United States General Accounting Office

GAO Report to Congressional Committees

May 1997 PERFORMANCE-BASED

ORGANIZATIONS

Issues for the Saint

Lawrence Seaway

Development Corporation

Proposal

GAO/GGD-97-74

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-276199 

May 15, 1997

The Honorable Ted Stevens, Chairman

The Honorable Robert Byrd

Ranking Minority Member

Committee on Appropriations

United States Senate

The Honorable John McCain, Chairman

The Honorable Ernest Hollings

Ranking Minority Member

Committee on Commerce, Science and Transportation

United States Senate

The Honorable Bob Livingston, Chairman

The Honorable David Obey

Ranking Minority Member

Committee on Appropriations

House of Representatives

The Honorable Bud Shuster, Chairman

The Honorable James Oberstar

Ranking Minority Member

Committee on Transportation and Infrastructure

House of Representatives

Congress and the administration have introduced various approaches in

recent years to make federal agencies more results oriented and federal

managers more accountable for results. One approach proposed by the

administration is the performance-based organization (PBO) concept,

inspired by the Next Steps program that the British government

introduced in the late 1980s.

As directed by the House conference report on fiscal year 1997

appropriations for the Department of Transportation (DOT) and Related

Agencies dated September 16, 1996, and on the basis of our discussions

with your offices, this report (1) compares the characteristics of the Next

Steps program and the PBO concept and (2) describes the changes and

effects the PBO concept potentially could have on the Saint Lawrence

Seaway Development Corporation (SLSDC). More specifically, we examined

how PBO status would potentially affect SLSDC’s financing mechanism,

management structure, accountability for performance, including safety

and regional economic impact, and congressional oversight.

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Because the PBO concept was still in the proposal stage, the PBO

information in our comparisons and discussions is largely based on PBO

concept papers and proposals; template legislation; policy papers written

by officials at the National Performance Review (NPR), Office of

Management and Budget (OMB), DOT, and SLSDC; and our interviews with

many of these individuals. Information on the Next Steps program is from

relevant literature, including assessments made by both the public and

private sectors in the United Kingdom.

Results in Brief The administration has proposed the creation of PBOs modeled after the

British Next Steps program, which reportedly has contributed to the

significant improvement in performance and reduction in costs in British

agencies during the 1990s. The Next Steps program and the PBO concept

share certain characteristics, including the relationship of the Next Steps

agency or PBO agency to its parent department. For example, both are

intended to separate the delivery of services (the agency’s role) from

policy functions (the department’s role) and to hold agencies more

accountable for results. However, important differences exist between the

Next Steps program and PBO concept. For example, according to NPR

officials, one of the primary goals of the Next Steps program has been to

reduce costs, although that is not a major goal of the PBO concept.

While the U.S. government has been developing the PBO concept, the

British government has continued to grapple with certain issues related to

the Next Steps program that may be of particular interest to Congress and

the administration as they consider the PBO concept. These issues include

the (1) lack of clarity in relationships between agencies and their parent

departments, (2) difficulty in developing and setting performance goals,

and (3) uncertainty concerning who is accountable for performance.

SLSDC is one of the administration’s initial candidates for PBO status.

According to SLSDC officials, it is seeking PBO status for several reasons:

(1) a more predictable and stable funding mechanism, (2) an accountable

senior management structure working under a performance contract with

clear incentives to improve efficiency and service, and (3) increased

autonomy from day-to-day DOT activities and reporting requirements.

SLSDC’s primary funding mechanism would change under the

administration’s proposed legislation from annual congressional

appropriations to mandatory, formula-based payments based in large

measure on the tonnage moved through the Seaway. SLSDC officials said

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they needed stable funding to develop a more aggressive maintenance

program and to increase the capital reserve fund, which has been used in

recent years to help finance multiyear maintenance programs. SLSDC

officials estimated that, under the proposed formula, annual payments

would increase from an estimated $11.2 million in fiscal year 1998 to

$12.8 million in fiscal year 2002. However, the formula-based payment is

not without some risk to SLSDC—if tonnage does not increase as estimated,

annual payments would fall short of SLSDC’s projections and could decline.

The proposed mandatory funding mechanism would change the

relationship between Congress and SLSDC. Under the SLSDC PBO proposal,

Congress’ role would be reduced in setting SLSDC’s funding levels and

determining how those funds should be used once the formula has been

enacted. Further, this mandatory funding would reduce Congress’ ability

to adjust program priorities and to allocate resources for other purposes.

Considering the relatively small size of SLSDC’s budget, the dollar effect of

this change would not be great. However, the shift from a discretionary

account to mandatory funding raises an issue of precedence in budget

policy that Congress may view as a greater concern.

Moreover, the harbor maintenance tax which is paid into the Harbor

Maintenance Trust Fund, the source of current appropriations for SLSDC

and the source for the proposed mandatory payments, has been ruled

unconstitutional by the U.S. Court of International Trade, and the ruling

has been appealed.1

 This legal challenge further complicates the decision

on whether to have SLSDC become a PBO under the proposed mandatory

payment mechanism because, while the ruling would affect the source of

funding, the ruling would not affect the mandatory funding formula.

SLSDC’s PBO proposal presents several changes in the area of accountability.

For example, as a PBO, the leadership of SLSDC would change from a

presidentially appointed and congressionally confirmed administrator to a

chief operating officer, competitively selected by and accountable to the

Secretary of Transportation, with pay and job security tied to the

achievement of detailed performance goals. The chief operating officer

could be more easily removed for inadequate performance than a

presidentially appointed administrator. However, Congress would no

longer have a formal role in selecting the chief operating officer, as it now

does in approving nominees for administrator through the Senate

confirmation process.

1

United States Shoe Corp. v. U.S., 907 F. Supp. 408 (1995).

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SLSDC officials also want changes to SLSDC’s management structure which

are to provide greater autonomy from DOT activities and requirements to

free up staff for SLSDC’s primary mission of ensuring safe and reliable

navigation through the Saint Lawrence Seaway System and the Great

Lakes. As a PBO, SLSDC expects to gain greater independence from DOT,

such as freedom from participating in DOT committees and reporting

requirements. Because DOT imposed many of the requirements from which

SLSDC is seeking relief, the department has the authority to grant SLSDC

relief without PBO status. However, department officials are reluctant to do

so.

PBOs in general are to result in improved organizational performance;

however, there are no clear indications of how PBO status would improve

SLSDC’s performance. Although general performance goals, objectives, and

measures have been drafted for SLSDC’s four performance areas (safety,

long- and short-term reliability of the Seaway system, trade development,

and customer service and fiscal performance), performance improvement

targets for those goals have generally not been established and would need

to be negotiated by the leadership of the PBO and the department.

However, SLSDC officials expect PBO status to result in a more efficient

operation by eliminating programs and cost areas that do not fully support

performance goals. We do not expect major changes in regional economic

impacts since the changes expected to occur as a PBO would not directly

influence the factors that affect regional impact.

Background In 1988, the British government assessed the progress of its ongoing public

management reform initiatives and decided to expand its reform efforts.

The expanded reforms, commonly referred to as the Next Steps program,

were initiated in response to the government’s desire to transform the

public sector into one in which services are provided through markets or

market-like arrangements and managed by people with the resources and

authority to provide the services for which they are accountable. The

reforms also were in response to the government’s desire to streamline the

central government, which was found to be burdened by high operating

costs and a workforce that was too big and insufficiently focused on

results.

The Next Steps Program

Development and

Evaluation

The aim of the Next Steps program is to improve the delivery of

government services, obtain better value for the taxpayers’ money, and

give staff more satisfying work and working conditions. Under the Next

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Steps program, a department’s service delivery functions are broken into

discrete management units, referred to as Next Steps agencies. Agencies

are responsible for delivering their respective services and are

accountable to the parent department for their performance. Policies are

to be made by parent departments. In short, Next Steps seeks to

(1) separate service delivery from policy functions, (2) give agencies more

flexibility and autonomy, and (3) hold agency managers accountable for

results.

The Next Steps program has become the British government’s

predominant form of service delivery, with about 71 percent of civil

servants employed in Next Steps agencies as of 1996. Next Steps agencies

numbered 125 in 1996, and ranged in size from 25 employees to nearly

69,000 employees. Because of Great Britain’s unitary form of government,

some Next Steps agencies perform functions that are generally not

performed at the federal level in the United States. Such agencies include

Driver and Vehicle Licensing, Fire Service College (training for the United

Kingdom Fire Service), and the Vehicle Certification Agency. However,

other Next Steps agencies are more directly comparable to U.S. federal

functions. These include the Royal Mint, the Social Security Benefits

Agency, the United Kingdom Passport Agency, and the Patent Office.

According to an NPR review, Next Steps agencies have reduced operating

costs an average of 5 percent each year while continuing to maintain or

improve services to the public.

PBO Development and

Requirements

According to the NPR, the proposal to create PBOs in the U.S. government

has been adapted from the Next Steps program. In explaining the need for

PBOs, the Vice President said that, while much of government can and

should operate more the way a top-notch business does, systems of

government presently do not allow them to operate in that manner. PBOs

will change those systems, he said.

According to NPR, a PBO is to be a discrete management unit that commits

to clear management objectives, measurable goals, customer service

standards, and specific targets for improved performance. The unit is to

remain in its current department under the policy guidance of the

department secretary. As appropriate to the specific PBO, waivers may be

sought from governmentwide regulations, policies, and procedures.

As PBOs, agencies are expected to shift from a focus on adherence to

required processes to a focus on customers and achieving program results.

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According to NPR, this can be done by (1) establishing clear measures of

performance (as also required by the Government Performance and

Results Act of 1993 (GPRA)), (2) granting the head of the agency authority

to deviate from specified governmentwide rules, and (3) holding the head

of the agency clearly accountable for achieving results. Legislation is

required to charter PBOs; none were chartered as of March 1997.

According to NPR, there are several prerequisites for an agency to become

a PBO candidate. It must (1) have a clear mission, measurable services, and

a performance measurement system in place or in development;

(2) generally focus on external, not internal, customers; (3) have a clear

line of accountability to an agency head who has policy accountability for

the functions; (4) have top-level support to transfer a function into a PBO;

and (5) have predictable sources of funding.

SLSDC as a PBO Candidate SLSDC is one of nine PBO candidates in the President’s fiscal year 1998

budget. (A complete listing of the candidates is included in app. I.) SLSDC is

responsible for ensuring safe and reliable navigation, primarily for

commercial vessels, through the Saint Lawrence Seaway System and the

Great Lakes. The Seaway System is comanaged for the United States and

Canada by SLSDC and the Canadian Saint Lawrence Seaway Authority.

SLSDC has direct responsibility for Seaway operations between Montreal,

Canada, and Lake Ontario.

SLSDC is a relatively small component within DOT, with a fiscal year 1997

appropriation of $10.3 million and a workforce of 164 employees. Of these

employees, 147 are located in Massena, NY, next to the waterway; and 17

are employed at SLSDC’s headquarters in Washington, D.C. Officials from

SLSDC and NPR said they believe there is value in SLSDC being a PBO model

for other government agencies, and that the Seaway would be a low-risk

pilot because it already has a corporate culture, operates in a businesslike

manner, and has a small budget.

Scope and

Methodology

The House conference report on fiscal year 1997 appropriations for the

Department of Transportation and Related Agencies dated September 16,

1996, directed us to evaluate the PBO concept, with a specific emphasis on

SLSDC. We coordinated our work with the congressional subcommittees

that fund and oversee SLSDC: (1) the Subcommittee on Transportation,

Senate Committee on Appropriations; (2) the Subcommittee on Surface

Transportation and Merchant Marine, Senate Committee on Commerce,

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Science and Transportation; (3) the Subcommittee on Transportation,

House Committee on Appropriations; and (4) the Subcommittee on Water

Resources and Environment, House Committee on Transportation and

Infrastructure. As agreed with these offices, our specific objectives were

to (1) compare the characteristics of the Next Steps program and the PBO

concept; and (2) describe the changes and effects the PBO concept

potentially could have on the Saint Lawrence Seaway Development

Corporation’s financing mechanism, management structure, and

accountability for performance including safety and regional economic

impact, and on congressional oversight.

To accomplish our first objective, we reviewed reports and studies from

both the public and private sectors of the United Kingdom,2

 the NPR, the

National Academy of Public Administration, and the Congressional

Research Service. Some of these reports provided information on the

history, implementation, operation, and evaluation of the Next Steps

agencies. Other reports and studies provided information on the concept

and history of the U.S. PBO effort. In addition, we interviewed officials from

OMB, the Office of Personnel Management (OPM), and NPR about PBOs and

their relationship to Next Steps agencies.

To meet our second objective, we reviewed numerous DOT and SLSDC

reports, which provided the key principles for establishing SLSDC as a PBO,

and the management, financing, and budgeting implications for transition

to a PBO. These reports included SLSDC’s PBO concept paper, proposed

administrative framework agreement, and financial plan; budget estimates;

proposed legislation; and an economic impacts study. These papers laid

out the foundation that we used to determine the potential effects to SLSDC

of becoming a PBO. However, DOT and administration officials stressed that

the PBO concept generally and the SLSDC proposal in particular are evolving.

Thus, as these proposals change, the potential effects might also change.

In addition, to better understand the PBO concept, SLSDC proposal, and its

governmentwide and Seaway specific implications, we met with senior

managers of DOT and SLSDC, both in Washington, D.C., and Massena, NY.

We also met with key officials in OMB, OPM, and NPR; the Executive Board of

the American Federation of Government Employees Local 1968, which

2

These studies include Improving Management in Government: The Next Steps (Mar. 1988); Making the

Most of Next Steps: The Management of Ministers’ Departments and their Executive Agencies

(May 1991); Sylvie Trosa, Next Steps: Moving On (Feb. 1994); After Next Steps: The Massey Report

(Jan. 1995); The Strategic Management of Agencies: Models for Management (Sept. 1995); Next Steps

Agencies in Government Review 1995 (Feb. 1996); and Next Steps Briefing Note (Apr. 1996). Most of

these studies are procurable through Her Majesty’s Stationary Office, Publications Centre, London.

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represents SLSDC’s union employees; and a senior official at the Canadian

Embassy in the U.S. (regarding the binational nature of the Seaway).

Further, we spoke with representatives from seven Seaway user groups

and interviewed staff of interested congressional representatives of the

Great Lakes area to obtain their views on the proposed PBO and its

potential consequences. While in Massena, we visited the Eisenhower and

Snell locks and Seaway facilities to observe current maintenance projects

and learn how future capital plans would affect lock operations.

One of the proposed PBO changes that the congressional committees

specifically asked us to examine was the mechanism for financing SLSDC

operations and its treatment under the Budget Enforcement Act of 1990.

SLSDC provided us with an analysis of the amount of funding it would have

received had the PBO funding mechanism been in place for fiscal years

1993 through 1997 and would expect to receive for fiscal years 1998

through 2002. We compared these funding estimates with the amount of

the appropriation SLSDC actually received during fiscal years 1993 through

1997 to illustrate the potential impact of the PBO funding mechanism. We

did not independently verify SLSDC’s PBO funding estimates.

We did our work in Massena, NY, and Washington, D.C., from October

1996 through March 1997 in accordance with generally accepted

government auditing standards. In April 1997, we provided the Secretary

of Transportation and the Director of OMB with a draft of this report for

review and comment. DOT and OMB comments are included with our

evaluation at the end of this letter.

Comparison of Next

Steps and PBO

Characteristics

Congress and the administration have introduced various approaches in

recent years to make federal agencies more results oriented and federal

managers more accountable for results. For example, the Government

Performance and Results Act of 1993 requires agencies to set goals,

measure performance, and report on their accomplishments. More

recently, the administration has proposed the formation of PBOs, which the

administration said were based on the British government’s Next Steps

program.

Information contained in relevant literature illustrated that the Next Steps

program and the PBO concept are constructed alike in many important

ways, but not in all. Both the Next Steps program and the PBO concept

require a discrete organizational unit to provide the agreed-upon service

that separates policymaking from provision of the service. In exchange for

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greater accountability for results, PBOs and Next Steps agencies are to be

granted more flexibility than conventional agencies, such as the authority

to deviate from certain personnel and procurement processes. Next Steps

agencies and potential PBOs are similar in their management structure and

accountability. Both are to be led by a chief executive (under PBOs to be

called the chief operating officer) who is competitively selected and

annually evaluated on the basis of performance and whose pay and job

security are directly tied to that performance. In both cases, the chief

executive is to be directly accountable to the head of the parent

department, which is accountable to Parliament, or Congress and the

President.

Despite the similarities in overall structure, the underlying philosophies of

Next Steps and PBOs differ in some important respects. For example, a key

difference is that Next Steps agencies have a goal of reducing costs each

year, while the PBO concept as articulated by the administration has a

major goal of improving performance rather than reducing costs.

However, senior OMB officials told us there is nothing inherent in the

concept that precludes future PBO candidates from having a goal of

achieving significant cost reductions.

A further difference in Next Steps and the PBO concept is the continuing

assessment of whether the service function should remain in the

government or not. Under the Next Steps program, agency charters are to

be reviewed at 3- to 5-year intervals or during major shifts in the policy

environment. As part of that review, the government is to determine if the

service should be continued and, if so, whether it should be provided by

the private sector or by the Next Steps agency. The PBO concept is

intended to work somewhat differently. Within 5 years of operation, an

evaluation is to be made to determine if the PBO (1) should continue as a

PBO or (2) return to the traditional structure in the department.

Unresolved Issues From

Assessments of Next Steps

As the British government has designed and implemented its Next Steps

program, it has confronted several difficult challenges with which it

continues to grapple, according to reports and evaluations from both the

public and private sectors of the United Kingdom. Information on these

issues may be useful to Congress and the administration as they consider

the PBO concept. These issues include agency and department roles,

performance goals, and accountability.

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Agency and department roles. Although the Next Steps program began in

1988, the roles of the Next Steps agencies and their parent departments

often remain unclear, according to British program evaluations, because of

the problems inherent in trying to separate roles.3

 For example, some Next

Steps agencies believed they had the flexibility to change functions, while

the parent departments believed they had the authority to prevent those

changes. Some agencies have characterized parent departments as

bureaucratic obstacles, while some departments have characterized Next

Steps agencies as separate little kingdoms, as stated in one report.4

These evaluations identified policymaking as one area in which agencies

and parent departments endure confusion of their roles. They indicated

that, while in theory departments make policies and agencies implement

those policies, there has not always been a clean separation between

policymaking and implementation. Management decisions made by

agencies sometimes have had an impact on policy choices made by the

departments, according to evaluations. For example, if an agency’s target

is to reduce an operating deficit, it may propose to do so by creating a user

fee. While this proposal may be viewed as a decision of agency

management on how to implement the policy of reducing an operating

deficit, it could also be viewed as making a policy decision on the type of

public program where user fee funding is appropriate.

The British government has taken steps to address these issues, but with

limited success, according to studies. One mechanism has been the

establishment of the “Fraser Figure,” a senior officer who is to interface

between the agency and the department. One evaluation explained that

although the Fraser Figure is used in 40 percent of the Next Steps

agencies, this process has not worked well because the officer rarely

represents the views of both the department and agency in a balanced way

and does not have adequate staff to coordinate activities. Another

mechanism is advisory boards, which have been used in 30 percent of the

Next Steps agencies, also with limited success. Advisory boards are

extremely diverse in composition, ways in which they work, and in their

objectives, as studies have indicated. For example, boards tend to be

unbalanced in their advisory and monitoring responsibilities, emphasizing

one over the other. Less than 25 percent of the Next Steps agencies use a

combination of the Fraser Figure and advisory boards.

3

Trosa, Next Steps: Moving On (Feb. 1994) and After Next Steps: the Massey Report (Jan. 1995).

4

Trosa, Next Steps: Moving On (Feb. 1994).

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Performance goals. The performance goals and targets for the Next Steps

agencies are set through negotiations between the agency and department,

according to British evaluations. However, the British experience has

underscored that public sector performance measurement is a complex,

iterative process that involves a number of competing considerations.

A British evaluation suggested that three major concerns have arisen in

connection with Next Steps goal setting.5

 First, goal setting does not

always reflect what is realistic as much as adding incremental

improvements to prior results. There can be a tension between the agency

and department over the target, with departments generally wanting more

ambitious improvement targets, the study indicated. Second, difficulties

exist over what exactly to measure when measuring core activities of Next

Steps agencies. The evaluation showed that performance measures

frequently focus on what agencies can measure, not what is most

important in assessing performance. In addition, some targets, such as

efficiency and quality, may even be in conflict with each other, requiring a

careful balance. Third, the study stated that target setting can create

difficulties when used in a mechanistic way and without appropriate

evaluation. For example, using unmet targets to criticize agencies, rather

than attempting to examine the reasons why the targets were not reached,

may simply lead agencies to establish more easily achievable targets. The

same would be true if targets were used to make automatic decisions,

such as performance-related pay. The British government published “The

Strategic Management of Agencies: Models for Management” in

September 1995 to provide advice and best practice guidelines on target

setting, such as balancing the dimensions of output, time, quality, and cost.

Accountability. A recent British study states that Next Steps has increased

agencies’ accountability to Parliament by making roles clearer and by

providing much more information through the publication of each

agency’s framework document, key annual targets, and annual report.6

However, as noted, the distinction between administration and policy

often remains unclear in assessing accountability, being described as a

“complex web of issues.”7

 The distinction is unclear because of the

inherent difficulties departments and agencies face in defining their

separate roles. For example, because policies and their implementation

are inherently linked—the study continued—it is difficult at times to

5

Trosa, Next Steps: Moving On (Feb. 1994).

6

Next Steps Briefing Note (Apr. 1996).

7

After Next Steps: the Massey Report (Jan. 1995).

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distinguish who is truly responsible for an outcome, the department

minister who makes the policy or the agency chief executive who

implements the policy. Questions have arisen on whether a poor result

was due to poor policy or inadequate implementation and on who was

ultimately accountable for the resulting performance. To mitigate this

concern, the British government has encouraged greater collaboration

between ministers and chief executives, facilitated by Fraser Figures.

Potential Effects of

PBO Status on SLSDC

SLSDC officials told us that it is seeking PBO status for several reasons: (1) a

more predictable and stable funding mechanism, (2) an accountable senior

management structure working under a performance contract with clear

incentives to improve efficiencies and service, and (3) increased autonomy

from day-to-day DOT activities. Officials from SLSDC and NPR also said that

the Seaway would be a low-risk pilot because it already has a corporate

culture, operates in a businesslike manner, and has a small budget.

Funding Mechanism SLSDC currently is funded from three sources: (1) annual appropriations

from the Harbor Maintenance Trust Fund (HMTF), (2) SLSDC’s capital

reserve, and (3) miscellaneous revenue such as interest on the capital

reserves. However, the primary funding is made through annual

appropriations, which are paid out of the HMTF.

8

 In requesting funds, SLSDC

goes through DOT and OMB and is subject to the budget decisions of these

two agencies as well as Congress.

Under the PBO proposal, the funding mechanism for SLSDC would change

from annual congressional appropriations to mandatory, formula-based

payments, based in large measure on the tonnage moved through the

Seaway. SLSDC officials told us that this change in funding is a major reason

for pursuing PBO status. They believe mandatory payments would give

them more reliable and forecastable funding and that SLSDC needs such

stability to better plan operations, maintenance, and capital

improvements. Of course, Congress could provide a more stable funding

stream through the annual appropriations process without making SLSDC a

PBO. In addition to the stability the formula would provide, SLSDC estimates

of formula-based funding over the next 5 years indicate that funds could

increase yearly, based on projected tonnage figures. However, SLSDC

8

HMTF was established by the Harbor Maintenance Revenue Act of 1986. Under law, the Fund’s

revenue is primarily derived from an appropriation equivalent to amounts received from an ad valorem

tax (user fee) on commercial cargo loaded and unloaded at specified U.S. ports open to public

navigation.

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officials told us that the projected tonnage figures were “rough estimates,”

and if tonnage actually declined then funding could also decline.

This proposed funding would be made through a mandatory payment from

the HMTF, which is financed through the harbor maintenance tax. This tax

has been ruled unconstitutional by the U.S. Court of International Trade.

The court’s ruling was appealed and is pending in the U.S. Court of

Appeals for the Federal Circuit. The ultimate ruling on this issue could

affect SLSDC’s current funding since its appropriations now come from that

fund. However, should the ruling be upheld, under the PBO formula-based

funding mechanism, SLSDC’s formula would provide for a certain level of

funding even though no tax would be collected.

The proposed PBO funding would be based on a formula that considers

shipping tonnage on the Saint Lawrence Seaway and inflation. Specifically,

the proposed formula is the 5-year average of U.S. international tonnage

(in metric tons) moved through the Seaway multiplied by a factor of 1.076

and adjusted for inflation by the percentage difference between the

Consumer Price Index for all urban consumers for the first quarter of

calendar year 1996 and for the first quarter of the calendar year in which

an annual payment is determined.

SLSDC officials told us that the proposed funding mechanism is not without

risk to the agency because it is dependent upon Seaway traffic. However,

they also felt that the formula, because of its 5-year rolling average, would

provide a more predictable funding mechanism than annual

appropriations. On the basis of information provided by SLSDC, as shown in

table 1, if the PBO formula had been in effect in past years, the formula

would have provided less than appropriations in some years and more in

others. For the 5-year period of 1993-1997, there is, on average, no

difference between appropriations and the PBO formula. Because it is

unknown what Congress might appropriate for SLSDC over the 1998-2002

period, we cannot compare appropriations and the PBO funding formula for

future years. However, as shown in table 1, SLSDC officials estimate that the

funding from the formula will increase each year over the next 5 years,

reaching a level of $12.8 million in fiscal year 2002.

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Table 1: SLSDC Actual and Projected

Funding for Fiscal Years 1993-2002 Current dollars in millions

Fiscal year Appropriation PBO formula

Difference between

PBO formula and

appropriation

1993 $10.7 $10.5 $-0.2

1994 10.8 10.4 –0.4

1995 10.2 10.3 +0.1

1996 9.9 10.6 +0.7

1997 10.3 10.1 –0.2

1998 None under PBOa 11.2 b

1999 None under PBO 12.0 b

2000 None under PBO 12.6 b

2001 None under PBO 12.8 b

2002 None under PBO 12.8 b

aIn the President’s budget request for fiscal year 1998, no appropriation is requested for SLSDC

since financing is proposed to be derived from an automatic annual payment from the HMTF.

bNot applicable.

Source: SLSDC.

Essentially, SLSDC officials worked backwards from an estimate of the

amount of funds they thought they needed in fiscal year 1997 to generate

the funding formula, according to SLSDC and OMB officials. The formula

came about through negotiations among officials from DOT, SLSDC, and OMB.

SLSDC estimated the level of funding it believed it needed in 1997 to operate

and maintain the Seaway and OMB tied that funding need to tonnage

through an adjustment factor.

SLSDC officials cite the failure of recent appropriated funds to fully cover

costs and the resulting drawdown of its capital reserves as supporting the

need for new, more stable funding. The Harbor Maintenance Revenue Act,

which created the HMTF, authorized the trust fund to fully finance SLSDC’s

operation and maintenance costs. However, according to SLSDC officials,

the HMTF has not fully funded operation and maintenance costs since 1987.

Figure 1 shows SLSDC’s actual operations and maintenance costs, HMTF

appropriations, and a retrospective look at what the level of funding would

have been if the PBO funding formula had been in effect for fiscal years

1993 through 1996.9

9

Table 1 provides data for HMTF appropriations and the retrospective PBO funding. Actual operations

and maintenance costs for fiscal years 1993 through 1996 are $12.6 million, $11.9 million, $11.2 million,

and $11.8 million respectively.

Page 14 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
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Figure 1: Comparison of O&M Costs,

HMTF Appropriations, and

Retrospective Application of the PBO

Formula

0

1

2

3

4

5

6

9

10

11

12

13

14

15

16

Fiscal year

SLSDC's reported operations and maintenance costs

Congressional appropriations

SLSDC's reported PBO formula retrospective

1993 1994 1995 1996

Dollars (in millions)

Source: SLSDC.

As shown in figure 1, SLSDC has had to augment its appropriations with

capital reserves and miscellaneous revenue to cover its operations and

maintenance costs. According to SLSDC officials, it is important to have a

stable, predictable funding source so that the agency would be able to

better plan for multiyear operations, maintenance, and capital

improvement projects. The Seaway facilities are about 40 years old and,

according to SLSDC officials, require a lead time for ordering and building

unique parts. Over time, the aging lock and machinery facilities and the

Page 15 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
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long-term concrete deterioration problems require an aggressive

preventive maintenance program, according to officials. Because the

formula would allow better forecasting of revenues, SLSDC officials said

they believe they could develop a more aggressive maintenance program.

SLSDC’s capital reserve fund has allowed SLSDC to smooth out fluctuations

in appropriations and lower-than-anticipated miscellaneous revenue. SLSDC

officials told us that because of the HMTF appropriations shortfalls, SLSDC

has been using its capital reserves, interest, and other revenue to finance

operations and maintenance. Table 2 provides data on the fluctuations of

this fund.

Table 2: Capital Reserve Fund Balance

and Drawdowns

Fiscal year

Reserve

balancea Significant reserve drawdowns

1985 $12.9 None

1986 10.9 Concrete rehabilitation-$2.1 million

1987

8.9

Basic operating expenses, transition year from

tolls-$2 million

1988 10.1 None

1989 11.5 None

1990

11.1

Corps of Engineers structural evaluation

study-$318,000

1991 11.6 None

1992 12.6 None

1993 11.9 Channel maintenance dredging-$528,000

1994 11.8 Concrete repair-$192,000

1995 11.9 None

1996

11.2

Concrete repair and workboat

purchase-$700,000

1997 10.0

(estimate)

Equipment replacement and capital outlay

programs-$1.2 million

aDollars in millions.

Source: SLSDC.

SLSDC officials told us it is important to maintain a level of $12 million in

the capital reserve fund, since this is the amount needed to replace two

gates. Under the PBO funding mechanism, SLSDC estimates the capital

reserve account could increase by yearly amounts varying from $680,000

in fiscal year 1998 to $1.58 million in fiscal year 2000. By the end of the

initial 5-year PBO period, SLSDC estimates that the combined effect of the

Page 16 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
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annual increases and the drawdowns would result in a capital reserve

fund’s balance of $11.5 million.

The change in funding would bring about several potential effects, which

raise questions of budget policy. SLSDC now competes for funding with

other discretionary programs in the budget, as well as within the DOT

budget. However, the legislation would change SLSDC from a discretionary

to a mandatory program.10 Providing mandatory funding for SLSDC would

reduce Congress’ ability to adjust program priorities and to allocate

resources for other purposes. Considering the relatively small size of

SLSDC’s budget, the effect of this change would not be great; however, the

precedent may be of greater concern.

The Statement of Purpose and Need accompanying the proposed

legislation stated that OMB would score the bill as having a net effect of

zero because the bill would reduce discretionary spending caps. However,

after our audit work was completed, OMB officials told us that the

administration would soon release a revised version of SLSDC’s PBO

legislation. We were told that the revised legislation, when issued, would

no longer contain the provision for reducing the discretionary spending

cap. Rather, according to OMB officials, SLSDC funding would still be treated

as a mandatory payment and would require an offset by cutting spending

in other mandatory programs or increasing revenue. This raises an

additional budget policy issue, beyond the creation of a new mandatory

program—how the increase in spending would be offset by cuts in other

mandatory programs or increases in taxes.

Management Structure PBO status would change the managerial leadership of SLSDC from an

appointed administrator to a contracted-for chief operating officer.

Currently, SLSDC is headed by a presidentially appointed administrator who

serves a 7-year fixed term and reports directly to the Secretary of

Transportation. As a PBO, SLSDC would be led by a chief operating officer

who would be competitively selected by the Secretary of Transportation

and would be accountable for delivering results that are spelled out in the

chief operating officer’s contract. Pay and job security would be tied to

performance, as measured through such objectives as efficiency, cost, and

service. The chief operating officer of SLSDC would be directly accountable

to the Secretary of Transportation who would, in turn, continue to be

10The proposed bill would reduce discretionary caps for fiscal year 1998 by $11.2 million in budget

authority and outlays. Comparable amounts for fiscal years 1999-2002 are $12.0 million, $12.6 million,

$12.7 million, and $12.8 million respectively.

Page 17 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
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accountable to Congress and the President for the activities and

performance of the SLSDC PBO.

British evaluations of Next Steps have shown that developing and

monitoring a chief executive’s contract is a long-term and iterative

process. Since SLSDC is a relatively small part of the Department of

Transportation, the Secretary may have to spend a disproportionate

amount of time to craft and monitor a chief operating officer’s contract

with specific and measurable performance goals. This degree of oversight

and accountability has not been applied before to SLSDC. Furthermore, if

SLSDC is one of the first PBOs, administration architects of PBOs may pay

particular attention to the development of the contract since it could be a

model for other PBOs.

As a PBO, SLSDC expects to have greater autonomy from DOT. SLSDC is part of

DOT and as such, DOT requires participation in its activities and reporting

requirements. According to SLSDC officials, SLSDC personnel are getting

pulled into departmental initiatives and away from the primary mission of

SLSDC. For example, according to one SLSDC official’s rough estimate, SLSDC

was required to participate in 60 DOT committees within a 1-year period.

SLSDC officials said that since its Washington office is so small (17

employees, including the Administrator and her staff), participation in DOT

functions places a disproportionate burden on SLSDC staff. DOT provided us

with a list of reporting requirements for SLSDC, which included 93 reports

that are either legislated, required by DOT, or required by other agencies.

This list includes for example, reports on Earth Day event planning, the

Interagency Council on the Homeless, vehicle lease agreements, and the

DOT annual report. The SLSDC Administrator said she believed many of the

reports could be eliminated under PBO status, although DOT and SLSDC

officials would have to negotiate which reports would be eliminated and

which would remain.

Under the PBO proposal, SLSDC would remain part of DOT but have greater

independence from the Office of the Secretary. In addition to the reporting

requirements previously discussed, SLSDC generally would not clear its

reports through the Office of the Secretary or participate in the

department’s various multimodal transportation groups. This would make

more staff resources available to work on SLSDC’s core mission, according

to SLSDC officials. However, the degree of independence would depend on

negotiations between officials of SLSDC and DOT.

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Many of the reporting requirements between DOT and SLSDC were imposed

by DOT. Therefore, SLSDC could seek waivers from DOT to eliminate some or

all of these reporting requirements. Eliminating some requirments does

not require making the agency a PBO. However, SLSDC officials told us that

because of its size, it is sometimes difficult to get an audience with DOT

officials, and DOT officials have not been receptive to granting waivers. DOT

officials confirmed this, saying they generally would not look favorably on

requests for relief from participating in departmentwide initiatives and

reporting requirements because the department does not want to set the

precedent of relieving any of its administrations from crosscutting

departmental requirements.

The PBO concept also provides flexibilities from governmentwide

personnel and procurement requirements. These flexibilities are intended

to give managers greater freedom in achieving their performance goals.

According to SLSDC managers, the corporation does not expect many

changes as a PBO in this regard.

Concerning personnel flexibilities, approximately two-thirds of SLSDC’s

employees belong to a union and, although the PBO legislation would allow

for changes, the personnel practices affecting the bargaining unit would

not change unless the contract was renegotiated. For the remaining one

third, SLSDC would have more flexibility regarding personnel and plans in

particular to explore developing and implementing innovative

performance and pay systems. Also, SLSDC would no longer be subject to

externally imposed employment ceilings and would be able to hire more

employees as needed within the limits of its budget.

As for procurement, the PBO proposal states that SLSDC does not make large

numbers of major procurements, and the existing rules have not posed a

problem, although there could be some changes in procurement actions as

a PBO. For example, under the PBO legislation, SLSDC could direct the

majority of its procurement actions to vendors in Massena and the Great

Lakes region.

Even as a PBO, SLSDC would still remain in DOT. The PBO concept follows the

British Next Steps program in attempting to separate policymaking (in this

case, by DOT) from the carrying out of services (in this case, by SLSDC).

SLSDC has started to work on this separation by drafting a list dividing up

the functions to be performed by itself and DOT under the PBO concept.

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According to evaluations of the Next Steps experience, the relationship

between the agency and its parent department is not always clear. Even

when it appears roles are clearly defined, such as the case of policy

(department) versus implementation (PBO), there will still be overlap of

those roles. As previously discussed, determining the appropriate

distribution of roles and responsibilities between SLSDC and DOT would

likely take time, involve trial and error, and need to be continuously

reassessed as new issues arise. For example, SLSDC has traditionally

conducted trade missions, which are intended to educate potential

shippers about the Saint Lawrence Seaway and serve as a means to

encourage more ships to use that system. As such, they may be viewed as

a method of achieving the goal of increasing traffic through the Seaway.

However, such missions also have policy implications, for example, if they

were to result in shifting the route imports take into the United States.

Performance Improvement

and Accountability

Consistent with the requirements of GPRA, under the PBO concept agencies

are to set goals, measure performance, and report on their

accomplishments. Under the PBO proposal, the SLSDC chief operating

officer (COO) would be held accountable for performance—with

opportunities for substantial bonuses when performance goals are met

and possible sanctions, including removing the COO, if goals are not met.

According to OMB and DOT officials, these possible incentives and sanctions

establish a foundation for substantial improvements in SLSDC’s

performance by clearly linking SLSDC’s leadership’s pay and tenure to

performance. SLSDC has drafted general goals and objectives as well as

more specific performance goals and indicators that could serve as a basis

for the contract. However, the actual measures of performance and

performance goals would be established in the contract between the COO

and the Secretary of Transportation. This provides the flexibility to

develop and adjust the measures and goals based on experience and

changing circumstances. Consequently, there are no clear indications yet

of how much SLSDC believes PBO status would improve SLSDC’s performance

in key areas.

Next Steps evaluations have shown that determining exactly what to

measure and how to set a performance goal remain a continuing political

and technical challenge. Our work has found that agencies are confronting

similar challenges as they implement GPRA, and we expect PBOs would also

confront such issues.11

11Managing for Results: Achieving GPRA’s Objectives Requires Strong Congressional Role

(GAO/T-GGD-96-79, March 6, 1996) and Managing for Results: Using GPRA to Assist Congressional and

Executive Branch Decisionmaking (GAO/T-GGD-97-43, February 12, 1997).

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According to SLSDC’s PBO proposal, SLSDC is to be held accountable in four

performance areas: (1) safety; (2) long- and short-term reliability of the

Seaway system; (3) trade development, including regional economic

impacts; and (4) customer service and fiscal performance. According to

SLSDC, a focus on these performance areas will ensure a more efficient

operation by eliminating programs and cost areas that do not fully support

performance goals. SLSDC estimates average annual cost savings in excess

of half a million dollars will be realized based on savings from reductions

in rent, personnel, programs, and elimination of awards. However, a

definitive plan on how these cost savings will be achieved has not yet been

developed. Each of SLSDC’s four key performance areas is discussed below.

Safety SLSDC currently makes safety a key measure of performance. For example,

SLSDC reports that the number of vessel incidents each year ranged from

one to four over the last 3 years. Over this period, the corporation

continued its foreign vessel screening program, including vessel

construction, standard safety equipment, and navigation charts and logs.

During 1995, 166 foreign vessels were inspected under the program. SLSDC

also has to annually maintain its two locks to provide a safe environment

for vessels transiting the Seaway. During the winter of 1995, SLSDC

completed the second phase of a 3-year concrete replacement project at

the U.S. Eisenhower lock.

As a PBO, SLSDC’s draft performance goals suggest that the SLSDC COO would

be held accountable for maintaining acceptable levels of safety and

reducing the likelihood of accidents and to demonstrate SLSDC’s

preparedness to respond to an environmental emergency. Safety measures

would apply to vessel and workplace safety as well as environmental

protection. For example, one goal would be to reduce the risk of

commercial vessel accidents; this would be measured by the number of

accidents/incidents per 1,000 transits. In addition, another goal would be

to maintain emergency response time (i.e., the time elapsed from

notification to arrival on the scene) at 3 hours or less. (The measure for

this goal is to be the time taken to respond to actual and simulated

emergencies.) SLSDC currently collects these data on an incident basis, but

they are not reported in an aggregated manner.

According to SLSDC officials, balancing the goals of safety and increased

traffic would not be a new concern if SLSDC should become a PBO. Both are

goals for the Seaway now, and SLSDC officials said that PBO status is not

expected to make a significant difference because, regardless of the level

of traffic, SLSDC must strike a balance between working safely and moving

Page 21 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
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traffic through the locks. Seaway officials told us SLSDC has been moving,

on average, about 12 vessels a day through the locks, which is about half

of its capacity. These officials said that marginal increases in traffic should

not compromise safety procedures, but a dramatic increase in traffic, such

as doubling current transits, would necessitate a review of safety

procedures and potential impacts.

Long- and Short-Term

Reliability

The second proposed performance goal for SLSDC is to ensure a viable

shipping route; the Seaway’s shipping season must be as long as possible

with maximum availability to users, according to SLSDC officials. Proposed

measures for reliability include lock availability, lock or equipment failure,

and lock and equipment inspections.

SLSDC’s draft PBO plans seek to maintain a high level of system reliability

and availability of U.S. navigation facilities for Seaway users. For example,

the SLSDC PBO goal is to achieve 95 percent lock/system availability. From

1991 through 1995, SLSDC averaged 96 percent availability, and during 1995,

the waterway’s availability rate climbed to 99 percent. However, the goal

of availability is affected by factors that are outside the control of SLSDC,

such as the weather (e.g., ice, high water).

Trade Development and

Regional Impacts

The third proposed performance goal, promotion of trade to generate new

business for the Saint Lawrence Seaway and to enhance the U.S. Great

Lakes economy, is already an important facet of SLSDC’s mission. Changes

in Seaway traffic can affect the entire Great Lakes-Saint Lawrence Seaway

area. Regional impacts take such forms as changes in jobs, personal

income, and federal, state, and local taxes. These impacts are a function of

many factors including tonnage levels, which port is used, commodity mix,

and labor and port productivity.

According to SLSDC, one performance indicator of effective trade

development is cargo tonnage. Over the last 10 years, tonnage has

fluctuated from 31.4 million metric tons per year to 40.6 million metric

tons per year. As a PBO, SLSDC plans to continue to measure annual U.S.

international volume, the actual number of vessels operating by fleet, and

the average tons per loaded vessel. Like system availability, tonnage is

affected by many economic factors outside the scope of the corporation’s

control.

However, the factors that affect the regional impacts would not change if

SLSDC should become a PBO. PBO status would change many things for

SLSDC, including its funding mechanism, selecting official for the agency

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head, and relationships with DOT and Congress. However, none of these

changes directly affects the factors that affect regional impact, so

changing the management approach to a PBO should not directly affect the

Great Lakes regional economy.

Because of the large number of variables that must be considered, a

sophisticated model is necessary to predict the specific locations and

magnitude of any changes in economic impacts. In the past, SLSDC has

commissioned studies to determine economic impacts of the region. Its

1995 Annual Report compared impacts on the 1991 (34.9 metric tons) and

1994 (38.4 metric tons) shipping seasons based on studies it had

commissioned. SLSDC reported increases in the 12-14 percent range in jobs;

personal income; annual revenue by Great Lakes firms; and local, state,

and federal taxes.

Customer Service and Fiscal

Performance

The PBO concept paper states that the fourth proposed performance goal

for SLSDC is to ensure that the customers and corporate employees

themselves have a voice in evaluating the corporation’s performance and

contributing to business decisions. In addition, SLSDC must ensure that U.S.

navigation facilities are in good working order and reserves are adequate

to meet emergency and critical drawdown needs.

While taking a corporate view of enhancing and protecting its customer

base, SLSDC has surveyed its customers on a regular basis to determine

how satisfied they were with the service SLSDC provided. SLSDC has had a

continuing program of coordination and outreach to user groups and

published customer-service standards in October 1996.

As a PBO, SLSDC plans to continue to ensure that customers have input into

evaluating the corporation’s performance and business decisions. For

example, SLSDC intends to measure customer satisfaction and has set a

target of achieving a rating of 3.5 or better based on a 1 to 5 scale. The

overall rating for 1995, the only year of the survey, was 4.5. Moreover,

according to SLSDC officials, the proposed funding formula provides an

additional incentive to improve customer service since any increases in

tonnage result in increased funding. As a PBO, SLSDC also expects to

continue to work with its employees and their representatives to promote

both employee satisfaction and human resources management practices.

To this end, SLSDC plans to institute a new measure by conducting an

employee satisfaction survey. This survey would serve as a baseline for

future measures and targets.

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The PBO concept and GPRA both require agencies to strive for results and

hold managers accountable for achieving results. However, the PBO

concept is different from GPRA in that the PBO concept provides for direct,

personal incentives for agency leadership for meeting performance goals

and sanctions for nonperformance. Under the PBO concept, the chief

operating officer would be eligible for substantial rewards and contract

renewal for excellent performance.12 Conversely, the chief operating

officer could be removed by the President or by the Secretary for

misconduct or failure to meet performance goals. In contrast, the

Secretary cannot remove the SLSDC administrator for not meeting

performance goals. Thus, the chief operating officer could be more easily

removed for inadequate performance than the holder of the administrator

position. Given the level of detail and specificity expected in the chief

operating officer’s contract, the Secretary should be able to easily tell if

goals were met or not, and take appropriate action. However, as

evaluations of Next Steps agencies have shown, while determining if a

goal was met may be straightforward, determining why a goal was not met

and the actions needed to meet unmet goals can be analytically difficult.

Moreover, the degree to which a secretary would be willing to fire a chief

operating officer for failure to meet performance goals is, of course,

unknown.

Congressional Oversight Since PBOs must be created through the enactment of enabling legislation,

Congress would have an opportunity to define its role in each PBO. As

currently structured, there is uncertainty within the PBO concept on the

relationship between Congress and PBOs. This includes the level and type

of oversight and control Congress would have over PBOs. In general, a

chief operating officer would be directly accountable to the department

head who, in turn, would remain accountable to Congress. Since the

funding mechanism is expected to be unique to each PBO, it is not possible

to generalize what Congress’ role would be in each PBO’s budget process.

More specifically, the relationship between Congress and SLSDC as a PBO

would fundamentally change. Because a mandatory funding mechanism

would eliminate appropriations, Congress would no longer determine the

level of funding or direct the use of those funds. However, even when

SLSDC was fully funded by Seaway tolls, it regularly went to Congress for

budget hearings and to receive Congress’ input on spending funds. SLSDC

officials told us that such a requirement could be written into SLSDC’s PBO

12A chief operating officer may receive a bonus of up to 50 percent of base pay, according to the

proposed PBO legislation for SLSDC.

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legislation to ensure congressional oversight, although they also noted

they have been exempt from appropriations hearings in the Senate for

many years and in the House for the past 2 years. Because the chief

operating officer would be selected by the Secretary of Transportation,

Congress would no longer have direct input into the selection of the

agency head. Moreover, under PBO status, SLSDC could have flexibilities

from governmentwide requirements governing personnel and

procurement.

Conclusion Reviews of Next Steps agencies have reported substantial improvements

in performance and reductions in costs over the past 7 years. Next Steps

agencies have a management structure that separates a department’s

service delivery functions from its policy functions. Performance-based

organizations would seek to emulate Next Steps agencies in many

important ways. Both are designed to operate in a more businesslike

manner, providing flexibility from constraints in exchange for greater

accountability for results. Because of their similarities, unresolved issues

from the Next Steps experience can provide lessons for the U.S. effort,

such as lack of clarity in relationships between agencies and their parent

departments, difficulty in developing and setting performance goals, and

uncertainty concerning who is accountable for performance.

Based on our evaluation, the effects of PBO status on SLSDC and

congressional oversight would be mixed. On the one hand, the SLSDC

proposal appears to be a workable mechanism for addressing SLSDC’s

reported concerns for more predictable funding, an incentive-based focus

on performance standards and measures, and relief from DOT

requirements. If Congress is interested in testing the PBO concept, SLSDC

could be a low-risk pilot because it has a small budget, businesslike

operations, and already has some flexibilities that would be available to a

PBO. On the other hand, other approaches are also available to address

some of SLSDC’s stated needs, such as DOT granting waivers from its

reporting requirements or Congress providing a more stable funding

stream through the annual appropriations process. However, the proposed

PBO funding mechanism, particularly the shift from a discretionary account

to mandatory funding, raises a potentially significant issue of budget

policy that may overshadow SLSDC’s condition. Moreover, the legal

challenge to the funding source complicates the final resolution of SLSDC’s

status.

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Agency Comments

and Our Evaluation

We provided a draft of this report to the Secretary of Transportation and

the Director of OMB. We received oral comments from senior officials at

the Department of Transportation, including the Assistant to the Deputy

Secretary and SLSDC’s Deputy Administrator, and designated officials at the

Office of Management and Budget.

In general, DOT officials told us the report provided a good historical

perspective on SLSDC and much valuable information on the PBO proposal.

However, they thought that the draft did not give sufficient attention to

some key areas.

First, DOT officials said the draft report did not give sufficient attention to

the “power of incentives” that would affect a chief operating officer’s pay

and tenure based on SLSDC’s performance. According to DOT officials, this

“incentivized management structure” is a key motivational factor for

achieving superior performance. DOT officials said that while these

incentives and consequences would initially affect only the top level of

SLSDC management, “leadership by example” would filter down to other

staff levels, providing the incentive for improved performance at all levels.

Each employee would better understand how his/her particular job

contributes to organizational goals and consequently each employee

would be more motivated to improve his/her performance. In addition,

personnel flexibilities, including performance-based pay, would allow all

staff to eventually benefit from the improved performance of the

organization.

Second, DOT officials said the draft report also did not give sufficient

attention to the potential improvements in customer service that would

result in a likely increase in Seaway traffic. For example, because PBO

status would allow a change in processes and promote an aggressive

marketing program, SLSDC might be able to provide better customer service

and attract new customers. Further, the amount of funding SLSDC would

receive is directly linked to tonnage through the Seaway, which provides

an additional incentive for SLSDC to better understand the needs of all

Seaway users and thus increase the number of transits and level of

tonnage.

Third, the officials stated that SLSDC’s PBO funding mechanism is not

without risk. Officials noted that the tonnage estimates that formed the

basis for SLSDC’s estimated funding are only rough projections and,

therefore, actual funding may stay the same or even decline if traffic does

not meet SLSDC’s projections.

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Fourth, according to the officials, the PBO initiative can have far-reaching

implications and provides the opportunity to substantially improve

performance in many agencies. Because SLSDC currently operates much

like a business, officials felt strongly that SLSDC is uniquely positioned to

become a PBO. The summary of experience from each PBO can affect how

the federal government could potentially develop new and better business

operations and practices, and officials thought SLSDC would be an excellent

candidate to participate in this experiment.

In general, we believe the draft report adequately addressed the issues

raised by DOT. For example, the draft report stated that performance

incentives and consequences are key design features of a PBO, and that the

PBO concept provides for direct, personal incentives for agency leadership

for meeting performance goals and sanctions for nonperformance.

Nonetheless, we have added additional language in this report to expand

upon this point. We also noted that, as a PBO, SLSDC would have the

flexibility to develop and implement innovative performance and pay

systems for its employees, and we added language reflecting plans SLSDC

officials told us about in their comments. Regarding customer service, the

draft report stated that SLSDC traditionally has sought to enhance and

protect its customer base and reach out to Seaway user groups, but we

added wording reflecting DOT’s view that its funding formula increases the

incentives for SLSDC to be customer oriented.

The draft report noted that the proposed funding mechanism is not

without risk since funding is dependent upon Seaway traffic and those

amounts are estimated. However, we added language to the report

reflecting DOT’s view that the tonnage estimates were rough estimates and

that SLSDC funding would decrease if tonnage declines.

In our view, the draft report also provided an appropriate discussion of the

corporation’s position on its advantages of becoming a PBO. For example,

we reported that SLSDC and NPR officials said that SLSDC would be a low-risk

pilot because it already has a corporate culture and has businesslike

operations. However, we also noted that the proposal has important policy

implications, which Congress may want to consider, particularly regarding

the mandatory funding mechanism.

OMB provided several overall comments on the draft of this report,

including comments regarding performance incentives, the relevance of

our information on the Next Steps agencies’ experience, alternative

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approaches to PBO status for SLSDC, and pending changes in SLSDC’s PBO

legislation.

OMB, like DOT, stated that we needed to provide more detail and attention

to the performance incentives that are contained within the SLSDC PBO

proposal. OMB also noted that there are real incentives for improved

performance, such as the possibility of a significant bonus for the chief

operating officer when performance goals are met and possible

consequences, such as the firing of a chief operating officer when goals

are not met. OMB also told us that such incentives and consequences are

key performance drivers and provide the motivation to strive for superior

performance.

OMB officials said that some of the draft report’s description of the British

Next Steps experiences and lessons learned may not be particularly

relevant to the PBO proposal because of the key differences between Next

Steps agencies and PBO candidates. For example, OMB officials stated that

the U.S. PBO concept does not provide for a “Fraser Figure” like the Next

Steps model. OMB officials also said that the draft did not sufficiently

address alternative approaches for autonomy from DOT requirements and

for a stable funding mechanism. For example, OMB stated that we did not

elaborate on what other funding alternatives could provide stable funding.

OMB officials told us that a forthcoming revised draft of the SLSDC PBO

legislation will change certain conditions of SLSDC’s PBO funding

mechanism. According to OMB officials, the proposed legislation would still

fund SLSDC through a mandatory payment, but the revised legislation would

no longer adjust the discretionary cap to accommodate the mandatory

payment. Instead, an offset from other mandatory spending will be

required. According to OMB officials, this revised legislation is consistent

with the President’s budget.

As we noted in our evaluation of DOT’s comments, we believe that the draft

appropriately considered performance incentives; but we added some

language to provide a fuller discussion. As we pointed out in our draft, we

agree that Next Steps and PBOs are different in several ways. However, the

administration’s documents on PBOs—including speeches by the Vice

President—repeatedly have referred to Next Steps agencies as a model for

PBOs. In that regard, we highlighted some of the lessons learned by Next

Steps agencies that appear to be most applicable to the PBO concept. For

example, the lack of clarity in the roles of agencies and departments and

the difficultly in developing performance measures appear to be relevant

Page 28 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
B-276199 

issues irrespective of the national context. We also added some language

in the report to reflect OMB’s comments about an alternative funding

mechanism.

Revisions to SLSDC’s proposed PBO legislation occurred after we completed

our audit work and had not been issued when we met with OMB. Since we

were told that this revision would no longer provide for a reduction in the

discretionary spending cap scored to offset the mandatory payment, the

legislation raises budget policy issues beyond the creation of a new

mandatory program—how the spending would be offset by cuts in other

mandatory programs or increases in taxes. We added language to that

effect in this report.

DOT and OMB also suggested a number of technical clarifications, which we

have incorporated as appropriate.

We are sending copies of this report to the Secretary of Transportation;

the Administrator of the Saint Lawrence Seaway Development

Corporation; the Director, Office of Management and Budget; and the

Project Director of the National Performance Review. We will also make

copies available to others on request.

Please contact me at (202) 512-8676 if you or your staff have questions.

Major contributors to this report are listed in appendix II.

L. Nye Stevens

Director, Federal Management

 and Workforce Issues

Page 29 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
Contents

Letter 1

Appendix I 

Candidates for PBO

Status, as of January

1997

32

Appendix II 

Major Contributors to

This Report

33

Tables Table 1: SLSDC Actual and Projected Funding for Fiscal Years

1993-2002

14

Table 2: Capital Reserve Fund Balance and Drawdowns 16

Figure Figure 1: Comparison of O&M Costs, HMTF Appropriations, and

Retrospective Application of the PBO Formula

15

Abbreviations

COO chief operating officer

DOT Department of Transportation

GPRA Government Performance and Results Act of 1993

HMTF Harbor Maintenance Trust Fund

OMB Office of Management and Budget

OPM Office of Personnel Management

NPR National Performance Review

PBO performance-based organization

SLSDC Saint Lawrence Seaway Development Corporation

Page 30 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
Page 31 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
Appendix I 

Candidates for PBO Status, as of January

1997

Agency PBO candidates

Commerce Technical information dissemination

(National Technical Information Service)

Commerce Intellectual property rights

(Patent and Trademark Office)

Commerce Seafood inspection

(National Marine Fisheries Service)

Defense Defense commissary services (Defense Commissary Agency)

Housing and Urban

Development

Mortgage insurance services

(Government National Mortgage Association)

Housing and Urban

Development

Mortgage insurance services

(Federal Housing Administration)

Office of Personnel

Management

Retirement benefits services

(Federal Retirement and Insurance Service)

Transportation Saint Lawrence Seaway

(Saint Lawrence Seaway Development Corporation)

Treasury U.S. Mint

Page 32 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
Appendix II 

Major Contributors to This Report

General Government

Division

Michael Brostek, Associate Director, (202)512-9039

J. Christopher Mihm, Assistant Director, (202)512-3236

Debra L. McKinney, Program Manager

Matthew D. Ryan, Senior Evaluator

Anthony Assia, Senior Evaluator

(410104) Page 33 GAO/GGD-97-74 Saint Lawrence Seaway Development Corporation Proposal
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