalty payments on hardrock

minerals extracted from federal lands.40

• The Federal Emergency Management Agency’s (FEMA) Public Assistance

Program helps pay state and local governments’ costs of repairing and

replacing eligible public facilities and equipment damaged by disasters. In

a May 1996 report, we presented a number of options identified by FEMA’s

regional program officials that, if implemented, could reduce program

costs. Among the options discussed was eliminating eligibility for private

nonprofit organizations, many of which operate revenue-generating

facilities such as utilities and hospitals, and publicly owned recreational

facilities, which generate a portion of their operational revenue through

user fees or admissions charges. Many of these types of facilities could

have alternate sources of income sufficient to meet disaster-related

costs.41

39Rural Development: Patchwork of Federal Water and Sewer Programs is Difficult to Use

(GAO/RCED-95-160BR, Apr. 13, 1995) and Water Subsidies: Basic Changes Needed to Avoid Abuse of

the 960-Acre Limit (GAO/RCED-90-6, Oct. 12, 1989).

40Mineral Royalties: Royalties in the Western States and in Major Mineral-Producing Countries

(GAO/RCED-93-109, Mar. 29, 1993) and Federal Land Management: The Mining Law of 1892 Needs

Revision (GAO/RCED-89-72, Mar. 10, 1989).

41Disaster Assistance: Information on Federal Costs and Approaches for Reducing Them

(GAO/T-RCED-98-139, Mar. 26, 1998) and Disaster Assistance: Improvements Needed in Determining

Eligibility for Public Assistance (GAO/RCED-96-113, May 23, 1996).
Page 43 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

• Repetitive flood loss is one of the major factors contributing to the

financial difficulties facing the National Flood Insurance Program. The

Congress and FEMA could consider eliminating flood insurance and

emphasizing mitigation for certain repeatedly flooded properties,

removing what some argue is now an incentive to locate in harm’s way.

Approximately 43,000 buildings currently insured under the National

Flood Insurance Program have been flooded on more than one occasion.

These repetitive losses account for about 36 percent of all program claims

historically (currently about $200 million annually) even though repetitiveloss structures make up a very small portion of the total number of insured

properties—at any one time between 1 to 2 percent. The cost to the

program of these multiple-loss properties over the years has been about

$2 billion.42

• We have reported in the past on this nation’s practice of compensating

veterans for medical conditions, such as diabetes, chronic obstructive

pulmonary disease, arteriosclerotic heart disease, and multiple sclerosis,

that were probably neither caused nor aggravated by military service.43 In

1996, the Congressional Budget Office reported that about 230,000

veterans were receiving about $1.1 billion in disability compensation

payments annually for diseases neither caused nor aggravated by military

service. Other foreign countries we reviewed require that a disability be

closely related to the performance of military duty to qualify for disability

benefits; no such link is required in the United States. The Congress could

reconsider whether diseases neither caused nor aggravated by military

service should be compensated as service-connected disabilities.

Mr. Chairman, I am sure that this illustrative list of government

performance and management problems is sobering. There is much to be

done, but the task is not overwhelming. Given the demanding missions of

our government and the sheer size and complexity of federal operations,

performance shortfalls should neither be surprising nor accepted. As my

testimony today suggests, significant opportunities exist to curb fraud,

waste, and abuse in a wide range of federal activities and to update the

priorities and program operations of the federal government in keeping

with broader changes affecting our entire society and economy.

42Flood Insurance: Information on Financial Aspects of the National Flood Insurance Program

(GAO/T-RCED-00-23, Oct. 27, 1999).

43Disabled Veterans Programs: U.S. Eligibility and Benefit Types Compared to Five Other Countries

(GAO/HRD-94-6, Nov. 24, 1993).

Pursuing Effective

Oversight: The

Challenge Ahead
Page 44 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

This is an opportune time to refocus congressional oversight. Not only are

we free of the dominating concerns of the recent past—the Cold War and

annual deficits—but we are about to begin to see the benefits of a wideranging reform agenda in the executive branch prompted by a series of

laws—including the Government Performance and Results Act, the Chief

Financial Officers Act, and the Clinger-Cohen Act—enacted by the

Congress. The concerns of the Congress that led to the passage of those

laws should now be directed toward a careful reconsideration of how the

Congress will take advantage of and leverage the new information and

perspectives coming from the executive branch management reforms.

As agencies continue to make progress in implementing these financial

and performance management reforms, we can expect further

opportunities for congressional oversight to be revealed. The information

they provide can assist in identifying weaknesses and illustrating programs

and functions that are working well. Financial statements, for instance, are

beginning to report information on improper payments, which is already

helping to better target areas needing priority congressional and

management attention. As more reliable financial information is developed

and disclosed, new information will be forthcoming to inform resource

allocation and oversight in other areas as well. For instance, audited

information on the extent of federal liabilities for environmental cleanup

should help us better understand future cost pressures facing the budget

and improve the cost effectiveness and targeting of our cleanup efforts.

Similarly, the development of more reliable cost information should help

us better manage these costs and make more informed tradeoffs among

competing programs and strategies to address federal objectives.

The evolution of performance management should also assist oversight.

The forthcoming publication of agency performance reports, due in March

of 2000, comparing actual levels of performance against performance goals

contained in agency plans, should help pinpoint both performance

shortfalls and successes. These reports should also prompt inquiries to

understand the factors responsible for performance outcomes, permitting

a more systematic understanding of the role played by program design and

management in influencing program results. The performance reports will

also help us better understand strengths and weaknesses in agency

performance information and data. Continued improvement in agency data

should facilitate a deeper and broader assessment of the relative

effectiveness of federal strategies to achieve important goals.

In this context, I would note that the Administration has articulated an

agenda in its fiscal year 2001 budget to improve financial and performance

management across a wide range of federal activities. Specifically, they
Page 45 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

have identified 24 priority management objectives dealing with many of

the problems discussed in this statement. For instance, the Administration

has included a goal addressing the improper payments problem and has

promised to provide guidance to agencies on such issues as verifying

eligibility criteria and estimating the extent of improper payment

problems. Proposals are also advanced to strengthen the management

capacities of HCFA and implement reforms at HUD, among other agencies.

Continued top-level management attention to these issues is vital to

making progress, as is congressional oversight of these initiatives.

As you know Mr. Chairman, oversight of federal programs and activities

can be a daunting challenge. While there may be some “low hanging fruit”

in the examples I have just discussed, real improvements in performance

and management will more likely call for a disciplined and determined

approach. Many of the examples I have discussed come from longstanding

weaknesses in management structures and processes and will likely

require sustained attention over an extended period of time. Examining

existing programs and operations entails taking a hard look at programs

that often have become deeply engrained and carefully reconsidering the

goals those programs were intended to address as well as how those goals

are implemented. It involves sorting through the maze of federal programs

and activities where multiple agencies often operate many different

programs to address often common or complimentary objectives.

Addressing identified problems will call for hard choices; although

offering distinct benefits, the choices will involve important stakes for

many throughout our system.

Effective congressional oversight can be a means not only to identify

where programs and activities should be terminated, but also where

carefully selected investments by federal agencies in human capital,

technology, and financial and information management resources can

yield important dividends in the form of longer term cost savings and

improvements in performance. However, better information is needed to

permit decisionmakers to sort through claims and to distinguish the

infinite variety of “wants” from those investments that promise to

effectively address critical “needs.” Unfortunately, recent experiences

ranging from information technology projects to major weapon systems

illustrate that our return on such investments has been disappointing.

Poorly conceived projects based on incomplete or inaccurate information

and performance projections have led to projects with huge cost overruns

and limited performance improvements. Although constructive change is

occurring,44 our work demonstrates the need to improve the basis for

44Executive Guide: Leading Practices in Capital Decision-Making (GAO/AIMD-99-32, Dec. 1999).
Page 46 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance

capital investments, in general, and information technology investments,

in particular.

I again commend you, Mr. Chairman, for holding these hearings and for

reminding us all of the importance of continued diligence regarding the

performance and management of government programs. Prudent

stewardship of our nation’s resources—whether in time of deficit or

surplus—is essential not only to meet today’s needs but also tomorrow’s

commitments and demands. Sustained congressional and executive

agency attention to improving management systems and controls is vital to

promoting proper stewardship of federal resources and preventing risks of

fraud, waste, and abuse that undermine the public’s confidence in their

government. Broad-scale reexamination of federal government priorities,

programs, and activities is also vital to ensure our capacity to meet current

and emerging needs. We in GAO take very seriously our responsibility to

assist you in promoting and ensuring accountability, integrity, and

reliability throughout the government.

For future contacts regarding this testimony, please contact Paul L.

Posner, Director for Budget Issues, at (202) 512-9573. Individuals making

key contributions to this testimony included George H. Stalcup, Michael J.

Curro, Hannah R. Laufe, and Toni J. Wehman.

(935350)

Contact and

Acknowledgements
Page 47 GAO/T-AIMD-00-96 Addressing Risks, Costs, and Performance
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