United States General Accounting Office

GAO Report to the Congress

March 1997 ADDRESSING THE

DEFICIT

Budgetary Implications

of Selected GAO Work

for Fiscal Year 1998

GAO/OCG-97-2

GAO United States

General Accounting Office

Washington, D.C. 20548

Comptroller General

of the United States

B-274810 

March 14, 1997

To the President of the Senate and

the Speaker of the House of Representatives

This report is part of our continuing effort to help the Congress identify

options that could be used to reduce the deficit.1

 It updates our previous

work in this area with new information and systematically identifies in a

single document the budgetary implications of selected program reforms

discussed in our work but not yet implemented or enacted. Where

available, budgetary savings estimates provided by the Congressional

Budget Office (CBO) or the Joint Committee on Taxation (JCT) are

presented for each of the options.

This year’s report contains 147 options. Nearly half of these

options—71—are new to this year’s report; the remainder are updated

versions of options that appeared in last year’s report. To update last

year’s options, we reviewed and analyzed congressional and agency

actions taken over the past year that affected the substantive content of

the option and/or its likely savings. In fact, some options from last year’s

report were not included in this year’s report (see appendix IV) because

the Congress has already addressed the relevant issues. The remaining

options from last year’s report have been updated and modified to reflect

recent congressional or agency actions.

All of the options are based on key findings and issues developed in our

audits and evaluations. Some of the options reflect our recommendations.

Others do not, but rather represent one way to address, in a budgetary

context, some of the significant problems identified in our reviews of

federal programs and activities. The Congress has many available options

for dealing with the deficit. Inclusion of a specific option in this report

does not mean that we endorse it as the only or most feasible approach, or

1

See Addressing The Deficit: Updating the Budgetary Implications of Selected GAO Work

(GAO/OCG-96-5, June 28, 1996); Deficit Reduction: Opportunities to Address Long-Standing

Government Performance Issues (GAO/T-OCG-95-6, September 13, 1995); Addressing The Deficit:

Budgetary Implications of Selected GAO Work for Fiscal Year 1996 (GAO/OCG-95-2, March 15, 1995);

and Addressing The Deficit: Budgetary Implications of Selected GAO Work (GAO/OCG-94-3, March 11,

1994).

Page 1 GAO/OCG-97-2 Addressing the Deficit
B-274810 

that other options are not also appropriate for consideration by the

Congress.2

This report is divided into four appendixes. Appendix I discusses the

conventions used to provide estimates of cost savings or additional

revenues. As in our previous report, appendix II provides for

congressional consideration an analytical framework of individual options.

This framework provides one set of criteria that may be used to assess

goals, scope, and approaches for delivering federal programs. It is

organized around the following three broad themes:

• reassess objectives, that is, reconsider whether to terminate or revise

services and programs provided;

• redefine beneficiaries, that is, reconsider who pays for or benefits from a

particular program; and

• improve efficiency, that is, reconsider how a program or service is

provided.

Appendix III presents narrative descriptions of the options, organized by

budget function and receipts. As mentioned above, appendix IV lists

options from last year’s report that were not updated for this year’s

volume.

Although we derived the options from our existing body of work, there are

similarities with other deficit reduction proposals. For example, some

options contained in this report have also been included in past editions of

CBO’s annual publication, Reducing the Deficit: Spending and Revenue

Options, House and Senate Budget Resolution proposals, and the

President’s annual budget submission.

We are sending copies of this report to the appropriate congressional

committees and every Member of the Congress. Copies will be made

available to others upon request.

2

Under the Budget Enforcement Act (BEA), as amended, the spending and revenue options included in

this report could be used either to reduce the deficit or to free up funds for other programs. Under the

pay-as-you-go (PAYGO) rules of BEA, savings from direct spending programs (entitlement and

mandatory programs) or revenue options would reduce the deficit unless these savings were used to

offset either direct spending program expansions or tax cuts. For discretionary spending programs,

savings from changes would contribute to additional deficit reduction if BEA caps on discretionary

spending were lowered; otherwise, the savings would be available for use in other discretionary

programs.

Page 2 GAO/OCG-97-2 Addressing the Deficit
B-274810 

This report was prepared under the direction of Paul L. Posner, Director

for Budget Issues, who may be reached at (202) 512-9573. Specific

questions about individual options may be directed to the GAO contact

listed with each option. Major contributors to this report are listed in

appendix V.

James F. Hinchman

Acting Comptroller General

of the United States

Page 3 GAO/OCG-97-2 Addressing the Deficit
Contents

Letter 1

Appendix I 

Explanation of

Conventions Used to

Estimate Savings and

Revenue Gains

12

Appendix II 

A Framework for

Deficit Reduction

14

Reassess Objectives 14

Redefine Beneficiaries 15

Improve Efficiency 15

Appendix III 

Options for Deficit

Reduction

17

050 National Defense 18

Defense Infrastructure Reform 19

Fiscal Year 1998 Defense Operation and Maintenance Budget 21

Continental Air Defense 23

Carrier Battle Group Expansions and Upgrades 25

Army’s Comanche Helicopter Program 27

F/A-18E/F Fighter 29

F-22 Fighter 31

Air Force Bomber Force Requirements 33

Air Force Fighter Squadrons 38

C-17 Strategic Airlift 40

Nuclear Submarine Force Reductions 42

Major Weapon System Warranty Law 44

Base Alignment and Closure Accounts 46

Defense Inventories Reform 48

Defense Transportation Restructuring 53

Depot Maintenance Program Excess Capacity 55

Military Exchange Stores Consolidation 59

Budgeted Civilian Personnel Requirements 61

Convert Some Support Officer Positions to Civilian Status 63

Attrition of Enlisted Personnel From the Military Services 65

Army National Guard Divisions 68

Junior Reserve Officers’ Training Corps 70

DOD’s Acquistion Workforce 72

Page 4 GAO/OCG-97-2 Addressing the Deficit
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DOD’s Finance and Accounting Infrastructure 74

DOD’s Training Infrastructure 77

DOD’s Transportation Migration Systems 79

DOD’s Materiel Management Migration Systems 81

DOD’s Bulk Fuel Budgeting 83

Navy Financial Management of Operating Materials and Supplies 85

Copayments for Care in Military Treatment Facilities 87

Administering Defense Health Care 89

Uniformed Services University of the Health Sciences 91

Uniformed Services Treatment Facilities 94

Department of Energy’s Procurement of Laboratory Testing

Services

97

150 International Affairs 99

USAID’s Housing Guaranty Program 100

Excess Real Estate at Overseas Diplomatic Posts 102

Overseas Diplomatic Posts 105

State Department Functions and Activities 108

State Department Support Functions 110

TV Marti 112

USIA Exchange Programs 114

USIA Overseas Posts, Activities, and Cultural Centers 116

International Broadcasting 120

Risk-Based Exposure Fees for Export-Import Bank 122

Export-Import Bank Programs 124

250 General Science, Space, and Technology 126

Space Station 127

NASA’s Earth Observing System Data and Information System 130

270 Energy 132

Clean Coal Technology Funds 133

Department of Energy’s National Laboratories 135

Use of Carryover Balances to Offset Future Budget Needs 138

Department of Energy’s Overtime Costs 140

Department of Energy’s Cleanup Studies 142

Department of Energy’s Contractors’ Separation Benefits

Package

144

Federal Exemption to Certain State Taxes for Department of

Energy’s Operating Contractors

146

Nuclear Waste Disposal Fees 148

Power Marketing Administrations Cost Recovery 149

Federal Investment in Successfully Commercialized Technologies 151

300 Natural Resources and Environment 153

Page 5 GAO/OCG-97-2 Addressing the Deficit
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Federal Land Policies 154

Collaborative Federal Land Management Approach 157

Federal Timber Sales 159

Fair Market Value for Natural Resources 161

Recreation Fees at Federal Sites 163

Hardrock Mining Royalities 165

Natural Resources Revenue Sharing 167

Federal Water Policies 169

Water Transfers 173

Pollution Fees and Taxes 174

Hazardous Waste Cleanup Cost Recovery 176

Non-Time-Critical Removals in Superfund Cleanups 178

Excess Funds in Superfund Contracts 180

Weather Service Modernization Project 182

350 Agriculture 185

Food Aid: Public Law 480 Title I Program 186

The Market Access Program 189

Export Credit Guarantee Programs 191

Agricultural Research Service Funding 194

USDA Telecommunications and Information Systems 196

370 Commerce and Housing Credit 198

Rural Housing Loans Interest Recapture 199

Use of Sampling for the 2000 Decennial Census 201

400 Transportation 204

State Share of State-Supported Intercity Rail Passenger Service 205

Amtrak Subsidies 207

Military Airport Program Funds 210

Cargo Preference Laws 212

Fees Paid by Foreign-Flagged Cruise Ships 215

Department of Transportation’s Oversight of Its University

Research

217

Fees for Certification of New Airlines 219

Fees for Registering Aircraft 221

450 Community and Regional Development 223

Eligibility for Federal Emergency Management Agency Public

Assistance

224

500 Education, Training, Employment, and Social Services 226

Consolidation of Student Aid Programs 227

Consolidation of Employment and Training Programs 229

550 Health 233

Prescription Drug and Medicaid Fraud 234

Page 6 GAO/OCG-97-2 Addressing the Deficit
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Medicaid: States Use Illusory Approaches to Shift Program Costs

to the Federal Government

236

Medicaid Formula: Fairness Could Be Improved 238

Automated Drug Utilization Reviews 240

Payments to Rural Health Clinics 243

Public Health Service Commissioned Corps 245

Unified Risk-Based Food Safety System 248

570 Medicare 251

Teaching Hospitals’ Medicare Payments 252

Medicare Program Safeguards 254

Medicare Payments for High Technology Procedures 256

Medicare Rate-Setting Methods for HMOs 258

Medicare Incentive Payments in Health Care Shortage Areas 260

600 Income Security 262

Fees for Non-Temporary Assistance to Needy Families (TANF)

Child Support Enforcement Services

263

Automated Child Support Enforcement Systems 265

Funding for State Automated Welfare Systems 267

Benefits for Retirement Eligible FECA Beneficiaries 269

Workers’ Compensation Cases Involving Third Parties 271

Workers’ Compensation Payments 273

Resource Transfers to Qualify for SSI 275

Return-to-Work Strategies for People With Disabilities 277

Reporting of Federal Employee Payroll Data to State

Unemployment Insurance Programs

279

650 Social Security 281

The PASS Work Incentive Program 282

700 Veterans Benefits and Services 284

Veterans’ Disability Compensation for Non-Service Connected

Diseases

285

Approving Education and Training Programs for Veterans 286

Cost Sharing for Veterans’ Long-Term Care 288

Effective VA Hospital Preadmission Certification 290

Construction of Veterans’ Medical Facilities 292

Underused VA Hospitals 295

VA’s Medical Care Account Growth Rate 297

Enrollment in VA Health Care System 300

Outpatient Pharmacy Costs 302

Sunset Date on VA’s Income Verification Program 304

750 Administration of Justice 306

Border Patrol Resources 307

Page 7 GAO/OCG-97-2 Addressing the Deficit
Contents

800 General Government, 

900 Net Interest, and 999 Multiple

310

General Services Administration Supply Depot System 311

Judiciary’s Long-Range Space Planning System 313

The 1-Dollar Coin 315

Commemorative Coins 317

Federal Reserve Operations 318

Premium Payments to Employees While on Leave 321

Davis-Bacon Act Reform 322

Formula-Based Grant Programs 325

Federal Grants 328

Federal Travel Processing 331

Receipts 333

Tax Treatment of Health Insurance Premiums 334

Information Reporting on Forgiven Debts 336

Administration of the Tax Deduction for Real Estate Taxes 338

Corporate Tax Document Matching 340

Tax Treatment of Interest Earned on Life Insurance Policies and

Deferred Annuities

341

Federal Agency Reporting to the Internal Revenue Service 343

Independent Contractor Tax Compliance 344

Deductibility of Home Equity Loan Interest 346

Internal Revenue Service Staff Utilization 348

Collecting Gasoline Excise Taxes 350

Computing Excise Tax Bases 351

Industrial Development Bonds Targeting 352

Highway User Fees on Heavy Trucks 354

Taxation of Additives to Diesel Fuel 356

Electronic Filing of Tax Returns 358

Appendix IV 

Options Not Updated

for This Report

360

Appendix V 

Major Contributors to

This Report

363

Abbreviations

AFDC Aid to Families With Dependent Children

AIP Airport Improvement Program

Page 8 GAO/OCG-97-2 Addressing the Deficit
Contents

AOC Administrative Office of the U.S. Courts

ARS Agricultural Research Service

AWIPS Advanced Weather Interactive Processing System

BBS broad-based, sustainable

BEA Budget Enforcement Act

BLM Bureau of Land Management

BRAC Base Realignment and Closure

BUR bottom-up review

CBO Congressional Budget Office

CERCLA Comprehensive Environmental Response,

Compensation, and Liability Act

CDR continuing disability review

CFO Chief Financial Officer

CHAMPUS Civilian Health and Medical Program of the Uniformed

Services

COP continuation-of-pay

CVP Central Valley Project

DBOF Defense Business Operations Fund

DFAS Defense Finance and Accounting Service

DFSC Defense Fuel Supply Center

DI Disability Insurance

DLA Defense Logistics Agency

DOD Department of Defense

DOE Department of Energy

DOT Department of Transportation

DUR drug utilization review

EDWAA Economic Dislocation and Worker Adjustment

Assistance

EM Environmental Management

EOS Earth Observing System

EOSDIS Earth Observing System Data and Information System

EPA Environmental Protection Agency

FAIR Federal Agriculture Improvement and Reform Act of

1996

FAA Federal Aviation Administration

FAS Foreign Agricultural Service

FDIC Federal Deposit Insurance Corporation

FDSL Federal Direct Student Loan

FECA Federal Employees’ Compensation Act

FEMA Federal Emergency Management Agency

FFEL Federal Family Education Loan

Page 9 GAO/OCG-97-2 Addressing the Deficit
Contents

FHWA Federal Highway Administration

FSN foreign service national

FY fiscal year

GAO General Accounting Office

GPS global positioning systems

GSA General Services Administration

HACCP Hazard Analysis and Critical Control Point

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HMO health maintenance organization

HPSA Health Professional Shortage Area

HUD Department of Housing and Urban Development

IDB industrial development bond

IFAD International Fund for Agricultural Development

INS Immigration and Naturalization Service

IRS Internal Revenue Service

JCS Joint Chief of Staff

JCT Joint Committee on Taxation

JFMIP Joint Financial Management Improvement Program

JROTC Junior Reserve Officers’ Training Corps

JTPA Job Training Partnership Act

LRIP low-rate initial production

MAP Military Airport Program

MIP Medicare Incentive Payment

MRI magnetic resonance imaging

MTMC Military Traffic Management Command

MWR morale, welfare, and recreation

NASA National Aeronautics and Space Administration

NOAA National Oceanic and Atmospheric Administration

NORAD North American Aerospace Defense Command

NTC non-time-critical

NWS National Weather Service

OCSE Office of Child Support Enforcement

OMB Office of Management and Budget

O&M operation and maintenance

OST Office of the Secretary

OTC over the counter

PASS plan for achieving self-support

PAYGO pay-as-you-go

PHS Public Health Service

PILT Payment in Lieu of Taxes

Page 10 GAO/OCG-97-2 Addressing the Deficit
Contents

PMA Power Marketing Administration

RHC Rural Health Clinic

RCRA Resource Conservation and Recovery Act

RFA Radio Free Asia

RFE/RL Radio Free Europe/Radio Liberty

RHS Rural Housing Service

RTC Resolution Trust Corporation

SAA state approving agency

SBU strategic business unit

SSA Social Security Administration

SSI Supplemental Security Income

SSN nuclear-powered attack submarine

TANF Temporary Assistance for Needy Families

TDY temporary duty

TRICARE DOD’s managed health care system

UI unemployment insurance

USAID U.S. Agency for International Development

USDA U.S. Department of Agriculture

USIA United States Information Agency

USTF Uniformed Services Treatment Facility

USTRANSCOM U.S. Transportation Command

USUHS Uniformed Services University of the Health Sciences

VA Department of Veterans Affairs

VOA Voice of America

Page 11 GAO/OCG-97-2 Addressing the Deficit
Appendix I 

Explanation of Conventions Used to

Estimate Savings and Revenue Gains

Cost estimates for many of our options were provided by CBO and JCT. As

in last year’s report, if specific estimates could not be provided, a brief

explanation is included with the option. Where estimates are provided, the

following conventions were followed:3

• For revenue estimates, the increase in collections reflects that which

would occur, over and above that due under current law, if the option

were enacted.

• For direct spending programs, estimated savings show the difference

between what the program would cost under the CBO baseline, which

assumes continuation of current law, and what it would cost after the

suggested modification.

• For nondefense discretionary spending programs, two estimates are

provided. One estimate is of savings compared to the actual fiscal year

1997 appropriations increased for projected inflation. A second estimate is

of savings compared to the fiscal year 1997 appropriations in nominal

terms (held constant for the next 4 years).

• For defense discretionary spending programs, estimates are of savings

compared to the 1997 Defense Plan that CBO uses for its defense

discretionary estimates. CBO uses this plan because it provides the

programmatic detail necessary to estimate the effects of changes in force

structures and weapons systems.

Specific assumptions made in estimating individual options are noted in

the option narratives in appendix III.

Subsequent savings and revenue estimates provided by CBO and JCT may

not match exactly those contained in this report. Differences in the details

of specific proposals, changes in assumptions which underlie the analyses,

and updated baselines can all lead to significant differences in estimates.

Also, a few of our options—involving sales of real estate and other

government-owned property—constitute asset sales. Under the Balanced

Budget and Emergency Deficit Control Act of 1985, as amended, proceeds

from asset sales are not counted in determining compliance with the

discretionary spending limits or PAYGO requirements. In order to provide

policymakers the fullest possible picture of the budgetary implications of

our work, we have included those options which constitute asset sales.

They are clearly identified as such.

3

For a complete discussion of the uses and caveats of the CBO estimates, see CBO’s August 1996

report, Reducing the Deficit: Spending and Revenue Options.

Page 12 GAO/OCG-97-2 Addressing the Deficit
Appendix I 

Explanation of Conventions Used to

Estimate Savings and Revenue Gains

Finally, some of the options could not be scored by CBO or JCT under

current scorekeeping conventions. Several of these involve management

improvements that we believe can contribute to solving the deficit

problem but whose effects are too indirect for estimation purposes. A few

options are not estimated because they concern future choices about

spending that is not currently in the baseline used to calculate annual

spending and revenue. In other cases, savings are likely to come in years

beyond the 5-year estimation period that CBO uses.

Page 13 GAO/OCG-97-2 Addressing the Deficit
Appendix II 

A Framework for Deficit Reduction

The history of deficit reduction efforts suggests that basing decisions on

explicit policy rationales, rather than considering separate

program-by-program assessments, may improve chances for success. A

consistent and systematic framework can be an effective means to

formulate and package broad-based deficit reduction proposals. Also, this

kind of approach can be used regardless of any other budgetary control

mechanism (for example, discretionary spending limits or sequestration

procedures) or any given level of desired deficit reduction.

GAO’s deficit reduction framework consists of three broad themes: reassess

objectives, redefine beneficiaries, and improve efficiency and accuracy.

These three fundamental strategies are based on an implicit set of decision

rules that encourage decisionmakers to think systematically, within an

ever-changing environment, about

• what services the government provides or should continue to provide,

• for whom these services are or should be provided, and

• how services are or should be provided.

By using a policy-oriented framework such as this, choices can be made

more clearly and the results become more defensible.

Reassess Objectives The first theme within our deficit reduction framework focuses on the

objectives for federal programs or services. Our premise is that

periodically reconsidering a program’s original purpose, the conditions

under which it continues to operate, and its cost-effectiveness, is

appropriate. Our work suggests three decision rules which illustrate this

strategy.

• Programs can be considered for termination if they have succeeded in

accomplishing their intended objectives or if it is determined that the

programs have persistently failed to accomplish their objectives.

• Programs can be considered for termination or revision when underlying

conditions change so that original objectives may no longer be valid.

• Programs can be reexamined when cost estimates increase significantly

above those associated with original objectives, when benefits fall

substantially below original expectations, or both.

For example, the Public Law 480 Title I Food Aid Program allows U.S.

agricultural commodities to be sold to developing countries on long-term

credit at below-market interest rates. The current goal of the program is to

Page 14 GAO/OCG-97-2 Addressing the Deficit
Appendix II 

A Framework for Deficit Reduction

promote U.S. foreign policy by enhancing the food security of developing

countries. The program is also designed to expand markets for U.S.

agricultural commodities. However, multiple and sometimes competing

objectives, as well as contradictory program requirements, have hampered

the program, and its contribution to long-term, foreign market

development for U.S. agricultural commodities has not been

demonstrated.

Redefine Beneficiaries The second theme within our deficit reduction framework focuses on the

intended beneficiaries for federal programs or services. The Congress

originally defines the intended audience for any program or service based

on some perception of eligibility and/or need. To better reflect and target

increasingly limited resources, these definitions can be periodically

reviewed and revised. Our body of work suggests four decision rules that

illustrate this strategy.

• Formulas for a variety of grant programs to state and local governments

can be revised to better reflect the fiscal capacity of the recipient

jurisdiction. This strategy could reduce overall funding demands while

simultaneously redistributing available grant funds so that the most needy

receive the same or increased levels of support.

• Eligibility rules can be revised, without altering the objectives of the

program or service.

• Fees can be targeted at individuals, groups, or industries that directly

benefit from federal programs. Also, existing charges can be increased so

that a greater portion of a program’s cost is shared by the direct

beneficiaries.

• Tax preferences can be narrowed or eliminated by revising eligibility

criteria or limiting the maximum amount of preference allowable.

For example, at a time when federal domestic discretionary resources are

constrained, better targeting of grant formulas offers a strategy to bring

down federal outlays by concentrating reductions on wealthier localities

with fewer needs and greater capacity to absorb cuts. Federal grant

formulas could be redesigned to lower federal costs by disproportionately

reducing federal funds to states and localities with the strongest tax bases

and fewer needs, as shown in GAO’s option on formula grants.

Improve Efficiency The third theme within our deficit reduction framework addresses how

the program or service is delivered. This strategy suggests that focusing on

Page 15 GAO/OCG-97-2 Addressing the Deficit
Appendix II 

A Framework for Deficit Reduction

the approach or delivery method can significantly reduce spending or

increase collections. Our body of work suggests five decision rules which

illustrate this strategy.

• Reorganizing programs or activities with similar objectives and audiences

can eliminate duplication and improve operational efficiency.

• Using reengineering, benchmarking, streamlining and other process

change techniques can reduce the cost of delivering services and

programs.

• Using performance measurement and generally improving the accuracy of

available program information can promote accountability and

effectiveness and reduce errors.

• Improving collection methods and ensuring that all revenues and debts

owed are collected can increase federal revenues.

• Establishing market-based prices can help the government recover the

cost of providing services while encouraging the best use of the

government’s resources.

As an illustration of this theme, GAO has identified over 150 federal

programs and funding streams providing employment and training

assistance. These programs are spread across 15 departments and

independent agencies with a total budget of about $20 billion. Many of

these programs have similar goals and provide the same services to similar

populations using separate, parallel delivery structures. Consolidating

these programs where it is appropriate can reduce administrative costs as

well as increase efficiencies in service delivery. GAO’s option illustrates

how opportunities to improve efficiency and flexibility in employment and

training programs can provide a basis for reducing program funding.

Page 16 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

This appendix describes each of GAO’s options for deficit reduction,

organized by budget function and receipts. For each option, we provide,

when relevant, information about the authorizing committee,

appropriations subcommittee, primary agency, budget account, spending

type, budget subfunction, and framework theme. We then provide a

summary and description of budgetary implications, which is followed by

an estimate (when available) of savings or revenue increase, relevant GAO

reports, and a GAO contact.

Page 17 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

050 National

Defense

• Defense Infrastructure Reform

• Fiscal Year 1998 Defense Operation and Maintenance Budget

• Continental Air Defense

• Carrier Battle Group Expansions and Upgrades

• Army’s Comanche Helicopter Program

• F/A-18E/F Fighter

• F-22 Fighter

• Air Force Bomber Force Requirements

• Air Force Fighter Squadrons

• C-17 Strategic Airlift

• Nuclear Submarine Force Reductions

• Major Weapon System Warranty Law

• Base Alignment and Closure Accounts

• Defense Inventories Reform

• Defense Transportation Restructuring

• Depot Maintenance Program Excess Capacity

• Military Exchange Stores Consolidation

• Budgeted Civilian Personnel Requirements

• Convert Some Support Officer Positions to Civilian Status

• Attrition of Enlisted Personnel from the Military Services

• Army National Guard Divisions

• Junior Reserve Officers’ Training Corps

• DOD’s Acquisition Workforce

• DOD’s Finance and Accounting Infrastructure

• DOD’s Training Infrastructure

• DOD’s Transportation Migration Systems

• DOD’s Materiel Management Migration Systems

• DOD’s Bulk Fuel Budgeting

• Navy Financial Management of Operating Materials and Supplies

• Copayments for Care in Military Treatment Facilities

• Administering Defense Health Care

• Uniformed Services University of the Health Sciences

• Uniformed Services Treatment Facilities

• Department of Energy’s Procurement of Laboratory Testing Services

Page 18 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

Option:

Defense

Infrastructure Reform

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

Although the Department of Defense (DOD) has in recent years undergone

substantial downsizing in funding, personnel, and force structure,

commensurate infrastructure support reductions have not been achieved.

For fiscal 1997, DOD estimates that about $152 billion, or 60 percent of the

Defense budget will still be needed for infrastructure requirements which

include installation support, training, medical care, logistics, force

management, acquisition infrastructure, and personnel. Despite progress

in reducing excess infrastructure through the Base Realignment and

Closure (BRAC) rounds, it is generally recognized that much excess

capacity will remain.

Significant budget reductions could be achieved by streamlining the

command structure of the remaining forces; sharing medical facilities and

services; consolidating depots and shipyards; reforming acquisition

processes; consolidating and eliminating research, development, and

training facilities; using simulators for training and exercises; and reducing

dependence on government-owned housing.

Savings for this option cannot be fully estimated until a comprehensive

consolidation and downsizing plan is specified. However, in an April 1996

report, GAO identified some specific options for reducing defense

infrastructure spending.

Related GAO Products Defense Infrastructure (GAO/HR-97-7, February 1997).

Defense Acquisition Infrastructure: Changes in RDT&E Laboratories and

Centers (GAO/NSIAD-96-221BR, September 13, 1996).

Page 19 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

Military Bases: Update on the Status of Bases Closed in 1988, 1991, and

1993 (GAO/NSIAD-96-149, August 6, 1996).

Defense Infrastructure: Costs Projected to Increase Between 1997 and

2001 (GAO/NSIAD-96-174, May 31, 1996).

Military Bases: Opportunities for Savings in Installation Support Costs Are

Being Missed (GAO/NSIAD-96-108, April 23, 1996).

Military Bases: Closure and Realignment Savings are Significant, but Not

Easily Quantified (GAO/NSIAD-96-67, April 8, 1996).

Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little

Savings for Modernization (GAO/NSIAD-96-131, April 4, 1996).

DOD Training: Opportunities To Reduce the Training Infrastructure

(GAO/NSIAD-96-96, March 29, 1996).

Military Bases: Analysis of DOD’s 1995 Process and Recommendations for

Closure and Realignment (GAO/NSIAD-95-133, April 14, 1995).

Defense Infrastructure: Enhancing Performance Through Better Business

Practices (GAO/T-NSIAD/AIMD-95-126, March 23, 1995).

GAO Contact David R. Warren, (202) 512-8412

Page 20 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

Option:

Fiscal Year 1998

Defense Operation

and Maintenance

Budget

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

The military services’ operation and maintenance (O&M) accounts are used

to fund a wide range of military and support activities including training,

purchasing spare and repair parts, and paying civilian personnel.

GAO analysis of selected O&M requests for fiscal year 1997 showed that the

budget for that year could have been reduced by $3.4 billion without

damaging defense operations and capabilities. The largest potential

reductions, each for over $180 million, were associated with improved

inventory management, excess bulk fuel requirements, excess unobligated

funds, storage of unneeded aircraft, O&M pass-throughs to the Defense

Business Operations Fund (DBOF), overstated civilian personnel

requirements, and funds requested for ground operation tempo that are

not needed for training purposes.4

Based on GAO’s analysis regarding potential savings in the fiscal year 1997

O&M budget, the Congress may wish to consider reductions of a similar

magnitude, $3.4 billion, when formulating fiscal year 1998 appropriations

for O&M accounts. It is important for the Congress to be aware that savings

for this option include savings for other options involving the individual

services’ O&M accounts since the problems GAO identified persist. CBO

estimated the following 5-year savings.

4

Specific options related to bulk fuel (see “DOD’s Bulk Fuel Budgeting”), civilian personnel reductions

(see “Budgeted Civilian Personnel Requirements”), and Army spare parts (see “Defense Inventories

Reform”) are contained in this report. Therefore, the projected savings from these specific options

should not be added to the $3.4 billion in potential savings shown here.

Page 21 GAO/OCG-97-2 Addressing the Deficit
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Options for Deficit Reduction

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 3,400 0 0 0 0

Outlays 2,530 677 112 37 17

Source: Congressional Budget Office.

Related GAO Products 1997 DOD Budget: Potential Reductions to Operation and Maintenance

Programs (GAO/NSIAD-96-220, September 18, 1996).

1996 DOD Budget: Potential Reductions to Operation and Maintenance

Programs (GAO/NSIAD-95-200BR, September 26, 1995).

1995 Budget: Potential Reductions to the Operation and Maintenance

Programs (GAO/NSIAD-94-246BR, September 6, 1994).

GAO Contact Mark E. Gebicke, (202) 512-5140

Page 22 GAO/OCG-97-2 Addressing the Deficit
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Options for Deficit Reduction

Option:

Continental Air

Defense

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

The continental air defense mission evolved during the Cold War to detect

and intercept Soviet bombers attacking North America via the North Pole.

The force that carries out that mission is within the North American

Aerospace Defense Command (NORAD), which is a joint U.S. and Canadian

command. As of the beginning of fiscal year 1997, the force consisted of

150 primary aircraft (Air National Guard F-15 and F-16 aircraft in 10

dedicated units which stand alert for NORAD).5

 The Air Force budgeted

about $345 million in fiscal year 1997, to operate and support the

continental air defense force.

The former Soviet Union no longer poses a significant threat of a bomber

attack on the continental United States. Further, internal problems within

Russia and other former Soviet Union countries have extended the time it

would take them to return to previous levels of military readiness and

capabilities. Reflecting these changing realities, the Chairman of the Joint

Chiefs of Staff determined in 1993 that the United States no longer needed

a large, dedicated air defense force and that the dedicated force could be

significantly reduced or eliminated.

Since the threat of a Soviet-style air attack against the United States has

largely disappeared, the air defense force now focuses its activities on air

sovereignty missions. These missions provide surveillance and control of

territorial airspace, including activities such as assisting aircraft in distress

or intercepting aircraft as part of antidrug smuggling efforts. However,

active and reserve general-purpose and training forces could perform this

mission because they (1) have comparable or better aircraft, (2) are

located at or near existing air defense bases, and (3) have pilots who

5

DOD’s 1997 plan reduced the number of dedicated continental air defense Air National Guard aircraft

from 150 to 90.

Page 23 GAO/OCG-97-2 Addressing the Deficit
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Options for Deficit Reduction

possess similar skills or who could acquire the necessary skills used by air

defense and air sovereignty pilots.

Based on our audit work, GAO has concluded that significant savings could

be achieved by dual-tasking the active, reserve, and training forces. If the

dedicated continental air defense force were eliminated, the following

savings could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 153 314 322 331 341

Outlays 126 278 309 322 333

Source: Congressional Budget Office.

Related GAO Product Continental Air Defense: A Dedicated Force Is No Longer Needed

(GAO/NSIAD-94-76, May 3, 1994).

GAO Contact Richard Davis, (202) 512-3504

Page 24 GAO/OCG-97-2 Addressing the Deficit
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Option:

Carrier Battle Group

Expansions and

Upgrades

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Operation and Maintenance, Navy

(17-1804)

Military Personnel, Navy (17-1453)

Procurement-funded Replenishment

Spares (17-1506)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

Aircraft carrier battle groups are the centerpiece of the Navy’s surface

force and significantly influence the size, composition, and cost of the

fleet. The annualized cost to acquire, operate, and support a single Navy

carrier battle group is from $1.7 billion to $2 billion (in fiscal year 1996

dollars) and will continue to increase. The Navy is embarking on several

costly carrier-related programs—procuring another carrier, refueling

existing carriers, and replacing/upgrading combat aircraft.

GAO’s analysis indicates that there are opportunities to use less costly

options to satisfy many of the carrier battle groups’ traditional roles

without unreasonably increasing the risk that U.S. national security would

be threatened. For example, one less costly option would be to rely more

on increasingly capable surface combatants, such as cruisers, destroyers,

or frigates, for overseas presence and crises response. If the Congress

chose to retire one aircraft carrier and one active air wing in 1998, the

following savings could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 350 710 1,170 900 6,580

Outlays 260 580 690 840 1,190

Note: Estimate includes savings from not buying a new carrier in fiscal year 2002.

Source: Congressional Budget Office.

Page 25 GAO/OCG-97-2 Addressing the Deficit
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Related GAO Products Navy’s Aircraft Carrier Program: Investment Strategy Options

(GAO/NSIAD-95-17, January 1, 1995).

Navy Carrier Battle Groups: The Structure and Affordability of the Future

Force (GAO/NSIAD-93-74, February 25, 1993).

GAO Contact Richard Davis, (202) 512-3504

Page 26 GAO/OCG-97-2 Addressing the Deficit
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Option:

Army’s Comanche

Helicopter Program

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Research, Development, Test and

Evaluation, Army (21-2040)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Reassess objectives

The Comanche helicopter is to replace the Vietnam-era scout and attack

helicopters that the Army considers incapable of meeting existing or

future requirements. The Comanche’s overall program cost has grown to

approximately $50 billion, with an estimated program unit cost of about

$39 million. Anticipated cost increases and other unresolved technical

risks indicate that future cost growth is likely. In December 1994, the

Secretary of Defense decided to restructure the Comanche program,

reducing program cost by about $2 billion for fiscal years 1996 through

2001. This action extended the development phase until 2006 and deferred

the production decision until then.

Although light attack missions are part of the Army’s plan for the

Comanche, its lethality is now expected to rival or surpass that of the

Apache—the Army’s premiere attack helicopter. In addition, as the Army

reduces its total helicopter fleet, it plans to modify many that will remain

to increase combat capabilities. For example, the Army is arming its scout

helicopter, the Kiowa, and modifying 227 basic model Apaches with the

Longbow system, which includes a fire control radar with a radar detector

and a Hellfire missile with a radio-frequency seeker. These actions,

collectively, tend to blur the distinction in roles among the Army’s

helicopter fleet.

GAO’s work has pointed to real and probable development cost increases,

uncertain operating and support cost savings, questions about the role of

the Comanche compared to other more affordable Army helicopters, and

deferral of the production decision. If the Congress would elect to

terminate the program, the following savings would be achieved.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 144 384 454 602 650

Outlays 82 268 397 520 607

Source: Congressional Budget Office.

Related GAO Products Comanche Helicopter: Testing Needs To Be Completed Prior to

Production Decisions (GAO/NSIAD-95-112, May 18, 1995).

Army Aviation: Modernization Strategy Needs To Be Reassessed

(GAO/NSIAD-95-9, November 21, 1994).

Comanche Helicopter: Program Needs Reassessment Due To Increased

Unit Cost and Other Factors (GAO/NSIAD-92-204, May 27, 1992).

GAO Contact Louis J. Rodrigues, (202) 512-4841

Page 28 GAO/OCG-97-2 Addressing the Deficit
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Options for Deficit Reduction

Option:

F/A-18e/F Fighter Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Aircraft Procurement, Navy (17-1506)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Reassess objectives

In 1992, the Navy justified the F/A-18E/F Fighter to correct operational

deficiencies that were projected to occur in its F/A-18C/D aircraft. As of

December 1995, the total program cost was projected to be almost 

$81 billion in then year dollars. In its fiscal year 1996/1997 Biennial Budget,

the Navy requested $236.882 million and $306.344 million to cover long

lead requirements for the procurement of 12 F/A-18E/F aircraft in fiscal

year 1997 and 24 aircraft in fiscal year 1998. An F/A-18E/F low rate initial

production (LRIP) milestone decision is scheduled for the first quarter of

calendar year 1997.

In a report issued in June 1996, GAO concluded that the need for the

F/A-18E/F is questionable. Operational deficiencies that in 1992 the Navy

stated existed in the current F/A-18C/D either have not materialized as

projected or can be corrected with nonstructural changes to the

F/A-18C/D. Furthermore, operational improvements that the E/F will have

over the C/D would be marginal.

GAO also reported that DOD’s $43.6 million (in fiscal year 1996 dollars) unit

recurring flyaway cost6

 for the F/A-18E/F is understated because E/F

procurement cost estimates are based on annual (72 aircraft) and total

procurement (1,000 aircraft) levels that are overstated. The Congress has

indicated that an annual production rate of 72 aircraft is not possible in the

current budget environment. Also, total production of 1,000 aircraft is

overstated by 340 aircraft—the number of Marine Corps E/Fs that are

included in the total buy but which the Corps has decided it will not

procure. GAO estimated that lowering the E/F annual production rate to a

more realistic level of 36 aircraft and procuring a total of 660 aircraft

would increase F/A-18E/F unit costs by about $10 million to $53 million in

6

Recurring flyaway costs include costs related to the production of the basic aircraft and do not

include all procurement costs. DOD consistently maintains that these costs are the most appropriate to

compare the costs of different aircraft.

Page 29 GAO/OCG-97-2 Addressing the Deficit
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Options for Deficit Reduction

fiscal year 1996 dollars. This compares to about $29.6 million for the

current F/A-18C/D.

GAO further reported that procuring 660 C/Ds rather than the E/F would

save almost $17 billion (fiscal year 1996 dollars). Savings would be greater

if fewer than 660 C/Ds are needed to maintain Navy tactical aircraft

inventories. Near term savings associated with procuring the C/D rather

than the E/F would be significant. Through fiscal year 2002 the unit

recurring flyaway cost of the E/F averages about $99.6 million (then-year

dollars), or more than three times the $29.6 million unit recurring flyaway

cost of the F/A-18C/D over this same period.

Because continued procurement of the less expensive F/A-18C/D would

provide the Navy a capable tactical aircraft, the Congress may wish to

reconsider the need to procure the F/A-18E/F. CBO estimates that canceling

the program would achieve the following budget savings during the next 5

years.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 1,812 2,116 2,233 1,654 2,410

Outlays 252 932 1,630 1,886 1,943

Source: Congressional Budget Office.

Related GAO Products Navy Aviation: F/A-18E/F Will Provide Marginal Operational Improvement

at High Cost (GAO/NSIAD-96-98, June 18, 1996).

Naval Aviation: F/A-18 E/F Acquisition Strategy (NSIAD-94-194, August 18,

1994).

Naval Aviation: Consider All Alternatives Before Proceeding With the

F/A-E/F (NSIAD-93-144, August 27, 1993).

GAO Contact Louis J. Rodrigues, (202) 512-4841

Page 30 GAO/OCG-97-2 Addressing the Deficit
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Option:

F-22 Fighter Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Aircraft Procurement, Air Force (57-3010)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Reassess objectives

The Air Force’s F-22 program was initiated in 1981 to replace F-15s and to

meet the evolving threat projected for the mid-1990s. Although the

Department of Defense (DOD) procurement plans support achievement of

initial operational capability in 2004, our reports issued in 1993 and 1994

indicated the need to replace F-15s with F-22s was not urgent. Our reports

indicated that potential adversary air forces are expected to include few

fighters that have the capability to challenge the F-15—a U.S. frontline

fighter.

DOD is currently planning to procure a significant number of F-22s before

completing operational tests and evaluations, thereby increasing the cost,

schedule, and performance risks within the system.7

 Initial operational

tests and evaluations, which provide a valid estimate of expected system

operational effectiveness and operational suitability, are not scheduled to

be completed until after the Air Force will have committed to procure 76

aircraft involving an investment of nearly $11 billion. Air Force plans call

for procurement of 4 aircraft a year, increasing to 12, 24, and 36 a year

before initial operational tests and their evaluation are completed. Many

aircraft systems entering production before starting operational testing

have required major modification later, which is often costly.

Using DOD guidelines, F-22 program concurrency is high because the F-22

program is scheduled to proceed into low rate initial production well

before any operational testing starts. Furthermore, the F-22 program

contemplates a higher commitment as a percentage of total production

prior to completion of initial operational testing than most modern fighter

programs.

7

In December 1996, the Air Force announced the results of a review of the program by a joint cost

estimating team. Significant changes to the program, including changes to the procurement plan, are

being considered as a result of that team’s report.

Page 31 GAO/OCG-97-2 Addressing the Deficit
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Since the need for the F-22 is not urgent, the Congress could choose to

restrict production of F-22s to six aircraft in 2000, eight aircraft in 2001,

and eight aircraft in 2002 until initial operational tests and evaluations are

completed in April 2002. Further, maintaining production quantities at

eight or less aircraft per year could defer the purchase of $282 million of

production tooling—$109 million in fiscal year 2000 to increase production

to 12 aircraft per year, $116 million in fiscal year 2001 to increase

production from 12 to 24 aircraft per year, and $57 million in fiscal year

2002 to increase production from 24 to 36 per year.

If the Congress were to restrict funding in this way and restrict

procurement of tooling to limit production to eight aircraft a year, the

following budget savings could be achieved during the next 5 years.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 0 127 1,340 2,608 3,810

Outlays 0 8 114 527 1,332

Source: Congressional Budget Office.

Related GAO Products Combat Air Power: Joint Mission Assessments Needed Before Making

Program and Budget Decisions (GAO/NSIAD-96-177, September 20, 1996).

Tactical Aircraft: Concurrency in Development and Production of F-22

Aircraft Should Be Reduced (GAO/NSIAD-95-59, April 19, 1995).

Weapons Acquisition: Low-Rate Initial Production Used to Buy Weapon

Systems Prematurely (GAO/NSIAD-95-18, November 21, 1994).

Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned

(GAO/NSIAD-94-118, March 25, 1994).

GAO Contact Louis J. Rodrigues, (202) 512-4841

Page 32 GAO/OCG-97-2 Addressing the Deficit
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Option:

Air Force Bomber

Force Requirements

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

Bombers currently in the force, B-2s, B-1Bs, and B-52Hs, were initially

designed and procured by the Department of Defense (DOD) primarily to

meet nuclear war-fighting requirements. Since the end of the Cold War,

DOD has placed increased emphasis on the role of bombers in future

conventional conflicts while reducing the number of bombers significantly

from a total of about 360 in 1989 to a planned retention of 187 bombers

through the early part of the next century.

Senior DOD officials have said that DOD cannot afford all of the services’

stated requirements and difficult decisions must be made on which

investment programs to cancel so that DOD can develop and implement a

long-term, sustainable recapitalization plan. While DOD believes it needs a

level of redundancy to provide commanders in chief with a safety margin

and flexibility, it may not need to upgrade its capabilities to the extent

currently planned. GAO’s analysis shows that DOD has not made a

compelling case to retain and upgrade 187 bombers to support future

war-fighting requirements. While there are a number of ways to reduce

capabilities to strike ground targets, a smaller bomber force may be one

option to reduce overlap that would result in an acceptable loss to DOD’s

overall war-fighting capabilities.

Because DOD’s plans to modernize combat airpower may be prohibitively

expensive, DOD is seeking ways to reduce costs. With this in mind, GAO has

identified three options to reduce or restructure the bomber force that

would achieve cost savings yet enable DOD to retain extensive aggregate

airpower capabilities. The first two options—retiring all or a portion of the

B-1B fleet—would result in a smaller bomber force than DOD currently

plans. Retiring or reducing the B-1B force may result in an acceptable

decrease in DOD’s existing capabilities. The third option—increasing the

number of B-1Bs in the Air National Guard—would not result in a smaller

Page 33 GAO/OCG-97-2 Addressing the Deficit
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Options for Deficit Reduction

force but would achieve some cost savings because reserve units are less

expensive to operate than active units. Options two and three are not

mutually exclusive. The three options and their projected cost savings are

detailed below.

Retire Entire B-1B Force Retiring the entire B-1B force of 95 aircraft would reduce DOD’s aggregate

conventional airpower capabilities somewhat but would yield significant

cost savings. Eliminating the B-1B force would decrease DOD’s inventory of

long-range airpower assets. However, B-2s and B-52Hs would still be

available for missions requiring long-range and large payload capabilities.

Retiring the B-1B force also would have no adverse effect on DOD’s nuclear

mission. The B-1B will no longer have a nuclear mission once B-2s enter

the force.

If the Congress directed DOD to retire the B-1B force, CBO estimates it

would save about $6 billion in budget authority and about $5.2 billion in

budget outlays for fiscal years 1998-2002 as shown in the following table.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 750 1,190 1,220 1,300 1,490

Outlays 430 950 1,130 1,290 1,440

Note: In estimating the cost savings of this option, CBO assumed that the B-1B force would be

retired over a 1-year period beginning immediately, resulting in smaller savings for fiscal year

1998.

Source: Congressional Budget Office.

Retire 27 B-1Bs in

Reconstitution Reserve

The Air Force currently has 27 B-1B aircraft in reconstitution reserve that

lack aircrews and funding for operations. In fiscal year 1997, the Air Force

will begin reducing the number of unfunded reconstitution reserve

aircraft, will establish two new operational B-1B squadrons using the

aircraft that are currently in reconstitution reserve, and will fund

additional aircrews and flying hours. The Air Force has included the cost

of upgrading reconstitution reserve aircraft in the B-1B Conventional

Munitions Upgrade Program estimated to cost $2.4 billion from fiscal years

1996 through 2008.

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If DOD perceives that the risks to retire the entire B-1B fleet outweigh the

savings that could be realized, it could retire 27 reconstitution reserve

B-1Bs and keep 68 B-1Bs in the force, 60 of which would be funded for

combat operations or training. This option would not result in as much

loss in capability as retiring the entire B-1B fleet. If 27 B-1Bs were retired,

DOD would still have numerous other combinations of platforms and

weapons to attack the types of targets that the B-1B is planned to destroy.

Compared to retiring all 95 B-1Bs, this option would provide commanders

in chief with more flexibility in planning air campaigns and basing aircraft

in theater, since B-1Bs would be based farther away from the theater of

operations and would not require refueling during a typical wartime

mission, unless operating from the United States.

Retiring the 27 B-1Bs in reconstitution reserve would save about

$750 million in budget authority for fiscal years 1998-2002. Reconstitution

reserve aircraft place an increased maintenance workload on the squadron

and require the Air Force to authorize and fund four additional

maintenance personnel per reconstitution reserve aircraft. Savings in the

near-term would reflect the immediate termination of these positions.

Savings would increase significantly in fiscal year 2000 because DOD would

not establish two additional operation squadrons and could eliminate the

personnel and flying-hour costs associated with these aircraft. Retiring 27

B-1Bs also would save procurement funds since DOD would upgrade only

68 B-1Bs for the conventional mission instead of 95 B-1Bs.8

 If the Congress

directed DOD to retire the 27 B-1Bs in reconstitution reserve, CBO estimates

the following savings could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 2 4 80 270 390

Outlays 2 4 64 230 350

Source: Congressional Budget Office.

Place 24 Additional B-1Bs

in the Air National Guard

Placing more B-1Bs in the Air National Guard is an option that could

reduce the cost to operate DOD’s bomber force while preserving the

war-fighting capability of DOD’s planned bomber force. By fiscal year 1998,

the Air Force will have 18 B-1Bs assigned to the National Guard and fully

8

According to CBO, savings from forgoing these upgrades would occur after fiscal year 2002.

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trained in the conventional role. B-1Bs will no longer have a nuclear role in

the near future, thus making the transfer of B-1Bs to the Air National

Guard somewhat easier than transferring B-52s to the Air Force Reserve.

Placing 24 more B-1Bs in the Air National Guard would save about

$110 million in budget authority for fiscal years 1998 to 2002. We examined

placing 24 more B-1Bs in the Air National Guard because this would

achieve a 50/50 active/reserve ratio when attrition and backup aircraft are

excluded and the Air Force has placed 50 percent or more of some

refueling and air mobility assets in the reserve component. Transferring

additional B-1Bs to the Air National Guard is not likely to degrade combat

effectiveness or result in loss of war-fighting capability. Air Reserve

combat units generally have readiness similar to active-duty units and are

required to be ready to deploy within the same time as active units based

in the continental United States. A major benefit of transferring bombers

to the reserve component is that reserve units traditionally are less

expensive to operate than active duty counterparts. Air National Guard

B-1B squadrons will require fewer flying hours than active squadrons

because Air National Guard units are able to recruit more experienced

pilots who require less frequent training to maintain their proficiency.

Also, in contrast to active duty units that rely primarily on active military

personnel, Air National Guard units rely heavily on less costly civilians and

part-time Guard personnel.

If the Congress directed DOD to place an additional 24 B-1Bs in the Air

National Guard, CBO estimates cost savings of about $110 million in budget

authority for fiscal years 1998 through 2002 could be achieved as shown in

the table below.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 0 0 10 40 60

Outlays 0 0 9 37 59

Note: One additional Guard unit would be started in fiscal year 2000 and two additional units

would be started in fiscal year 2001.

Source: Congressional Budget Office.

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Related GAO Products Air Force Bombers: Options to Retire or Restructure the Force Would

Reduce Planned Spending (GAO/NSIAD-96-192, September 30, 1996).

Embedded Computers: B-1B Computers Must Be Upgraded to Support

Conventional Requirements (GAO/AIMD-96-28, February 27, 1996).

B-1B Conventional Upgrades (GAO/NSIAD-96-52BR, December 4, 1995).

B-1B Bomber: Evaluation of Air Force Report on B-1B Operational

Readiness Assessment (GAO/NSIAD-95-151, July 18, 1995).

Air Force: Assessment of DOD’s Report on Plan and Capabilities for

Evaluating Heavy Bombers (GAO/NSIAD-94-99, January 10, 1994).

Strategic Bombers: Issues Relating to the B-1B’s Availability and Ability to

Perform Conventional Missions (GAO/NSIAD-94-81, January 10, 1994).

Strategic Bombers: Adding Conventional Capabilities Will Be Complex,

Time-Consuming, and Costly (GAO/NSIAD-93-45, February 5, 1993).

Strategic Bombers: Need to Redefine Requirements for B-1B Defensive

Avionics System (GAO/NSIAD-92-272, July 17, 1992).

Strategic Bombers: Updated Status of the B-1B Recovery Program

(GAO/NSIAD-91-189, May 9, 1991).

Strategic Bombers: Issues Related to the B-1B Aircraft Program

(GAO/T-NSIAD-91-11, March 6, 1991).

GAO Contact Richard Davis, (202) 512-3504

Page 37 GAO/OCG-97-2 Addressing the Deficit
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Option:

Air Force Fighter

Squadrons

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Operation and Maintenance, Air Force

(57-3400)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

The Air Force accounts for its fighter force structure in wing equivalents

that represent 72 aircraft. At the end of the Air Force’s planned drawdown,

the Air Force’s active component F-15 and F-16 communities will make up

about 10 fighter wing equivalents. The Air Force plans to organize these

aircraft in 37 squadrons at 17 bases in the United States and overseas.

Until recently, Air Force fighter wings were predominantly organized in 3

squadrons of 24 aircraft. However, the Air Force has decided to reduce its

squadron size to 18, which consequently reduced its wing size to 54. This

change in unit size increased the number of wings and squadrons to more

than would have been needed had the squadron size stayed at 24.

The Air Force has not demonstrated that it needs additional squadrons. Air

Force officials believe that more squadrons are needed to provide the Air

Force with additional flexibility to respond to numerous potential conflicts

across the globe. Although the Air Force considers smaller fighter

squadrons beneficial, it had not performed any analysis to justify its

decision. Further, according to Air Force officials, Commanders in Chief,

who are responsible for conducting these operations, developed plans

based on the number of aircraft that are needed to execute

missions—regardless of squadron size.

Keeping more squadrons than are needed increases operating costs and

may result in more base infrastructure than the Air Force needs. GAO

developed several notional basing plans that the Air Force could use in

considering how to consolidate its fighter force into fewer squadrons.

Implementing these plans could eliminate not only between two and seven

squadrons, but also a wing and/or fighter base. CBO identified operating

and support cost savings ranging between $38 million and $149 million

Page 38 GAO/OCG-97-2 Addressing the Deficit
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annually (in 1997 dollars).9 Recurring savings resulting from a base closure

are estimated at an additional $40 million annually (in 1997 dollars).

However, these savings would not begin to accrue until 3 to 4 years after

the base closure decision. If the Congress chose to consolidate the Air

Force’s fighter force into fewer squadrons by eliminating seven of them,

the following operating savings could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 75 153 157 161 165

Outlays 71 149 156 160 165

Note: Savings estimates do not include funds associated with the base closure. The savings

could be significant depending on the base selected for closure.

Source: Congressional Budget Office.

Related GAO Product Air Force Aircraft: Consolidating Fighter Squadrons Could Reduce Costs

(GAO/NSIAD-96-82, May 6, 1996).

GAO Contact Richard Davis, (202) 512-3504

9

The CBO savings estimate is based on GAO’s personnel reduction estimates. Based on these

reductions, GAO’s work shows that operating costs savings could range between $25 million and

$115 million annually. Differences between CBO and GAO estimates are attributable to the larger

infrastructure cost savings estimated by CBO and not included in GAO’s estimates.

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Option:

C-17 Strategic Airlift Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Aircraft Procurement, Air Force (57-3010)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Reassess objectives

The C-17 jet transport is being manufactured for the Air Force by

McDonnell Douglas Corporation. The Air Force originally planned to

acquire 210 C-17s; however, as a result of the Major Aircraft Review, that

number was reduced to 120. In 1993, because of ongoing problems with

the C-17 program, the Department of Defense (DOD) explored the

possibility of acquiring a mixed fleet of C-17s and nondevelopmental

commercial transport aircraft, such as Boeing 747-400s. In November 1995,

as a result of an Air Force study which considered a number of possible

mixes of C-17s and non-developmental airlift aircraft and a Defense

Acquisition Board decision, DOD decided that the advantages of a transport

fleet with only C-17s outweighed the cost savings of acquiring a mixed

fleet. Thus, DOD is planning to acquire 120 C-17s to replace the C-141s that

are being retired.

An option not considered by the Defense Acquisition Board, which may

also satisfy airlift requirements, would be to acquire 100 C-17s and no

nondevelopmental airlift aircraft. This option could save over $7 billion in

life cycle costs. Airlift needs could be met with this reduced number of

C-17s if DOD implemented other individual measures, such as increasing,

by a small amount, prepositioning; using training aircraft that were

assumed to be unavailable in the analyses presented to the Defense

Acquisition Board; increasing the use of the Civil Reserve Air Fleet

aircraft, extending slightly the time frame for delivery, or a combination of

these measures.

Because of the potential for cost savings, the Congress may wish to

consider funding only 100 C-17s rather than the 120 that are currently

planned for acquisition. If the Congress chose to fund only 100 C-17s, CBO

estimates that the following budget savings could be achieved.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 0 0 0 240 2,974

Outlays 0 0 0 15 242

Source: Congressional Budget Office.

Related GAO Product Military Airlift: DOD Could Meet Mobility Needs With Fewer C-17s and Save

Billions (GAO/NSIAD-97-38, December 30, 1996).

GAO Contact Louis J. Rodrigues, (202) 512-4841

Page 41 GAO/OCG-97-2 Addressing the Deficit
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Option:

Nuclear Submarine

Force Reductions

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Shipbuilding and Conversion, Navy

(17-1611)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Reassess objectives

Nuclear-powered attack submarines (SSN) are the Navy’s prime

antisubmarine warfare asset. Today, faced with a changed world threat

and a new defense posture, the Navy is reducing the size of its SSN fleet.

The Department of Defense’s (DOD’s) Bottom-Up Review (BUR) determined

that the Navy needed to maintain a force of 45 to 55 SSNs after fiscal year

1999 to meet the requirements of the defense strategy, including both

regional conflicts and peacetime presence operations. There are less

costly alternatives than the approach the Navy has chosen to maintain the

required SSN force structure. As we have reported, these alternative

approaches would save billions of dollars and meet the Navy’s force

structure and threat requirements.

In October 1994, we reported that there were less costly alternatives than

the Navy shipbuilding plan for maintaining DOD’s approved attack

submarine force structure of 45 to 55 submarines. Under two of the three

alternatives, the Navy could maintain a sustained low-rate production, and

under the third, the Navy could defer SSN construction until early in the

next century. The Navy and the Congress subsequently decided not to

defer SSN construction.

This alternative, would build only 25 SSNs through 2014, 6 fewer than the

Navy currently plans. This alternative allows a force structure of close to

55 submarines through 2014, before declining to 45 SSNs in 2020. The

alternative would buy one submarine in each year from 1998 through 2002

and, eventually buy 3 submarines every other year until 25 submarines are

purchased. If the Navy accepted this alternative and bought 6 fewer

submarines than currently planned, the following savings would be

achieved through 2002.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 0 160 240 170 1,730

Outlays 0 10 50 110 220

Note: Estimate includes savings from not buying a new submarine in fiscal year 2002.

Source: Congressional Budget Office.

Related GAO Product Attack Submarines: Alternatives for a More Affordable SSN Force Structure

(GAO/NSIAD-95-16, October 13, 1994).

GAO Contact Richard Davis, (202) 512-3504

Page 43 GAO/OCG-97-2 Addressing the Deficit
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Option:

Major Weapon System

Warranty Law

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Aircraft Procurement, Air Force (57-3010)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

During the 1970s and the 1980s, the Congress was faced with an

acquisition process that delivered weapon systems that often failed to

meet their military missions, were operationally unreliable, and had

defective and poor workmanship and material. As a result, in 1984 the

Congress passed legislation requiring the Department of Defense (DOD) to

obtain warranties on major weapon systems. The warranties were

expected to improve weapon system reliability by providing a mechanism

to hold contractors liable for poor performance. Prior to the warranty law,

DOD was permitted but not required to obtain a warranty.

GAO estimated that the military services spend approximately $271 million

annually obtaining weapon system warranties. GAO found that none of the

warranties reviewed, where claim and price data were available, were

cost-effective. For example, for the warranties reviewed, the government

only collected $5 million after paying $94 million for these weapon system

warranties.

Despite DOD’s efforts to address administrative weaknesses, such as failing

to file all warranty claims or making use of adequate cost-benefit analyses,

DOD continues to have fundamental problems managing the warranty

program. The administrative problems appear to be unintended

consequences of the warranty law. Attempts to administratively correct

the warranty law have not been successful. Because of the potential for

cost savings, the Congress should repeal the warranty law (10 U.S.C.

2403). Savings under this option would depend on the extent the military

departments still obtain warranties for some programs after the law is

repealed, therefore, CBO is unable to provide a savings estimate at this

time.

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Related GAO Product Weapons Acquisition: Warranty Law Should Be Repealed (GAO/NSIAD-96-88,

June 28, 1996).

GAO Contact Louis J. Rodrigues, (202) 512-4841

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Option:

Base Alignment and

Closure Accounts

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Military Construction (Senate)

Military Construction (House)

Primary agency Department of Defense

Account Base Realignment and Closure (97-0103)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

Changing national security needs and the Department of Defense’s (DOD)

recognition that its base structure was larger than required led to a

decision to close numerous bases around the country. Consequently, the

Congress enacted legislation that instituted closures of facilities identified

by the Base Realignment and Closure (BRAC) Commission as part of the

base closure process.

The Congress appropriates BRAC funds on a no year and lump sum basis.

Funds can be used for a variety of purposes including construction, family

housing, and environmental restoration costs associated with base

closures and realignment. Therefore, DOD is provided a tremendous

amount of flexibility to finance BRAC expenditures from the BRAC account.

While DOD budget guidance directs services to request only funds needed

in the appropriation year, large unobligated balances indicate the services

have been requesting more than necessary. Because requirements lack the

specificity of regular DOD requirements, large unobligated balances

represent funds the Congress may wish to rescind. The following savings

represent a rescission of the $148 million.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 148 0 0 0 0

Outlays 46 53 28 15 2

Source: Congressional Budget Office.

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Related GAO Products Military Bases: Potential Reductions to the Fiscal Year 1997 Base Closure

Budget (GAO/NSIAD-96-158, July 15, 1996).

Military Bases: Update on the Status of Bases Closed in 1988, 1991, and

1993 (GAO/NSIAD-96-149, August 6, 1996).

GAO Contact David R. Warren, (202) 512-8412

Page 47 GAO/OCG-97-2 Addressing the Deficit
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Option:

Defense Inventories

Reform

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

Over 100 GAO reports have pointed out Department of Defense (DOD)

inventory management problems and have shown that DOD has

accumulated inventory that greatly exceeds its operational and war

reserve needs. Systemic problems in determining requirements and

inadequate financial accountability and control have contributed to poor

inventory management practices. Traditionally, DOD’s culture has

emphasized overbuying and placed little value on economy and efficiency,

causing unneeded items to pile up in warehouses.

DOD could be more aggressive in implementing private sector practices

that could reduce inventory costs. DOD has implemented, in a limited

manner, certain commercial practices such as direct vendor delivery for

medical and food items. However, these initiatives represent only about

3 percent of the items for which this concept could be used.

Systemic reforms—such as improving the way inventory requirements are

determined, using commercial inventory management practices, and

changing financial management policies and practices—continue to be

needed to achieve further reductions in DOD’s budget requirements. GAO

estimates that, as of September 1995, only about half of DOD’s $69.6 billion

in inventory had to be on hand to support current operations and war

reserves. GAO’s work has shown that several private business have been

able to reduce their on hand inventories by more than 50 percent by

implementing best practices.

Unless DOD takes more aggressive actions, its inventory management

problems will continue into the next century. We have identified four

specific inventory related options the Congress may wish to consider for

DOD budget reduction purposes.

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Use Prime Vendors to

Supply High-Volume

Clothing and Textile Items

DOD spends over a billion dollars for clothing and textile items sold to

military service customers, primarily the services’ 14 recruit induction

centers and over 300 military exchange stores. GAO has reported that while

private sector companies are cutting costs by minimizing inventories, DOD

continues to store redundant levels of clothing and textile inventories

throughout its wholesale and retail system. Much of this inventory is aged;

for about 26 percent of the items, DOD had 10 years of supply on hand. To

maintain these stocks, DOD employs a large operations infrastructure and

thus incurs unnecessary inventory storage and handling costs.

Many private sector firms and some federal agencies with uniformed

employees are relying on prime vendors to manage their clothing

inventories. Prime vendors provide timely and direct delivery between

customers and suppliers, and order additional stock from manufacturers

on short notice, with quick turnaround, to minimize inventory holding

costs and improve customer service. GAO believes that substantial

opportunities exist to reduce DOD annual expenditures on clothing and

textile items by adopting best commercial practices on a wide-scale basis.

For example, the Congress may wish to direct DOD to adopt a primary

vendor program for supplying clothing and textile items to it’s 14 recruit

induction centers. Although CBO believes that initiating such actions would

save money, it was unable to calculate a savings estimate at this time.

Use Innovative

Commercial Practices to

Supply Electronics Items

to Maintenance and Repair

Facilities

The Defense Logistics Agency (DLA) manages over 1 million electronics

items such as resistors, fuses, and switches. It stores this inventory, valued

at over $2 billion, at 28 distribution depots and other storage locations.

This large level of inventory reflects DLA’s practice of buying and storing

electronics supplies to ensure they are available to customers—sometimes

several years in advance of when the supplies are actually needed. The

turnover of DLA’s electronics inventory is slow. In fiscal year 1993, the

wholesale inventory of such items would turn over once every 4 years. In

comparison, private sector suppliers often turn their stock over four times

a year.

Many private sector companies have adopted modern inventory

management practices, including long-term relationships with suppliers,

direct delivery programs, and direct communication channels between

suppliers and end users. With these practices, companies do not store

supplies at intermediate handling and storage locations, as DOD does.

Instead, they arrange for suppliers to deliver inventory items directly to

the end user’s facility at about the time when the items are needed. The

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result is a reduction in inventories and related holding costs as well as

improved customer service.

DLA has initiated several programs to adopt commercial practices for

electronics items, but overall progress is slow and projected results are

limited. Substantial opportunities exist and significant savings would

result if electronics items were managed by adopting best commercial

practices on a wide-scale basis. The Congress may wish to direct DLA to

adopt modern inventory management practices that would result in a

similar 50 percent decrease in electronics items inventory. Although CBO

believes that initiating such actions would save money, it was unable to

calculate a savings estimate at this time.

DOD Spare and Repair

Parts Storage Locations

The Army, Navy, and Air Force store the majority of their general issue

spare and repair parts inventories at a few locations with the remaining

inventory being stored at hundreds of other locations. To illustrate, over

95 percent of the Army’s general issue inventory is stored at 7 major

locations and the remaining 5 percent is stored at 110 other locations. The

Navy stores 81 percent of its inventory at 6 locations and the other

19 percent at 52 locations. The Air Force’s storage pattern is similar to that

of the Army and Navy. It stores 96 percent of its inventory at 6 major

locations and the other 4 percent at 105 locations.

Most of the items stored at other than major locations had small quantities

of onhand inventory. In fact, over 53 percent of the items had onhand

quantities of three or less, while only 25 percent of the items had quantities

of 11 or more. Our analysis also showed that many of the Army items10 had

infrequent issues over the 2-year period ending August, 1996. Over

53 percent of the inventory items at other than major storage locations had

no issues and, an additional 33 percent of the items had less than five

issues during the same 2-year period. The need for many of the items

stored at other than major locations is questionable.

Maintaining inventory that is not needed is expensive and does not

contribute to an effective, efficient, and responsive supply system. Our

analysis showed that $2.7 billion of the inventory was not needed to meet

the services’ current operating and war reserve requirements. CBO agrees

that DOD could save millions of dollars annually in inventory holding costs

by eliminating at other than major locations inventory that is not needed

10Information was not readily available from the Air Force and Navy to determine the number of

inventory issues on an item-by-item basis at each storage location.

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to meet current operating and war reserve requirements. However, CBO

could not provide a savings estimate at this time.

Army Spare and Repair

Parts Budget

The Army budget stratification reports which are used to determine spare

and repair parts budget requests are based on inaccurate data. When an

item’s available inventory is not sufficient to meet the requirements, the

item is considered to be in a shortage position, and the aggregate value of

shortage items is the basis for determining the budget request.

Our review of 258 items with a reported shortage value of $519 million

showed that the shortage position for $211 million of the items was

incorrect. If accurate requirements and inventory data had been used, the

inventory shortage for these items would have been $23 million rather

than the $211 million reported. As a result, the fiscal year 1996 budget

request included $188 million ($211 million minus $23 million) for items

that were not in a shortage position.

Because corrective actions were not taken in time to affect the fiscal year

1997 budget request, we believe the fiscal year 1997 request is also

overstated. Therefore, the Congress may want to reduce the Army’s fiscal

year 1998 spare and repair parts budget request by the $188 million it was

overstated in fiscal year 1996.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 188 0 0 0 0

Outlays 143 35 6 2 1

Source: Congressional Budget Office.

Related GAO Products Defense Inventory Management (GAO/HR-97-5, February 1997).

Defense Inventory: Spare and Repair Parts Inventory Costs Can Be

Reduced (GAO/NSIAD-97-47, January 17, 1997).

1997 DOD Budget: Potential Reductions to Operation and Maintenance

Program (GAO/NSIAD-96-220, September 18, 1996).

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Navy Financial Management: Improved Management of Operating

Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94,

August 16, 1996).

Inventory Management: Adopting Best Practices Could Enhance Navy

Efforts to Achieve Efficiencies and Savings (GAO/NSIAD-96-156, July 12, 1996).

Defense Logistics: Requirement Determinations for Aviation Spare Parts

Need to Be Improved (GAO/NSIAD-96-70, March 19, 1996).

Best Management Practices: Reengineering the Air Force’s Logistics

System Can Yield Substantial Savings (GAO/NSIAD-96-5, February 21, 1996).

Army Inventory: Budget Requests for Spare and Repair Parts Are Not

Reliable (GAO/NSIAD-96-3, December 29, 1995).

Inventory Management: DOD Can Build on Progress in Using Best Practices

to Achieve Substantial Savings (GAO/NSIAD-95-142, August 4, 1995).

Best Practices Methodology: A New Approach for Improving Government

Operations (GAO/NSIAD-95-154, May 25, 1995).

Commercial Practices: DOD Could Reduce Electronics Inventories by Using

Private Sector Techniques (GAO/NSIAD-94-110, June 29, 1994).

Commercial Practices: Leading-Edge Practices Can Help DOD Better

Manage Clothing and Textile Stocks (GAO/NSIAD-94-64, April 13, 1994).

GAO Contacts David R. Warren, (202) 512-8412

Mark E. Gebicke, (202) 512-5140

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Option:

Defense

Transportation

Restructuring

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

In 1993 and again in 1996, we reported that the Department of Defense’s

(DOD) current transportation processes are fragmented, inefficient, and

costly. Beginning in 1949, various studies, commissions, and task forces

have recommended changes in the defense transportation system

organizational structure. In 1987, after the Goldwater-Nichols Act of 1986

urged that actions be taken to unify transportation management, the

Secretary of Defense established the U.S. Transportation Command

(USTRANSCOM). USTRANSCOM’s own study shows that little has changed since

it was created and charged with responsibility for unifying DOD’s

transportation infrastructure.

Our work shows that opportunities exist to reduce defense transportation

infrastructure and improve efficiency of cargo traffic management

operations. For example, combining common-user traffic management

functions and positions under the direct command and control of a single

manager, USTRANSCOM, would reduce overhead and eliminate duplicative

functions. Moreover, nearly all defense surface cargo moves by

commercial carriers during peacetime and noncontingency operations.

More outsourcing of the traffic management functions related to

shipments by commercial carriers is possible and would further reduce

transportation costs.

Overall, fixing the organizational structure is a mandatory first step to

substantially reduce transportation costs. One logical way, though not the

only one, as related to surface traffic management functions, would be to

(1) place the Defense Business Operations Fund-Transportation staff of

the Navy’s Military Sealift Command staff worldwide together with the

staff of the Army’s Military Traffic Management Command (MTMC), thereby

eliminating duplicative staff and overlapping layers of management,

(2) consolidate or eliminate the resulting continental United States area

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command offices thereby eliminating duplicate staff functions,

(3) consolidate or eliminate the resulting overseas area offices, and

(4) consolidate or eliminate the resulting port command and area offices.

Although MTMC, because of the recommendations of the 1995 Defense Base

Closure and Realignment Commission to close the Military Ocean

Terminal at Bayonne, New Jersey, and California’s Oakland Army Base,

has announced plans to consolidate the continental United States area

command staff in a new location, opportunities still exist to reduce

infrastructure and improve efficiency of traffic management operations. If

the Congress chose to restructure the organization as noted, the following

civilian personnel savings could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 16 33 51 70 73

Outlays 16 32 50 69 73

Source: Congressional Budget Office.

Related GAO Products Defense Transportation: Reengineering the DOD Personal Property

Program (GAO/NSIAD-97-49, November 27, 1996).

Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little

Savings for Modernization (GAO/NSIAD-96-131, April 4, 1996).

Defense Transportation: Streamlining of the U.S. Transportation

Command Organization Is Needed (GAO/NSIAD-96-60, February 22, 1996).

Defense Transportation: Commercial Practices Offer Improvement

Opportunities (GAO/NSIAD-94-26, November 26, 1993).

GAO Contact David R. Warren, (202) 512-8412

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Option:

Depot Maintenance

Program Excess

Capacity

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

The Department of Defense’s (DOD) annual $15 billion depot maintenance

program provides for the repair and overhaul of military parts, weapon

systems, and equipment. This work is accomplished by commercial

contractors as well as by DOD employees in large industrial depots

maintained by the military departments.

Factors such as threat changes, new war-fighting plans, force structure

reductions, and increased reliability and maintainability of many military

systems have significantly reduced depot maintenance requirements over

the past few years. Faced with substantial excess depot capacity and high

infrastructure costs, DOD has been struggling to implement initiatives to

more cost effectively (1) utilize existing maintenance resources at depots

and operational units, (2) reduce excess depot maintenance infrastructure,

largely by closing depots as a part of the base closure and realignment

process, and (3) reallocate workload from closing depots. At the same

time, DOD has embarked on the implementation of a depot maintenance

strategy that will privatize much of the depot maintenance workload

without determining whether privatizing specific depot workloads will

result in savings.

In previous reports and as a part of our ongoing review of DOD depot

maintenance operations and management, GAO has identified the following

shortcomings in these initiatives and has highlighted other actions that

could be taken to improve the cost-effectiveness of the DOD depot

maintenance program.

First, DOD has not been successful in achieving an optimal balance

between maintenance work performed at operational units and at depots.

Cost-benefit evaluations of competing alternatives that consider

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infrastructure, personnel, material, transportation, and equipment

tradeoffs could result in significant savings.

Second, the services continue to rely largely on their own service depots

rather than maximizing interservicing opportunities by consolidating

similar maintenance operations at a single location. On many occasions,

we have pointed out that this approach leads to unnecessary duplication

of resources. A greater use of cross-servicing could eliminate costly

redundancies and excess capacity.

Third, DOD plans to privatize-in-place depot maintenance activities without

evaluating other alternatives such as public-private competitions or

interservicing. Such privatization-in-place initiatives will do little to resolve

the extensive excess capacity problem that currently exists in both public

and private sector industrial facilities and may not be the most

cost-effective solution. An option that could result in substantial savings

would be to reallocate core workload to remaining military depots when

determined to be more cost-effective and use competitive procedures to

include public and private entities to determine the source-of-repair for

noncore workload.

Fourth, DOD is reluctant to use competitions between the public and

private sector to ensure that the privatization of maintenance workloads

will result in savings. While there are opportunities to achieve cost savings

by privatizing depot maintenance workloads which have commercial

counterparts and where there is a substantial private sector competitive

market, it is less likely the private sector will be more cost-effective in an

uncompetitive environment. A greater reliance on public-private

competitions as a means of depot maintenance workload reallocations

could produce significant savings.

Fifth, while the four previous base realignment and closure (BRAC) rounds

have resulted in the identification of four naval shipyards, three naval

aviation depots and two warfare centers, three Air Force depots, and five

Army depots for closure or realignment, significant excess capacity will

remain in the public depot system, particularly if DOD proceeds with its

privatization-in-place plans. Additional closures and/or realignments could

reduce costly excess capacity and produce significant savings.

Sixth, we have reported that reengineering the processes and procedures

for organic workloads that have been subjected to competition resulted in

significant efficiency gains and productivity improvements. Similar

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reengineering initiatives for other organic workloads should also result in

significant savings.

One option the Congress may wish to consider is to direct DOD, prior to

privatizing any depot workloads at depots identified by the BRAC for

closure or realignment, to complete cost analyses that consider the

savings potential of consolidating those BRAC-identified depot maintenance

workloads at other DOD depots. Such analyses should include determining

savings that can be achieved for existing workloads by reducing overhead

rates through more efficient capacity utilization of fixed overhead at

underused military depots. The magnitude of savings would depend on the

resulting structure and size of the depot maintenance system and

workload split between the private and public sectors. CBO agrees that

savings would occur but were unable to provide a savings estimate at this

time.

Related GAO Products Defense Infrastructure (GAO/HR-97-7, February 1997).

Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly

While Excess Capacity Exists (GAO/NSIAD-97-13, December 31, 1996).

Depot Maintenance: Opportunities to Privatize Repair of Military Engines

(GAO/NSIAD-96-33, March 5, 1996).

Closing Maintenance Depots: Savings, Workload and Redistribution Issues

(GAO/NSIAD-96-29, March 4, 1996).

Navy Maintenance: Assessment of the Public-Private Competition Program

for Aviation Maintenance (GAO/NSIAD-96-30, January 22, 1996).

Depot Maintenance: The Navy’s Decision To Stop F/A-18 Repairs at Ogden

Air Logistics Center (GAO/NSIAD-96-31, December 15, 1995).

Military Bases: Analysis of DOD’s 1995 Process and Recommendations for

Closure and Realignment (GAO/NSIAD-95-133, April 14, 1995).

Aerospace Guidance and Metrology Center: Cost Growth and Other

Factors Affect Closure and Privatization (GAO/NSIAD-95-60, December 9,

1994).

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Correspondence to the Chairman, Subcommittee on Readiness, Senate

Committee on Armed Services, follow-up to April 12, 1994, Depot

Maintenance Testimony (GAO/NSIAD-94-242R, July 28, 1994).

Navy Maintenance: Assessment of the Public and Private Shipyard

Competition Program (GAO/NSIAD-94-184, May 25, 1994).

Depot Maintenance: Issues in Allocating Workload Between the Public and

Private Sectors (GAO/T-NSIAD-94-161, April 12, 1994).

Depot Maintenance: Issues in Management and Restructuring To Support a

Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993).

GAO Contact David R. Warren, (202) 512-8412

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Option:

Military Exchange

Stores Consolidation

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

GAO reviewed the morale, welfare, and recreation (MWR) program—a

$12 billion dollar enterprise that provides service members, their

dependents, and eligible civilians with an affordable source of goods and

services like those available to civilians—and found that revenue

generated by the MWR activities is likely to decrease in the 1990’s because

of the downsizing of forces and increasing private sector competition.

Appropriated funds—which now constitute 10 percent of MWR

funding—are also expected to decline as overall budgets decline.

Exchange stores are the largest producer of MWR revenue. The Department

of Defense’s (DOD) decentralized approach to managing the MWR program

will not work well in this environment. Since 1968, studies by GAO, DOD,

and others have recommended the consolidation of exchanges into a

single entity. Each study predicted financial benefits could be achieved

through consolidation. While the Army and Air Force exchanges have been

consolidated, the Navy and Marine Corps retain independent exchanges.

Further consolidations could achieve additional savings. For example,

consolidating the Navy and Marine Corps exchange systems with the Air

Force/Army exchange system would eliminate entire headquarters

operations and the corresponding overhead costs. The Congress may wish

to direct DOD to consolidate the Navy and Marine Corps exchange systems

with the existing Air Force/Army exchange system. CBO estimated that the

following 5-year savings might be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 40 60 60 60 60

Outlays 30 50 60 60 60

Source: Congressional Budget Office.

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Related GAO Product Morale, Welfare, and Recreation: Declining Funds Require DOD to Take

Action (GAO/NSIAD-94-120, February 28, 1994).

GAO Contact David R. Warren, (202) 512-8412

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Option:

Budgeted Civilian

Personnel

Requirements

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

The services determined their civilian personnel requirements for fiscal

year 1997 based on the estimated end-strength for fiscal year 1996 adjusted

for program changes that are expected to occur during fiscal year 1997.

Once the beginning and ending strength for the budget year are

determined, the services compute the estimated work years and multiply

the result by the average civilian personnel salary cost.11 If fiscal year 1996

actual end strength was less than budgeted, the beginning point for

determining the fiscal year 1997 requirement was overstated.

Based on the actual number of civilian personnel on board as of April 1996

for the Navy and other DOD agencies and as of May 1996 for the Army and

Air Force, we estimated that the actual end strength at the end of fiscal

year 1996—the beginning figure for fiscal year 1997—would be 7,33112 less

than the figure used by the services for determining their fiscal year 1997

budget request. Because the services used a larger beginning figure, the

number of work years used in the budget request is also overstated by

3,665 work years ($185.5 million). In addition, our comparison of the

civilian personnel requirements shown in the President’s Budget to the

justification documents prepared in support of the budget request showed

that the budget request was overstated $60 million. Thus, the total

overstated personnel requirements equate to about $245.5 million.

In view of the overstated personnel requirements, the Congress may want

to reduce the services’ fiscal year 1998 budget requests for civilian

personnel by the amounts of the overstatements; the Army’s by

$33.3 million, the Navy’s by $108.3 million, the Air Force’s by $70 million,

and other DOD agencies by $33.9 million.

11The average salary cost includes an estimate of funds needed for severance pay and separation

incentives purposes as well as for compensation.

12This equates to 3,665 work years.

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CBO agrees that the differences in proposed versus actual reductions in

personnel creates windfall surpluses in personnel accounts during a single

budget year. More accurate reporting and subsequent tightening of the O&M

budget may produce savings; however, CBO is unable to estimate a

five-year cost savings for this option.

Related GAO Product 1997 DOD Budget: Potential Reductions to Operation and Maintenance

Program (GAO/NSIAD-96-220, September 18, 1996).

GAO Contact Mark E. Gebicke, (202) 512-5140

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Option:

Convert Some

Support Officer

Positions to Civilian

Status

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

Commissioned military officers are required to provide leadership and

command military organizations. The services use officers in such

warfighting positions as infantry commander and fighter pilot and such

support positions as civil engineer, personnel officer, and veterinarian.

Thousands of officers are staffing positions that could be converted to

civilian status without reducing operational forces. GAO evaluated about

32,000 officer positions in the Army, Air Force, and Navy (about 30 percent

of all officers in support positions), and found that about 9,500 are

performing work that could be performed by civilians at lower cost.

Independently, the Army identified about 6,100 officer and enlisted

positions that it believes could be converted to civilian status and the Air

Force found between about 15,200 and about 25,400 officer positions that

it believes could be converted.

Savings can only be obtained if the military position is deleted from end

strength. Also, the savings are partially offset by the need to staff

converted positions with civilian personnel, but GAO found that civilians of

roughly equal grade are less expensive than corresponding military

personnel. GAO did not evaluate the potential to use contractors rather

than federal civilians in converted positions although using contractors

might produce greater savings.

DOD is in the midst of an extensive drawdown of civilian personnel.

Military to civilian conversions, however, do not necessarily conflict with

plans to reduce the size of government. For example, DOD currently plans

to reduce civilian endstrength by 26 percent between fiscal year 1993 and

2001. If DOD reduced civilian endstrength by about 25 percent (rather than

26 percent), it would have enough civilian authorizations to replace the

9,500 officer positions.

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If the Congress directed the Department of Defense to civilianize, at a

minimum, the 9,500 officer support positions identified by GAO and then

maintain the grade structure that existed prior to conversion, the following

budget savings could be achieved. These savings assume that the

commissioned military officer positions are deleted from DOD’s force.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 97 100 103 106 110

Outlays 95 100 103 106 110

Source: Congressional Budget Office.

Related GAO Product DOD Force Mix Issues: Converting Some Support Officer Positions to

Civilian Status Could Save Money (GAO/NSIAD-97-15, October 23, 1996).

GAO Contact Mark E. Gebicke, (202) 512-5140

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Option:

Attrition of Enlisted

Personnel From the

Military Services

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

For at least the last decade, about one-third of enlistees in the military

services have failed to complete their first tours of duty. A large

percentage of this attrition occurs in the first 6 months of enlistees’ first

terms, before they have reported to their first duty stations. For example,

more than 25,000 of the 176,000 recruits who were enlisted in fiscal year

1994 were separated before they had completed 6 months of service. In

fiscal year 1994, the services’ enlisted attrition rates at the 6-month point

were as follows: 15.7 percent for the Army, 15.7 for the Navy, 12.5 for the

Marine Corps, and 11.6 for the Air Force.

Thousands of recruits are separated in their first 6 months of service

because the services do not adequately screen applicants for disqualifying

medical conditions or for preservice drug use. One reason that this

screening is inadequate is that recruiters do not have sufficient incentives

to ensure that their recruits are qualified. Thousands of recruits also are

separated who fail to meet minimum performance criteria. Recruits have

problems meeting performance standards because they are not physically

prepared for basic training and because they lack motivation. At present,

DOD lacks consistent and complete information on the percentage of

attrition that is unnecessary. DOD’s primary database for managing attrition

does not allow it to adequately determine the reasons that enlisted recruits

separate and set appropriate targets for reducing attrition.

In our recently issued report, to reduce the attrition of enlisted personnel

during the first 6 months of their terms of enlistment and ensure that only

qualified personnel are enlisted, we recommended that the Secretary of

Defense direct the services to

• strengthen their recruiter incentive programs to encourage recruiters to

thoroughly prescreen potential recruits with medical histories;

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• link recruiting quotas to recruits’ successful completion of basic training;

• require potential recruits to provide the names of their medical insurers

and providers and allow the services access to past medical information;

• revise their forms for collecting information from recruits; and

• use a newly proposed DOD database of medical diagnostic codes to

determine whether medical screening tests should be added to

preenlistment examinations.

The recommendations, if implemented would help the services meet their

goals to reduce attrition in the first 6 months.

All the services agree that reducing early attrition is desirable. To this end,

three services have attrition-reducing targets ranging from 4 to 10 percent.

If the services reach their goals, they would realize immediate short-term

annual savings because they would be transporting, feeding, clothing, and

paying fewer recruits. We estimated short-term annual savings would

range from around $5 million to $12 million. Even greater dollar savings

could be realized over time as the services began to reduce the

infrastructure associated with recruiting and training enlistees. We

estimated the services possible long-term infrastructure savings could

range from $15 million to $39 million. However, these long-term savings

probably would not be proportional to the decrease in attrition.13

CBO could not provide a 5-year cost savings that might occur if DOD

reduced enlisted attrition by at least 4 percent because of limitations with

DOD’s and the services’ attrition data. However, CBO was able to calculate

an estimated cost savings that might result if DOD and the services reduced

those attritions that result from inadequate medical screenings designed to

identify pre-existing conditions. Those estimated cost savings are shown in

the table below.

13GAO’s short-term cost savings are based on cost data provided by the Navy and includes the cost to

transport a recruit to basic training; pay, feed, and house the recruit while at basic training; provide the

recruit’s medical examination while at basic training; and transport the recruit home after separation.

Long-term cost savings are based on cost data provided by the Office of the Secretary of Defense and

includes the cost of recruiting and training each new recruit up to the 6-month point in their first

terms.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 5 5 5 6 6

Outlays 5 5 5 6 6

Source: Congressional Budget Office.

Related GAO Product Military Attrition: DOD Could Save Millions by Better Screening Enlisted

Personnel (GAO/NSIAD-97-39, January 6, 1997).

GAO Contact Mark E. Gebicke, (202) 512-5140

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Option:

Army National Guard

Divisions

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

In March 1996, we reported that the Army National Guard’s combat

structure, with 42 combat brigades, exceeds projected requirements for

two major regional conflicts, according to war planners and Department of

Defense (DOD) and Army studies. Although the National Guard has state

missions in addition to its federal role, RAND studied the use of Guard

forces for state missions and concluded that even in a peak year, such

missions would not require a large portion of the Guard and therefore

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

In our report, we noted that the Army has a shortage of support troops for

a two regional conflict strategy and was studying alternatives to redesign

the Guard’s combat structure to meet critical shortages that the Army

identified in its support capabilities. We recommended that the Secretary

of Defense validate the size and structure of all the Guard’s combat forces

and that the Secretary of the Army prepare and execute a plan to bring the

size and structure in line with validated requirements. We further

recommended that the Secretary of Defense consider eliminating Guard

forces that exceed validated requirements. DOD’s Commission on Roles

and Missions had similar recommendations in their report.

In January 1997, we reported on the study to redesign the Guard’s combat

structure. We stated that the study developed an option that provides for

the conversion of some Guard combat and supporting forces to fill

needed, but unresourced, support requirements. However, neither this

study nor other studies deal with the critical issues of validating the need

for the remaining Guard combat structure or eliminating any excess

forces. As a result, substantial Guard combat structure is left in place that

has no valid war fighting missions. We recommended that the Secretary of

Defense, as he guides the Quadrennial Defense Review, direct that the

Review process validate any requirement for Guard combat structure. We

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further recommended that once this validation is complete, the Secretary

of Defense, in concert with the Secretary of the Army, eliminate any

structure beyond validated requirements.

If the validation process determines that there is structure beyond

validated needs, savings could be achieved by eliminating those excess

forces. For example, the following savings could be achieved, if the

equivalent of one division were eliminated from the force structure.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 117 240 245 252 259

Outlays 105 225 242 248 255

Note: For estimating purposes, CBO used the cost of an armored division. Since the Army has

identified a shortage in its support forces, this option would retain all support personnel indirectly

associated with the eliminated division. The elimination of each additional division would yield

more or less savings, depending on the type of division eliminated.

Source: Congressional Budget Office.

Related GAO Products Army National Guard: Planned Conversions Are A Positive Step, but

Unvalidated Combat Forces Remain (GAO/NSIAD-97-55BR, January 29, 1997).

Army National Guard: Validate Requirements for Combat Forces and Size

Those Forces Accordingly (GAO/NSIAD-96-63, March 14, 1996).

GAO Contact Richard Davis, (202) 512-4032

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Option:

Junior Reserve

Officers’ Training

Corps

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Operation and Maintenance—Army, Navy,

Marine Corps, and Air Force

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Reassess objectives

The National Defense Act of 1916 established the Junior Reserve Officers’

Training Corps (JROTC) program for high schools and private secondary

schools. The program’s primary purpose was to disseminate military

knowledge among the secondary school population of the United States.

The ROTC Vitalization Act of 1964 expanded the program and required the

Secretary of each military department to establish and maintain JROTC

units. In the wake of the August 1992 Los Angeles riots, the President and

the Chairman of the Joint Chiefs of Staff made plans to double the size of

the program within 5 years.

The Army, Navy, Marine Corps, and Air Force Operation and Maintenance

(O&M) budget requests for fiscal year 1997 included $135.3 million for the

JROTC program. This program was in place in over 2,300 high schools in

economically disadvantaged areas, affluent areas, private schools, and

Department of Defense (DOD) dependent schools at the time of our review

in 1996. The program objectives are to teach military and citizenship

subjects. The JROTC program is essentially a “stay in school” program. In

addition, the Army runs a summer camp and O&M funds are used to help

pay instructors’ salaries. Service officials emphasized that JROTC is not

viewed as a recruiting tool.

In our September 1995 report we stated that while the program may

provide worthwhile benefits to the community and the public in general,

the question is whether DOD should be involved in funding this type

program or if the program should be funded by a non-DOD appropriation

account. Congress may wish to discontinue or phase out the program. If

the program was eliminated, the following savings could be achieved.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 170 170 180 180 190

Outlays 130 160 170 180 180

Source: Congressional Budget Office.

Related GAO Product 1996 DOD Budget: Potential Reduction to Operation and Maintenance

Program (GAO/NSIAD-95-200BR, September 26, 1995).

GAO Contact Mark E. Gebicke, (202) 512-5140

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Option:

DOD’s Acquisition

Workforce

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

In November 1995, GAO reported that the Department of Defense (DOD) had

a combined acquisition workforce of about 464,000—398,000 civilians and

66,000 military personnel in fiscal year 1994. The DOD acquisition

infrastructure consumes enormous resources that could otherwise be

utilized to meet modernization needs. In 1994, DOD’s civilian acquisition

workforce was 12 percent lower than in 1980; however, these personnel

reductions have not resulted in a commensurate decline in civilian payroll

costs. This is due in part to the significant decline in blue-collar workers

and an increase in white-collar workers. In addition, DOD officials stated

that civilian payroll costs increased because of other factors, such as the

advent of locality pay and changes in grade structure.

Despite declines in both the defense procurement budget and the civilian

workforce since 1990, the number of acquisition organizations remains

relatively constant. Each acquisition organization maintains similar

occupational fields in common areas, such as personnel, budgeting,

computer specialists, and contracting, and many of the duties performed

in these occupations are not unique to an acquisition organization’s

mission. As a result, there are significant opportunities to improve

efficiencies in these areas, such as consolidating, cross-servicing, and

streamlining certain functions.

The National Defense Authorization Act for Fiscal Year 1996 contains a

provision (Title IX, section 906) that required DOD to provide a plan to

reduce the number of personnel (both military and civilian) assigned to

defense organizations by 25 percent, or 90,000 personnel over a 4-year

period. The provision also required an actual reduction of 15,000

personnel during fiscal year 1996. In addition, the Defense Authorization

Act for 1997 reemphasized congressional commitment to realizing

significant reductions and increased efficiencies from the defense

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acquisition infrastructure. Although the 1997 Act requires a specific

reduction of 15,000 in the number of personnel assigned to defense

acquisition organizations during fiscal year 1997, it also directs DOD to

assess the impact of the reductions prior to consideration of further cuts.

Stopping at the 30,000 person reduction level would amount to only

one-third of the total 25-percent reduction required by Title-IX, section

906.

The savings from a 90,000 person reduction in civilian personnel salaries

alone are estimated in the following table.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 805 1,657 2,556 3,513 3,636

Outlays 781 1,631 2,529 3,485 3,633

Source: Congressional Budget Office.

Related GAO Products Defense Acquisition Organizations: Changes in Cost and Size of Civilian

Workforce (GAO/NSIAD-96-46, November 13, 1995).

Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little

Savings for Modernization (GAO/NSIAD-96-131, April 4, 1996).

GAO Contact Louis J. Rodrigues, (202) 512-4841

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Option:

DOD’s Finance and

Accounting

Infrastructure

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

After several false starts, in May 1994 the Department of Defense (DOD)

announced it would begin consolidating and reducing the size of its

finance and accounting infrastructure during fiscal year 1995. It plans to

reduce the number of sites where finance and accounting activities are

conducted from over 300 to 26, which will result in a major reduction in

staff years. The 26 sites are composed of 5 large existing finance centers

and 21 new sites that are called operating locations. To date, 16 operating

locations have been opened.

Despite these consolidation efforts, additional opportunities exist to

reduce the infrastructure and improve the efficiency of finance and

accounting operations. In September 1995, we reported that the process

DOD used to identify the appropriate size and location of its consolidated

operations was flawed. Not only would the planned infrastructure be

larger than necessary, but it would also perpetuate the continued use of

older, inefficient, and duplicative systems. With fewer people available to

support the same operations and systems at fewer locations, the

consolidation could degrade, rather than improve, customer service.

Moreover, DOD’s plan does not reflect leading-edge business practices and,

therefore, may require additional consolidations if business process

reengineering techniques are used to identify more productive business

practices for DOD finance and accounting operations.

Because DOD’s decision to open 21 new operating locations was not based

on current or future operating requirements, customer needs, or

leading-edge business practices, other consolidation alternatives could

produce substantial infrastructure savings. The Defense Finance and

Accounting Service (DFAS) Consolidation Task Force showed that savings

could occur by retaining the 5 large centers plus 6, 10, or 15 operating

locations. The Task Force concluded, however, that 6 new operating

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locations was the best alternative because it would save more money and

allow an optimum consolidation of finance and accounting functions.

Based on this and other factors, we recommended that DOD reassess the

number of operating locations needed to efficiently perform finance and

accounting operations.

DOD’s subsequent reassessment concluded that 16 rather than 21 operating

locations are needed to support its finance and accounting operations.

Because of its interpretation of congressional intent, however, DOD

continues to support the opening of all 21 locations. In presenting this

option, we relied on the analysis performed by the DFAS Consolidation

Task Force which identified 6 as the optimum number of operating

locations.

Recognizing the costs DOD has incurred to open 16 centers, reducing the

number of operating locations from 16 to 6 could achieve savings in

several different ways. First, a reduction in the infrastructure would

require fewer support and management personnel and related items to

operate the locations. Second, military construction funding for sites that

would require extensive renovations would not be necessary. Third, in

anticipation of the efficiencies and service improvements that would be

achieved under DOD’s reengineering and privatization efforts, annual

funding could be reduced 10 to 15 percent. If the Congress was to direct

the Secretary of Defense to reduce the existing 16 locations to 6, as

recommended by the DFAS Consolidation Task Force, the following savings

could be achieved in civilian personnel and military construction. This

represents the optimum consolidation of locations according to the DFAS

Consolidation Task Force. The savings estimate assumes that by reducing

the number of sites to six, 6,500 civilian personnel positions would be

eliminated. This magnitude of personnel reductions can only be attained if

DOD achieves the productivity gains it expects from reengineering and

privatization/outsourcing initiatives. However, the Congress and DOD will

need to reach an agreement on the exact number of operating locations

and reductions in personnel. Moreover, DOD may need to make

investments in this area to improve its financial management systems.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from 1997 Defense Plan

Budget authority 174 299 369 382 395

Outlays 171 295 367 381 395

Source: Congressional Budget Office.

Related GAO Product Defense Financial Management (GAO/HR-97-3, February 1997).

DOD Infrastructure: DOD’s Planned Finance and Accounting Structure Is Not

Well Justified (GAO/NSIAD-95-127, September 18, 1995).

GAO Contact David R. Warren, (202) 512-8412

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Option:

DOD’s Training

Infrastructure

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

Analysis of the Department of Defense’s (DOD) end strengths, training

workloads, and overall training budgets between fiscal years 1987 and

1995 showed that end strengths and training workloads have decreased at

much greater rates than the training budget. Between fiscal years 1987 and

1995, the number of Army, Navy, Marine Corps, and Air Force active duty

personnel decreased from about 2.2 million to about 1.5 million—a

reduction of about 30 percent. During the same period, the training

workloads for formal training and education programs decreased from

about 248,000 to about 178,000—a reduction of about 28 percent.

However, military personnel funding, which is used to pay military

students, instructors, and training support and management personnel,

decreased by only about 15 percent, and operation and maintenance (O&M)

funding, which is used to pay DOD civilian and contractor instructors and

to operate, maintain, and support training facilities and equipment,

increased about 30 percent.

The cost of providing formal military training and education to individuals

increased significantly between fiscal years 1987 and 1995. During this

period, the training cost per student increased from about $53,194 to

$72,546. (After considering the effects of inflation, the cost per student

increased about $4,200 a year.) This cost differential when multiplied by

the fiscal year 1995 training workload shows that it cost about $745 million

more to train students in fiscal year 1995 than it would have taken to train

the same number of students in 1987, even after accounting for inflation.

Officials told us that the primary reason that training had become more

expensive was the increased use of government civilian and private-sector

instructors and facilities rather than military instructors.

DOD and the services have completed several actions to reduce the training

infrastructure, and even more actions will be implemented over the next

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several years. The actions are intended to (1) reduce the number of

locations where a particular course is taught, (2) increase interservice

training, and (3) increase the use of private sector instructors and

facilities. Also, actions by the Base Realignment and Closure (BRAC)

Commission to close and realign bases where training is conducted are

also expected to reduce the training infrastructure. However, an overall

plan to guide and measure the progress of reducing the training

infrastructure is lacking.

The lack of a management information system with reliable cost data

within the various training categories makes it difficult for DOD to evaluate

the overall effectiveness of alternate methods of providing training and

assess whether actions taken to reduce costs are achieving the expected

results. The need for reliable data and a system for evaluating it has

become even more critical because excess training infrastructure

identified in the future will be difficult to eliminate in the absence of a

BRAC-like process.

In view of the disparity between training workload and training costs,

Congress may want to cap the funding level for O&M-related formal

education and training at the fiscal year 1997 level until DOD develops a

management plan to guide and measure progress in reducing the training

infrastructure.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 144 300 461 635 818

Outlays 130 281 441 615 797

Note: The savings shown in the above table represent the amounts estimated for O&M-related

formal education and training above the fiscal year 1997 funding level.

Source: Congressional Budget Office.

Related GAO Product DOD Training: Opportunities Exist to Reduce the Training Infrastructure

(GAO/NSIAD-96-93, March 29, 1996).

GAO Contact Mark E. Gebicke, (202) 512-5140

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Option:

DOD’s Transportation

Migration Systems

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Reassess objectives

In April 1994, DOD developed a structured approach to identify, select, and

implement transportation migration systems.14 However, in its haste to

meet a March 1997 deadline, DOD selected these systems without fully

analyzing alternatives, such as acquiring new systems or contracting for

services. Further, in making a quarter of its transportation migration

system selections, DOD relied on incomplete and unverified cost data.

Finally, DOD did not assess how making significant changes to

transportation operations—through reengineering and outsourcing—will

affect its migration systems. By relying on such inadequate analyses in

making its system selections, DOD essentially gambled that systems

migration would achieve anticipated savings and resolve problems with

transportation business processes. As a result, its selections may turn out

to be poor investments and preclude the use of better commercial

alternatives.

DOD has little assurance that its selection of 28 transportation migration

systems is cost effective. At a minimum, had DOD followed its own

regulations and calculated investment returns, it would have

found—based on data available when the migration systems were

selected—that two of the selected systems would produce a negative

return if implemented as migration systems. The Air Loading Module

would lose 67 cents out of every dollar invested and the Cargo Movement

Operations Systems would lose 4 cents out of every dollar invested.

Before proceeding with its systems migration effort, DOD should

immediately establish current cost, benefit, investment return, and

schedule baselines and terminate the migration of transportation systems

for which migration is shown to be a poor investment. For example, if the

14A migration system is an automated information system which replaces several systems that perform

similar functions.

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Air Loading Module and the Cargo Movement Operations Systems were

not deployed as migration systems, the following savings could be

achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 3 0 0 0 0

Outlays 2 1 0 0 0

Source: Congressional Budget Office.

Related GAO Products Defense IRM: Strategy Needed for Logistics Information Technology

Improvement Efforts (GAO/AIMD-97-6, November 14, 1996).

Defense Transportation: Migration Systems Selected Without Adequate

Analysis (GAO/AIMD-96-81, August 29, 1996).

GAO Contact Jack L. Brock, Jr., (202) 512-6240

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Option:

DOD’s Materiel

Management

Migration Systems

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Defense Business Operations Fund

(97-4930)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Reassess objectives

In December 1995, the Department of Defense (DOD) determined that its

goal of developing a standard suite of nine integrated systems to improve

various aspects of materiel management operations—including asset

management, requirements determination, and inventory

management—would cost much more than the $5.3 billion originally

estimated. DOD abandoned its plan to deploy all nine systems as an

integrated suite across all inventory control points and now plans to

deploy the systems individually as they are developed at selected sites. It

has also embarked on an accelerated deployment schedule to provide

these systems from fiscal year 1996 through 1999.

As a result, DOD is embarking on a new strategy before taking a number of

steps to ensure that the hundreds of millions of dollars to be spent on

materiel management systems, as well as the monies already invested,

bring positive results. Specifically, DOD did not first conduct economic and

risk assessments that would ensure its strategy would be cost-effective.

DOD also did not incorporate efforts to improve, consolidate, and privatize

logistics operations into its strategy. Such changes will impact the

processes the systems are being developed to support. Further, this

strategy was not justified within DOD’s own oversight process, nor were

documents critical to defining the program’s objectives, costs, goals, and

risk mitigation strategies prepared. As a result, DOD decisionmakers were

not afforded an opportunity to thoroughly review the new program before

deploying new systems.

Moreover, DOD is proceeding with deployments under the new strategy

without accommodating the time required for testing the new systems.

This greatly increases the risk that DOD will experience problems

associated with shifting testing to system users and curtailing the levels of

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testing normally done. As a result, DOD is likely to incur substantial

additional costs to operate and maintain its current systems and to correct

deficiencies with the new systems.

To provide more timely service, DOD made a major change in its materiel

migration system15 policy. In doing so, it is clearly on a course to

accelerate system deployments before critical steps are taken that would

help ensure that good business decisions are made and that risks are

minimized. As a result, DOD is likely to deploy systems that will not be

significantly better than the hundreds of systems already in place and

could waste millions of dollars resolving problems that result from the

lack of developing and implementing a clear and cohesive strategy. Before

proceeding with any new strategy, it is imperative that DOD takes the

necessary steps to fully define its approach, plan for risks, ensure

adequate oversight, and complete testing of the new systems. DOD must

also immediately establish current cost, benefit, investment return, and

schedule baselines and terminate materiel management migration systems

for which migration is shown to be a poor investment.

Savings for this option cannot be estimated at this time. The amount of

savings would depend on the outcome of DOD’s review of its systems.

Related GAO Products Defense IRM: Strategy Needed for Logistics Information Technology

Improvement Efforts (GAO/AIMD-97-6, November 14, 1996).

Defense IRM: Critical Risks Facing New Materiel Management Strategy

(GAO/AIMD-96-109, September 6, 1996).

GAO Contact Jack L. Brock, Jr., (202) 512-6240

15A migration system is an automated information system which replaces several systems that perform

similar functions.

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Option:

DOD’s Bulk Fuel

Budgeting

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

The Defense Fuel Supply Center (DFSC) has the primary responsibility for

providing the services with the fuel they need. DFSC purchases the fuel

from commercial sources and sells it to the services. Although DFSC is the

primary source, the services also buy a small amount of fuel direct from

commercial sources. For fiscal year 1996, the Army, Navy, and Air Force

budget requests for bulk fuel totaled $4.12 billion. Of this total, the three

services planned to buy $107 million, or 2.6 percent, from commercial

sources. Therefore, the amount of funds requested to buy fuel from DFSC

was about $4.01 billion.

At the time that the Department of Defense (DOD) submitted its fiscal year

1996 budget request, DFSC estimated that the services would purchase

about $3.68 billion of fuel in fiscal year 1996, or about $330 million less

than the amount requested. During the authorization and appropriation

process, the Congress reduced the budget request $100 million. Based on

historical usage data adjusted for factors expected to occur in fiscal year

1996, DFSC estimated, in February 1996, that the services’ fuel purchases in

fiscal year 1996 would be about $3.57 billion, or about $440 million less

than the amount the services requested in their budgets.

For fiscal year 1997, the services have again requested more funds for fuel

than they will need. The services budgeted for 117.8 million barrels of fuel

at a cost of $3.796 billion. However, DFSC estimates that the services will

buy 113.2 million barrels at a cost of about $3.613 billion, or $183 million

less than the services estimate.

Because the over budgeting for bulk fuel seems to be a recurring practice,

the Congress may want to reduce the services’ fiscal year 1998 budget

requests by the $183 million overbudgeted for fiscal year 1997.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 183 0 0 0 0

Outlays 136 36 6 2 1

Source: Congressional Budget Office.

Related GAO Products 1997 DOD Budget: Potential Reductions to Operation and Maintenance

Program (GAO/NSIAD-96-220, September 18, 1996).

DOD Bulk Fuel: Budgeting for Bulk Fuel and Other Operation and

Maintenance Activities (GAO/T-NSIAD-96-208, July 30, 1996).

DOD Bulk Fuel: Services’ Fuel Requirements Could Be Reduced and Funds

Used for Other Purposes (GAO/NSIAD-96-96, March 28, 1996).

GAO Contact Mark E. Gebicke, (202) 512-5140

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Option:

Navy Financial

Management of

Operating Materials

and Supplies

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Operations and Maintenance, Navy

(17-1804)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

The Chief Financial Officers Act of 1990, as amended, requires that each

agency Chief Financial Officer (CFO) develop an integrated agency

accounting and financial management system that complies with

applicable principles and standards and provides for complete, reliable,

consistent, and timely information that is responsive to the agency’s

financial information needs. The act also specifies that each agency CFO

should direct, manage, and provide policy guidance and oversight of asset

management systems, including inventory management and control.

Our broad-based review of various aspects of the Department of the

Navy’s financial management operations and its ability to meet the

management and reporting requirements of the CFO Act identified

numerous deficiencies. These deficiencies can have significant budgetary

implications. For example, we found that, because of inadequate systems,

Navy item managers did not have sufficient visibility over $5.7 billion in

operating materials and supplies on ships and at 17 Navy redistribution

sites. About $883 million, 15 percent of the $5.7 billion, was excess to

current operating allowances or needs.

Lacking adequate visibility, item managers incurred unnecessary costs of

approximately $27 million in the first half of fiscal year 1995 as a result of

ordering or purchasing items that were already on-hand at operating

locations and classified as excess. Also, our analysis of planned purchases

through the end of fiscal year 1997 showed that the Navy could incur an

estimated additional $38 million in unnecessary costs by procuring items

which are already in operating level stock as excess.

We recommended that the Navy could achieve savings by providing item

managers with full visibility over such materials and eliminating redundant

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or unnecessary redistribution sites. Almost half of the excess items were

stored at the Navy’s 17 redistribution sites. These sites are often located in

the same general area as other DOD suppliers. Eliminating the 17 sites

would reduce associated operating costs by $3 million annually and could

reduce redundant supply operations and streamline visibility efforts.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 3 3 3 3 3

Outlays 2 3 3 3 3

Source: Congressional Budget Office.

Related GAO Products Defense Financial Management (GAO/HR-97-3, February 1997).

Navy Financial Management: Improved Management of Operating

Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94,

August 16, 1996).

CFO Act Financial Audits: Navy Plant Property Accounting and Reporting Is

Unreliable (GAO/AIMD-96-65, July 8, 1996).

Financial Management: Control Weaknesses Increase Risk of Improper

Navy Civilian Payroll Payments (GAO/AIMD-95-73, May 8, 1995).

GAO Contact Lisa G. Jacobson, (202) 512-9542

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Option:

Copayments for Care

in Military Treatment

Facilities

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Defense Health Program (97-0130)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Redefine beneficiaries

Numerous GAO reports and testimonies have documented the problems of

controlling costs in the military health service system. In particular, we

have reported that currently care received by military beneficiaries in

military hospitals and clinics is free. However, when care must be

obtained through civilian providers, military beneficiaries share in the

costs of the care they receive. This uneven system has led to confusion,

uncertainty, and inequity among beneficiaries as to what their health care

benefits are. Further, research has shown that free care leads to greater

(and unnecessary) use and, therefore, greater costs.

The Department of Defense (DOD) managed care system—TRICARE—is

intended to make health care benefits uniform regardless of venue, but

some cost sharing is still based on where patients receive their care. Under

TRICARE, beneficiaries pay the same enrollment fees whether they are

enrolled with a military or civilian primary care manager. However,

subsequent cost-sharing—in the form of copays for visits—is still not

required for care provided in military clinics but is required for care from

civilian providers.

The Congress may wish to establish beneficiary cost-sharing requirements

in military facilities that are similar to the cost sharing for care that

beneficiaries receive from civilian providers. CBO estimates that such a

change would result in the following savings.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 305 300 302 305 307

Outlays 258 292 298 303 305

Savings from the 1997 funding level adjusted for inflation

Budget authority 305 300 302 305 307

Outlays 258 292 298 303 305

Source: Congressional Budget Office.

Related GAO Products Defense Health Care: New Managed Care Plan Progressing, but Cost and

Performance Issues Remain (GAO/HEHS-96-128, June 14, 1996).

Defense Health Care: Despite TRICARE Procurement Improvements,

Problems Remain (GAO/HEHS-95-142, August 3, 1995).

Defense Health Care: DOD’s Managed Care Program Continues to Face

Challenges (GAO/T-HEHS-95-117, March 28, 1995).

Defense Health Care: Issues and Challenges Confronting Military Medicine

(GAO/HEHS-95-104, March 22, 1995).

Defense Health Care: Lessons Learned From DOD’s Managed Health Care

Initiatives (GAO/T-HRD-93-21, May 10, 1993).

Defense Health Care: Obstacles in Implementing Coordinated Care

(GAO/T-HRD-92-24, April 7, 1992).

Defense Health Care: Implementing Coordinated Care—A Status Report

(GAO/HRD-92-10, October 3, 1991).

The Military Health Services System—Prospects for the Future

(GAO/T-HRD-91-11, March 14, 1991).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Administering

Defense Health Care

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Defense Health Program (97-0130)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

Each of the three military departments (Army, Navy, and Air Force)

operates its own health care system, providing medical care to active duty

personnel, their dependents, retirees, and survivors of military personnel.

To a large extent, these systems perform many of the same administrative,

management, and operational functions.

Since 1949 over 22 studies have reviewed whether a central entity should

be created within the Department of Defense (DOD) for the centralized

management and administration of the three systems. Most of these

studies encouraged some form of organizational consolidation. A Defense

health agency would consolidate the three military medical systems into

one centrally managed system, eliminating duplicate administrative,

management, and operational functions. No specific budget estimate can

be developed until numerous variables, such as the extent of consolidation

and the impact on command and support structures, are determined.

DOD’s implementation of a systemwide managed care program—

TRICARE—adds to the advantages to be gained by eliminating the separate

medical systems within the department. DOD has divided the country into

12 regions, each with its own administrative staff headed by a Lead Agent.

These Lead Agents have the responsibility for administering TRICARE in

their regions. However, because all of the operational control over medical

facilities is still with the separate services, the Lead Agents do not have the

command and control authority to manage the medical care delivered

directly by DOD, which is most of the care received by military health care

beneficiaries. Presumably, a single Defense health agency would

incorporate this new regional structure and give Lead Agents genuine

control over all DOD care in their regions.

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Related GAO Products Defense Health Care: New Managed Care Plan Progressing, but Cost and

Performance Issues Remain (GAO/HEHS-96-128, June 14, 1996).

Defense Health Care: Medicare Costs and Other Issues May Affect

Uniformed Services Treatment Facilities’ Future (GAO/HEHS-96-124, May 17,

1996).

Defense Health Care: Effects of Mandated Cost Sharing on Uniformed

Services Treatment Facilities Likely to Be Minor (GAO/HEHS-96-141, May 13,

1996).

Defense Health Care: Despite TRICARE Procurement Improvements,

Problems Remain (GAO/HEHS-95-142, August 3, 1995).

Defense Health Care: DOD’s Managed Care Program Continues to Face

Challenges (GAO/T-HEHS-95-117, March 28, 1995).

Defense Health Care: Issues and Challenges Confronting Military Medicine

(GAO/HEHS-95-104, March 22, 1995).

Defense Health Care: Lessons Learned From DOD’s Managed Health Care

Initiatives (GAO/T-HRD-93-21, May 10, 1993).

Defense Health Care: Obstacles in Implementing Coordinated Care

(GAO/T-HRD-92-24, April 7, 1992).

Defense Health Care: Implementing Coordinated Care—A Status Report

(GAO/HRD-92-10, October 3, 1991).

The Military Health Services System—Prospects for the Future

(GAO/T-HRD-91-11, March 14, 1991).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Uniformed Services

University of the

Health Sciences

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Accounts Multiple

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Improve efficiency

With the end of the draft in 1972, the military services needed new ways to

obtain active duty physicians. To address this need, Public Law 92-426

established two complementary programs: the Health Profession

Scholarship Program and the Uniformed Services University of the Health

Sciences (USUHS), a medical school operated by DOD.

Under the scholarship program, DOD pays tuition and fees, plus a monthly

stipend for students enrolled in civilian medical schools. In return, the

students incur an obligation to serve a year of active duty for each year of

benefits received, with a 2-year minimum obligation. Upon graduation,

most scholarship program participants go on active duty and begin

graduate medical education (GME) in military hospitals. In 1994, 987

scholarship program participants graduated from medical school.

Students at USUHS enter active military service as medical students, receive

the pay and benefits of officers at the O-1 level, and incur 7-year service

obligations. In 1994, 155 medical students graduated from the University.

Overall, USUHS graduates represent about 14 percent of military physicians

on active duty.

In the 2 decades since its legislative establishment, proposals have been

made to close USUHS. Those who propose closing the University assert that

DOD’s need for physicians can be met at a lower cost using physicians

educated at civilian medical schools under the DOD scholarship program.

GAO’s analysis shows that 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 University graduate is

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

program graduate. However, GAO estimates show that the annual costs of

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USUHS graduates ($182,000) are comparable to scholarship graduates

($181,000) when total federal costs are amortized over the expected years

of military service because USUHS graduates are expected to have longer

military careers and the University receives less non-DOD federal support

than civilian medical schools. USUHS graduates are expected to serve for

about 18.5 years, on average, while scholarship program physicians serve

for 9.8 years, on average.

Those who propose retaining the University assert that it is needed to

provide a stable cadre of physicians trained to meet the unique demands

of military medicine. GAO’s analysis shows that USUHS provides a medical

education that compares well with that of other U.S. medical schools.

However, while USUHS graduates begin their military medical careers with

more readiness training than their peers, the significance of the additional

training is unclear.

In addition, to help meet standards required for accreditation as an

academic institution, USUHS provides education and training for other

health care and related professions and engages in research, consultation,

and archival activities. While these activities do not directly contribute to

the education of military physicians, they do involve USUHS faculty and

staff, and University officials believe that DOD would continue to conduct

these activities even if USUHS is closed. USUHS officials estimated the value

of these activities to be about $18.6 million—a figure that GAO did not

validate.

Given the changes in operational scenarios and DOD’s approach for

delivering peacetime health care, new assessments of the military’s

physician needs and the means to acquire and retain physicians are in

order. If DOD continues to need a cadre of experienced career physicians,

alternative strategies, such as an additional scholarship option with a

longer service obligation, could be considered as a potentially less

expensive way to increase the length of selected military physicians’

careers.

This option assumes that (1) the University would close at the end of fiscal

year 2000 after the current freshman class graduates, (2) the scholarship

program would be expanded to offset the loss of physicians trained at

USUHS, and (3) scholarship program participants incur a 2-year service

obligation for each year of benefits received.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from 1997 funding level

Budget authority 17 32 45 83 81

Outlays 14 28 42 76 79

Savings from 1997 funding levels adjusted for inflation

Budget authority 19 37 53 94 94

Outlays 16 33 49 86 92

Source: Congressional Budget Office.

Related GAO Product Military Physicians: DOD’s Medical School and Scholarship Program

(GAO/HEHS-95-244, September 29, 1995).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Uniformed Services

Treatment Facilities

Authorizing committees Armed Services (Senate) 

National Security (House)

Appropriations subcommittees Defense (Senate)

National Security (House)

Primary agency Department of Defense

Account Defense Health Program (97-0130)

Spending type Discretionary

Budget subfunction Department of Defense—Military

Framework theme Redefine beneficiaries

In 1982, the Congress enacted legislation that designates nine former

Public Health Service hospitals now under civilian ownership as

Uniformed Services Treatment Facilities (USTF) and makes them part of

the Department of Defense’s (DOD) health care system. Between 1994 and

1997, DOD has spent over $1.3 billion on noncompetitive, set-aside

contracts with the USTFs to deliver health care to what now totals about

124,000 beneficiaries. This arrangement with DOD has guaranteed the USTFs,

in addition to their private health care business, a stable revenue source by

enabling them to provide care to uniformed services beneficiaries. The

USTFs offer their members the full Civilian Health and Medical Program of

the Uniformed Services (CHAMPUS)16 benefit package plus additional

preventive services not covered by CHAMPUS. But unlike CHAMPUS, USTF

members do not lose their eligibility when they reach age 65 and become

Medicare-eligible. At the beginning of fiscal year 1996, 22 percent (about

27,000) of the USTF members were Medicare-eligible.

GAO and others have reported that the USTFs are not as cost-effective as

alternative federal sources of health care. The Institute for Defense

Analyses estimated that the USTFs cost the government $110 million more

per year than what costs would be if the beneficiaries had to rely on the

current military health services system and Medicare for their care. Also,

the Institute reported that high numbers of USTF beneficiaries have private

insurance coverage, and GAO found that many are receiving Medicare

services outside the USTF, even though DOD has already paid the USTFs in

advance for all USTF members’ care. In response to GAO’s

16CHAMPUS is a fee-for-service health insurance program that pays for a substantial part of the health

care that civilian hospitals, physicians, and others provide to nonactive duty DOD beneficiaries. DOD

is in the process of changing its military health services system from the separate systems of direct

care in military facilities and CHAMPUS to TRICARE, a nationwide managed care program. TRICARE

involves managing beneficiary care using all available military hospitals and clinics, supplemented by

contracted civilian services. TRICARE offers CHAMPUS-eligible beneficiaries choice between three

benefit plans—fee for service, preferred provider, and health maintenance organization.

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recommendations, DOD and the Health Care Financing Administration have

recently estimated about $33 million in unnecessary costs to the

government from USTF members’ use of Medicare between October 1993

and December 1995.

The Congress included reforms in the fiscal year 1997 DOD authorization

act to reduce the relative costliness of the USTFs compared with alternative

programs, such as military hospitals, TRICARE, and Medicare. However,

before any savings can be realized, DOD must complete new sole-source

contract negotiations with each USTF. An immediate, cost-effective, and

equitable option would be to terminate the USTF program by repealing the

hospitals’ status as designated, sole-source providers of DOD health care.

Instead, former USTF beneficiaries would be treated the same way all other

DOD beneficiaries are treated under DOD’s managed care support contracts

and direct care system. Such beneficiaries would retain their eligibility for

Medicare-financed care, as well as DOD’s direct care system. And, as noted

above, a high number of such beneficiaries already have private insurance.

Ending the USTFs’ current sole-source, noncompetitive contractual

relationship with DOD would remove their decided business advantage over

other, competitive TRICARE providers.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 118 107 95 81 71

Outlays 118 107 95 81 71

Savings from the 1997 funding level adjusted for inflation

Budget authority 121 122 123 128 128

Outlays 121 122 123 128 128

Source: Congressional Budget Office.

Related GAO Products Defense Health Care: Medicare Costs and Other Issues May Affect

Uniformed Services Treatment Facilities’ Future (GAO/HEHS-96-124, May 17,

1996).

Defense Health Care: Effects of Mandated Cost Sharing on Uniformed

Services Treatment Facilities Likely to Be Minor (GAO/HEHS-96-141, May 13,

1996).

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Defense Health Care: Uniformed Services Treatment Facility Health Care

Program (GAO/HEHS-94-174, June 2, 1994).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Department of

Energy’s Procurement

of Laboratory Testing

Services

Authorizing committees Energy and Natural Resources (Senate)

Resources (House)

Commerce (House)

Appropriations subcommittees Energy and Water Development 

(Senate and House)

Primary agency Department of Energy

Account Defense Environmental Restoration and

Waste Management (89-0242)

Spending type Discretionary

Budget subfunction Atomic Energy Defense Activities

Framework theme Improve efficiency

Both the Department of Energy (DOE) and the Environmental Protection

Agency (EPA) are responsible for large environmental cleanup efforts. A

major component of DOE’s cleanup program involves analyses of toxic and

radioactive contaminants. DOE has estimated that these analyses may cost

the federal government more than $15 billion over the next 30 years. While

both agencies analyze nonradioactive organic and inorganic chemicals

using some of the same testing methods, the agencies procure these

commonly-used analyses in a different manner. EPA centrally contracts for

them while DOE employs a decentralized procurement approach that relies

heavily on its operating contractors to subcontract for them through

commercial laboratories.

Under its procurement approach, DOE pays higher prices to its commercial

laboratories than EPA does for the same analyses and methods, partly

because decentralized purchasing practices do not produce price

competition, volume discounts, and compliance with one standard

contract format. Also, DOE’s decentralized approach to procuring

commonly-used analyses results in duplication of contractor efforts in the

award and management of commercial laboratory subcontracts, which

adds inefficiencies and increases administrative costs. GAO’s analysis

indicates that if DOE contracted for these services through one central

procurement function, similar to EPA’s approach, it would receive

substantially lower prices from commercial laboratories by consolidating

its overall buying power and greatly reduce the inherent duplication in

contract award and oversight activities. DOE is currently attempting to

contract for these services on a regional basis.

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DOE estimated that laboratory analyses costs are at least 15 percent of its

cleanup costs, and in fiscal year 1997, DOE was appropriated about

$6 billion for Defense Environmental Restoration and Waste Management.

While we believe savings could be achieved through centralization, a

5-year savings amount is difficult to estimate for several reasons, including

the lack of current and complete data and the extent to which DOE’s prices

would be affected by the potential for radioactivity in DOE’s samples.

Related GAO Product Nuclear Facility Cleanup: Centralized Contracting of Laboratory Analysis

Would Produce Budgetary Savings (GAO/RCED-95-118, May 8, 1995).

GAO Contact Victor S. Rezendes, (202) 512-3841

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150 International

Affairs

• USAID’s Housing Guaranty Program

• Excess Real Estate at Overseas Diplomatic Posts

• Overseas Diplomatic Posts

• State Department Functions and Activities

• State Department Support Functions

• TV Marti

• USIA Exchange Programs

• USIA Overseas Posts, Activities, and Cultural Centers

• International Broadcasting

• Risk-Based Exposure Fees for Export-Import Bank

• Export-Import Bank Programs

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Option:

USAID’s Housing

Guaranty Program

Authorizing committees Foreign Relations (Senate) 

International Relations (House)

Appropriations subcommittees Foreign Operations (Senate and House)

Primary agency Agency for International Development

Account Housing Guaranty Program Account

(72-0401)

Spending type Discretionary

Budget subfunction International Development and

Humanitarian Assistance

Framework theme Reassess objectives

The Foreign Assistance Act of 1961, as amended, authorizes the U.S.

Agency for International Development (USAID) to guaranty loans made by

U.S. investors to borrowers in developing countries for shelter-related

projects. With this authority, USAID operates the Housing Guaranty

Program. A long-run goal of this program is to increase shelter for

low-income families in developing countries by stimulating local credit

institutions to provide the necessary investment capital and other

resources. Since 1961, USAID has guarantied over $2.7 billion in loans to 44

countries for home construction, mortgages, home improvements, urban

infrastructure, and other shelter-related projects.

In June 1995, GAO reported that USAID had not achieved the key objectives

of the Housing Guaranty Program despite over 30 years of trying. GAO’s

analysis showed that U.S.-sponsored housing construction projects had

not actually stimulated private investment. Nonetheless, USAID continued

to guaranty loans for housing projects under this program. Furthermore,

GAO found that USAID does not always know whether the program is

benefiting the poor target population. On the contrary, we found

numerous instances where the program was benefiting higher-income

families. We also reported that many borrowers have defaulted on

previous loan payments forcing USAID, as guarantor, to make these

payments for them. The fees that USAID charges borrowers do not generate

sufficient income to cover these costs.

GAO recommended that the Congress terminate the program. Although

defaults on outstanding loan balances could cost USAID in excess of $1

billion, CBO estimates that terminating the Housing Guaranty Program

would produce $24 million in savings over 5 years.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 4 4 4 5 5

Outlays 0 1 2 3 3

Savings from the 1997 funding level adjusted for inflation

Budget authority 4 5 5 5 5

Outlays 0 1 2 3 4

Source: Congressional Budget Office.

Related GAO Product Foreign Housing Guaranty Program: Financial Condition Is Poor and

Goals Are Not Achieved (GAO/NSIAD-95-108, June 2, 1995).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

Excess Real Estate at

Overseas Diplomatic

Posts

Authorizing committees Foreign Relations (Senate) 

International Relations (House)

Appropriations subcommittees Commerce, Justice, State, the Judiciary,

and Related Agencies (Senate and House)

Primary agency Department of State

Account Security and Maintenance of U.S. Missions

(19-0535)

Spending type Discretionary

Budget subfunction Conduct of Foreign Affairs

Framework theme Reassess objectives

The Department of State has millions of dollars invested in overseas

properties that may be unneeded or too expensive to maintain. Proper

management of the sale of these assets could generate considerable

revenue. State’s process for selling unneeded real estate requires weighing

multiple factors presented by different groups with competing interests.

Resistance from the host government can add further to delays in selling

these properties. Resolving these differences often stalls potential sales for

years. Furthermore, State has the authority to retain and use the proceeds

from real estate sales for other facilities’ needs without specific approval

from the Office of Management and Budget (OMB) or the Congress. The

Congress did not appropriate funds for any new facilities in fiscal year

1997; therefore, State will likely use sales receipts for that purpose. To

reduce the deficit, the Congress would have to restrict the proceeds from

the asset sales from reverting to the State Department.

As of October 1995, State had a list of over 100 properties for potential sale

valued at $467 million, including high-value properties in Manila, Paris,

Singapore, and Bangkok. In addition, our review of State’s records

identified other properties not on the list that potentially could be sold,

including properties at closed posts in Zanzibar, Tanzania, and Alexandria,

Egypt; and properties that are vacant or unsuitable for the purposes for

which they were acquired including high-value properties in Hamilton,

Bermuda, and Buenos Aires, Argentina.

The 104th Congress endorsed our recommendation that the Department of

State establish an independent panel to review and recommend the sale of

real estate. The panel could review the list identified by State as well as

properties identified in our report or by other sources. If State establishes

a panel to review and sell only those properties it has identified, and if the

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Congress specifically restricted the proceeds from reverting back to the

State Department, CBO estimates that $150 million in assets could be

generated and earmarked for deficit reduction over the next five years. We

believe that substantial additional revenues could be generated through

the sale of other assets, such as the property in Hamilton, Bermuda, and

Buenos Aires, Argentina.

In addition, in 1995 we reported that certain high-value properties in

Tokyo are unneeded. Our analysis demonstrated the feasibility of—and

identified options for—selling portions of this property. For example,

selling the Deputy Chief of Mission residence and constructing a less

costly replacement residence on the government-owned housing

compound could generate proceeds that could be used for deficit

reduction. The State Department has rejected this option because the

embassy desired to retain the facility for representational purposes.

The current sales value of the Tokyo property is uncertain. There has been

no recent appraisal of the Deputy Chief of Mission residence, but in 1990,

it was valued at $92 million. Embassy information, based on Japanese

government reports in September 1994, shows that residential property

values have declined about 30 percent since 1990. GAO assumes that the

Deputy Chief of Mission residence is valued at $40 million—less than 50

percent of its value in 1990. In preparing the following estimate, CBO

assumes that the construction of the new Deputy Chief of Mission

residence on the Mitsui compound would cost $4 million and that the sale

of the old residence would take place after the construction of the

replacement residence is completed. The sale of the old residence for

$40 million would count towards deficit reduction only if the Congress

specifically restricted the proceeds from reverting back to the State

Department.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Sell unnecessary real estate at overseas diplomatic posts

Asset sale

Budget authority 30 30 30 30 30

Outlays 9 17 24 29 30

Source: Congressional Budget Office.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Sell high value property in Tokyo

Asset sale

Budget authority –4 0 0 0 40

Outlays –1 –1 –1 –1 40

Source: Congressional Budget Office.

Related GAO Products State Department: Options for Addressing Possible Budget Reductions

(GAO/NSIAD-96-124, August 29, 1996).

Overseas Real Estate: Millions of Dollars Could Be Generated By Selling

Unneeded Real Estate (GAO/NSIAD-96-36, April 23, 1996).

Overseas Real Estate: Inaction on Proposals to Sell High-Value Property in

Tokyo (GAO/NSIAD-95-73, April 7, 1995).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

Overseas Diplomatic

Posts

Authorizing committees Foreign Relations (Senate) 

International Relations (House)

Appropriations subcommittees Commerce, Justice, State, the Judiciary,

and Related Agencies (Senate and House)

Primary agency Department of State

Account Diplomatic and Consular Programs

(19-0113)

Salaries and Expenses (19-0107)

Spending type Discretionary

Budget subfunction Conduct of Foreign Affairs

Framework theme Reassess objectives

In fiscal year 1995, State spent about $1.9 billion, or almost 70 percent of

its budget, operating overseas posts. State maintains a diplomatic

presence in 252 overseas locations, including countries where the United

States has limited interests. Because overseas posts consume such a large

portion of State’s operating budget, closing posts or reducing their size

offers the greatest potential for achieving substantial budget reductions.

Balanced, thoughtful decisions on closing and/or reducing the size of posts

must be made to ensure that U.S. interests are well served overseas and

Americans are protected within available funding.

In response to funding constraints in recent years, State has closed and

reduced the size of a number of posts and has proposed the closure of

additional posts. However, it has made little headway because of internal

and external resistance to these changes. In GAO’s August 1996 report, we

suggested that one strategy to reduce the controversy surrounding post

closings would be to establish an independent post closure panel like the

Defense Base Closure and Realignment Commission. Such an approach

would allow for decision-making based on the need to support both State

and non-State activities, consistent with overall U.S. policy interests and

priorities as well as available resources. It would also have the advantage

of mitigating at least some of the pressures and parochial interests that

have historically operated to maintain a U.S. overseas presence in some

locations.

Reducing the number of overseas posts might be accomplished in any

number of ways. For example, one option would be to use multiple

country accreditation in some regions, where an ambassador operating

from a regional post would “circuit ride” to several small, neighboring

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countries, eliminating the need for permanent embassy structures in each

country. Regional posts would allow consolidation of staff and other

resources, although cost reductions would be offset to some degree by

travel and other related expenses. The British government employs this

approach in some African countries, and the U.S. Embassy in Bridgetown,

Barbados, executes diplomatic responsibilities for a number of countries

in the eastern Caribbean. State could expand this approach to include

other regions, such as the Baltic States, Africa, and countries in South

America. The State Department’s financial management systems could not

readily provide post-specific operating costs and closing costs to estimate

the savings for this option. However, we calculate that if State closed 20

small embassies and employed the “circuit rider” approach to cover its

diplomatic responsibilities in these countries, State could reduce its costs

by up to $40 million annually, after closing costs have been dealt with and

if the U.S. direct-hire positions were eliminated.

A second option would be to reevaluate the need for State’s 77 consulates

and consulates general. Although many consulates are small or moderately

sized, some are bigger and more expensive to operate than major

embassies. Some believe that the end of the Cold War, expanded media

coverage, and improved information and telecommunications technology

make it possible for State to close consulates and consolidate staff at

embassies or other consulates located in the same countries. Our analysis

has shown that if State closed one of its largest consulate generals it could

reduce its annual operating costs by nearly $20 million, after closing costs

have been dealt with and if the U.S. direct-hire positions were eliminated.

Another way to reduce costs would be to reduce overseas staffing—an

item that accounts for a large portion of overseas costs. Large and

comprehensive posts understandably absorb a disproportionate share of

the total costs of U.S. overseas posts and, therefore, represent a significant

opportunity in this regard. In fiscal year 1995, the cost of operating the

posts in Germany alone totaled over $90 million. The cost of operating the

posts in Japan totaled over $54 million during the same period. Although

the cost reductions from eliminating U.S. direct-hire positions overseas

vary by region and post, using average costs, CBO estimates that $45 million

could be saved by eliminating 100 such positions through attrition over 5

years.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Eliminating 100 overseas positions

Savings from 1997 funding level

Budget authority 3 6 9 12 15

Outlays 3 5 8 11 14

Savings from the 1997 funding level adjusted for inflation

Budget authority 3 6 9 12 15

Outlays 3 5 8 11 14

Source: Congressional Budget Office.

Related GAO Products State Department: Options for Addressing Possible Budget Reductions

(GAO/NSIAD-96-124, August 29, 1996).

Overseas Presence: Staffing at U.S. Diplomatic Posts (GAO/NSIAD-95-50FS,

December 28, 1994).

State Department: Overseas Staffing Process Not Linked to Policy

Priorities (GAO/NSIAD-94-228, September 20, 1994).

GAO Contact Benjamin F. Nelson (202) 512-4128

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Option:

State Department

Functions and

Activities

Authorizing committees Foreign Relations (Senate) 

International Relations (House)

Appropriations subcommittees Commerce, Justice, State, the Judiciary,

and Related Agencies (Senate and House)

Primary agency Department of State

Account Diplomatic and Consular Programs

(19-0113)

Salaries and Expenses (19-0107)

Spending type Discretionary

Budget subfunction Conduct of Foreign Affairs

Framework theme Improve efficiency

The Department of State’s functional bureaus share responsibility with

several other U.S. agencies on various overlapping policy issues. The

involvement of many agencies in similar or related functions does not

mean the agencies unnecessarily duplicate activities, but it does suggest

the potential for consolidation or transfer of some of State’s duties. For

example, we identified nearly 30 agencies and offices involved in trade

policy and export promotion, about 35 engaged in global programs, and

over 20 involved in international security functions. For many of these

functions, several offices and bureaus within State headquarters and

overseas posts are involved.

State’s costs could be reduced by lessening the degree of its involvement

in functions that overlap with other agencies or by lessening overlap

within State’s offices. For example, CBO estimates that if the 45 overseas

labor attaché and 6 corresponding headquarters positions were eliminated

through attrition over five years it would produce savings of $30 million.

According to several officials at overseas posts, labor issues could be

adequately covered by political and/or economic officers. In addition,

several State bureaus monitor labor issues. State has proposed abolishing

or lowering the rank of some labor attaché positions in the past but has

encountered resistance from the Department of Labor and others.

In addition, State could cut costs if some of its legislatively mandated

workload requirements were reduced. In fiscal year 1996, State was

required to produce over 130 congressionally mandated reports. While

some reports could be eliminated or curtailed, it is not clear which are the

best candidates because their cost and relative value to the users are not

known. For example, country reports on economic policy and trade

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practices, required by the Omnibus Trade and Competitiveness Act of

1988, consume the equivalent of 5 staff years at headquarters and 100

posts at an annual cost of at least $500,000 and State Department officials

indicated that the information in the reports is available through other

sources. Since the personnel and expenses involved in preparing these

reports would likely be reallocated rather than eliminated, CBO does not

anticipate any budgetary savings from this option.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Eliminating Labor Attaché and corresponding headquarters positions

Savings from the 1997 funding level

Budget authority 2 4 6 8 10

Outlays 2 4 6 8 9

Savings from the 1997 funding level adjusted for inflation

Budget authority 2 4 6 8 10

Outlays 2 4 6 8 9

Source: Congressional Budget Office.

Related GAO Products Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures

(GAO/NSIAD-97-6, November 8, 1996).

State Department: Options for Addressing Possible Budget Reductions

(GAO/NSIAD-96-124, August 29, 1996).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

State Department

Support Functions

Authorizing committees Foreign Relations (Senate) 

International Relations (House)

Appropriations subcommittees Commerce, Justice, State, the Judiciary,

and Related Agencies (Senate and House)

Primary agency Department of State

Accounts Diplomatic and Consular Programs

(19-0113)

Salaries and Expenses (19-0107)

Spending type Discretionary

Budget subfunction Conduct of Foreign Affairs

Framework theme Improve efficiency

In fiscal year 1995, State allotted $1.8 billion, or about 65 percent of its

budget, to domestic and overseas support operations. These funds

provided support for both Department staff and employees from other

federal agencies. Centrally funded operations account for approximately

$1.1 billion of the support budget and cover central administration costs

and the costs of running several regional centers that provide financial and

information management services to overseas posts. The geographic

bureaus control the remaining portion of State’s support budget, which is

largely used to fund the salaries of those employees in support positions.

Cost-cutting measures being considered by State include hiring more U.S.

family members to fill overseas staffing positions, increasing employees’

payments for medical services, and increasing the length of overseas tours.

Over the long term, State hopes to further reduce its operating expenses

through business process reengineering and the outsourcing of certain

support functions. In both areas, however, only limited progress has been

made.

GAO identified several additional options State could implement to adjust

to potential budget cuts as well as some of the potential adverse

consequences of these options. These options include (1) expanding the

use of foreign service nationals (FSN) in support positions at overseas

posts, (2) reviewing employees’ benefits and allowances, and (3) reviewing

support staff levels in headquarters.

While cost-savings estimates for the last two options are not available until

reforms are specified, CBO estimates that expanding the use of foreign

nationals in selected posts could result in $165 million in savings over 5

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years. Specifically, State could increase its use of FSNs to replace Foreign

Service specialists working in non-sensitive positions. Employment of FSNs

is far less costly than the employment of Foreign Service specialists

because FSNs do not receive the benefits and allowances payable to

Foreign Service employees. We estimate that State currently has 500

Foreign Service specialists in six job categories it considers nonsensitive.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 11 22 33 44 55

Outlays 9 20 30 41 52

Savings from the 1997 funding level adjusted for inflation

Budget authority 11 22 33 44 55

Outlays 9 20 30 41 52

Source: Congressional Budget Office.

Related GAO Products Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures

(GAO/NSIAD-97-6, November 8, 1996).

State Department: Options for Addressing Possible Budget Reductions

(GAO/NSIAD-96-124, August 29, 1996).

State Department: Actions Needed to Improve Embassy Management

(GAO/NSIAD-96-1, March 12, 1996).

State Department: Widespread Management Weaknesses at Overseas

Embassies (GAO/T-NSIAD-93-17, July 13, 1993).

State Department: Survey of Administrative Issues Affecting Embassies

(GAO/NSIAD-93-218, July 12, 1993).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

Tv Marti Authorizing committees Foreign Relations (Senate) 

International Relations (House)

Appropriations subcommittees Commerce, Justice, State, and the

Judiciary, and Related Agencies (Senate

and House)

Primary agency U.S. Information Agency

Account Broadcasting to Cuba (67-0208)

Spending type Discretionary

Budget subfunction Foreign Information and Exchange

Activities

Framework theme Reassess objectives

The U.S. Information Agency (USIA) recognizes that although it provides

television broadcasts to Cuba through TV Marti, the broadcasts are

constantly and effectively jammed. USIA’s research data shows that, mainly

as a result of the jamming, the number of Cubans who are able to watch

the broadcasts is small. Other factors that decrease effectiveness of TV

Marti include broadcast hours that are not convenient to viewers and a

broadcast signal that does not reach much beyond the greater Havana

area. The U.S. Advisory Commission on Public Diplomacy has reported

that TV Marti is not cost-effective and has repeatedly recommended that it

be terminated. In March 1994, the Advisory Panel on Radio Marti and TV

Marti concluded that TV Marti cannot be considered cost-effective and

would not be cost-effective unless the viewing audience in Cuba could be

substantially expanded. TV Marti broadcasts daily from 3:30 am to 8 am,

but Cuba jams the broadcasts. In an attempt to overcome jamming, TV

Marti is converting from VHF to UHF transmission even though Cuba

could acquire equipment to jam the new signal at relatively little cost.

Further, GAO has criticized controls over program quality and objectivity,

and according to the Advisory Panel, identified problems do not appear to

have been fully resolved.

The Congress may wish to eliminate TV Marti given its persistent problems

and its limited ability to achieve its goals. The savings that could be

achieved if TV Marti were eliminated are shown in the following table.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 6 11 11 11 11

Outlays 5 10 11 11 11

Savings from the 1997 funding level adjusted for inflation

Budget authority 6 12 12 13 13

Outlays 5 11 12 13 13

Source: Congressional Budget Office.

Related GAO Products TV Marti: Costs and Compliance With Broadcast Standards and

International Agreements (GAO/NSIAD-92-199, May 6, 1992).

Broadcasts to Cuba: TV Marti Surveys Are Flawed (GAO/NSIAD-90-252,

August 9, 1990).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

USIA Exchange

Programs

Authorizing committees Foreign Relations (Senate) 

International Relations (House)

Appropriations subcommittees Commerce, Justice, State, the Judiciary,

and Related Agencies (Senate and House)

Primary agency U.S. Information Agency

Account Educational and Cultural Exchange

Programs (67-0209)

Spending type Discretionary

Budget subfunction Foreign Information and Exchange

Activities

Framework theme Reassess objectives

The U.S. Information Agency (USIA) manages a variety of exchange

programs to foster mutual understanding between the people of the

United States and other countries. In 1994, USIA academic exchanges

accounted for less than 24 percent of all U.S. government-funded

international exchange and training activities. In fiscal year 1996, these

exchanges cost about $210 million plus approximately $29 million to

manage them.

In recent years, funding levels have not permitted USIA to maintain the

same number of exchanges it supported in the past. Should funding be

further reduced, options to cut costs include eliminating certain

exchanges entirely, reducing the amount of funds USIA allocates to each

program, or obtaining more financial support from the private sector or

foreign governments. The advisability of implementing any or all of these

options would need to be evaluated along with the impact such actions

might have on U.S. bilateral relationships and on the promotion of ties

between private citizens and organizations in the United States and

abroad. Whether the federal government still needs to fund each

exchange, whether the exchange is targeted at the most appropriate

countries, whether it is unique and unavailable from the private sector,

and whether it is effective are questions requiring review if the budget for

exchanges is significantly cut.

Savings resulting from reduced funding for certain programs would

depend on the specific programs and the level of cuts. Likewise, savings

that result from obtaining more financial support from the private sector

would depend on specific negotiations with companies and new bilateral

agreements with other countries. However, critics of one program, USIA’s

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high school exchange, argue that it is more expensive and has less

immediate impact than other programs. For example, in fiscal year 1995

USIA spent more than $56 million on the Congress-Bundestag Program with

Germany and the Freedom Support Act/Newly Independent States and

Support for East European Democracy Act Programs that specialized in

exchanges of secondary school students and educators. CBO estimates that

$222 million in savings over 5 years could be generated if these programs

were eliminated.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 41 41 41 41 41

Outlays 21 36 39 41 41

Savings from the 1997 funding level adjusted for inflation

Budget authority 42 43 44 46 47

Outlays 21 37 42 44 46

Source: Congressional Budget Office.

Related GAO Products U.S. Information Agency: Options for Addressing Possible Budget

Reductions (GAO/NSIAD-96-179, September 23, 1996).

Exchange Programs: Inventory of International Educational, Cultural, and

Training Programs (GAO/NSIAD-93-157BR, June 23, 1993).

Exchange Programs: Observations on International Educational, Cultural,

and Training Programs (GAO/T-NSIAD-93-7, March 23, 1993).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

USIA Overseas Posts,

Activities, and

Cultural Centers

Authorizing committees Foreign Relations (Senate)

International Relations (House)

Appropriations subcommittees Commerce, Justice, State, the Judiciary,

and Related Agencies (Senate and House)

Primary agency U.S. Information Agency

Accounts Salaries and Expenses (67-0201)

Educational and Cultural Exchange

Programs (67-0209)

Spending type Discretionary

Budget subfunction Foreign Information and Exchange

Activities

Framework theme Reassess objectives

The mission of the U.S. Information Agency (USIA) is to explain and

advocate U.S. policy to foreign publics, provide information about the

United States, build lasting relationships and mutual understanding, and

advise U.S. decisionmakers on foreign public opinion and its implications

for the United States. In fiscal year 1996, USIA spent $310 million, or about

28 percent of its $1.1 billion budget, on personnel, infrastructure,

programs and headquarters activities to support its 199 overseas posts in

143 countries.

Although U.S. foreign policy objectives may have changed in light of

post-cold war needs, USIA has not determined if its organizational structure

and public diplomacy programs have outlived their usefulness. Agency

officials believe it is difficult to link a program to a desired result, and

existing evidence of impact is largely anecdotal. However, such

assessments are critical to USIA’s ability to remain viable while managing

budgetary reductions.

This option is divided into three parts: eliminating some USIA overseas

posts, activities, and cultural centers.

Posts GAO reported in 1996 that USIA maintains overseas missions in countries

that are relatively less important to the U.S. foreign policy and retains

overseas infrastructure and programs which may no longer be relevant.

For example, in fiscal year 1997 at a cost of about $29 million, USIA

operated posts in more than 50 countries where it believed the United

States had limited public diplomacy goals.

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Reducing or eliminating these posts or activities are options to lower costs

but actual savings will depend on the current costs of the posts closed or

reduced. Based on fiscal year 1997 costs, CBO estimates that closing these

posts in countries where the United States has limited public diplomacy

goals would produce $148 million in savings over 5 years.

Activities One activity we believe merits review is USIA’s student advising operation.

USIA spends about $2.6 million annually to subsidize more than 400

educational advisory centers worldwide that provide information about

the U.S. system of education. Some of these centers are housed in USIA

offices and are fully funded by the U.S. government. Others are operated

by host country universities or U.S. nonprofit organizations and are

partially funded by USIA. An additional $1.4 million is spent annually for

training, materials, and other activities.

Proponents of the student advising operation believe that it is in the best

interests of the United States to support student advising because

international students spend nearly $7 billion a year in the United States,

contributing substantially to the U.S. economy, and American students are

introduced to different cultures, enhancing diversity. Critics have

concluded, however, that new worldwide trends to internationalize higher

education, advancements in communication technology, and the increased

sophistication of non-U.S.-government-sponsored educational advising

institutions indicate that a guidance and oversight role for USIA is more

appropriate than an operational one. They argue that the increase in

private sector counseling services, coupled with dwindling USIA resources,

suggest it is an appropriate time for USIA to turn over its educational

advising role to the private sector. CBO estimates that eliminating student

advising operations would result in savings of $15 million over 5 years.

Cultural Centers USIA maintains more than 70 cultural centers, libraries, and branch offices

overseas. Because they may not be colocated with an embassy and require

staff to deal directly with the public, they are often expensive to operate.

In Germany, for example, the fiscal year 1995 cost to operate six cultural

centers (called America Houses) was nearly $9 million, which was for 77

staff and for activities such as reference centers with online databases,

student counseling activities, and cultural events.

USIA could cut costs by finding alternatives for its cultural centers. For

example, critics of the cultural centers believe that binational centers are a

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cost-effective alternative to cultural centers. Binational centers are private,

autonomous institutions established to promote mutual understanding

between the United States and host countries. USIA may have only minimal

or no funds invested in the centers and may or may not assign staff. USIA

successfully encouraged the formation of a binational center when funding

limitations forced it to close an America House in Germany. The agency

collaborated with private industry and the local German government to

establish a German-American Institute to further relations through cultural

and educational events. CBO estimates that if USIA closed its cultural

centers it could achieve $141 million in savings over 5 years.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Eliminate USIA posts

Savings from the 1997 funding level

Budget authority 16 29 29 29 29

Outlays 13 27 29 29 29

Savings from the 1997 funding level adjusted for inflation

Budget authority 17 31 32 33 35

Outlays 14 29 32 33 35

Source: Congressional Budget Office.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Eliminate student advising operations

Savings from the 1997 funding level

Budget authority 2 3 3 3 3

Outlays 2 3 3 3 3

Savings from 1997 funding level adjusted for inflation

Budget authority 2 3 3 3 4

Outlays 2 3 3 3 4

Source: Congressional Budget Office.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Eliminate USIA cultural centers

Savings from the 1997 funding level

Budget authority 14 28 28 28 28

Outlays 12 26 28 28 28

Savings from 1997 funding level adjusted for inflation

Budget authority 15 30 31 32 33

Outlays 13 27 31 32 33

Source: Congressional Budget Office.

Related GAO Product U.S. Information Agency: Options for Addressing Possible Budget

Reductions (GAO/NSIAD-96-179, September 23, 1996).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

International

Broadcasting

Authorizing committees Foreign Relations (Senate) 

International Relations (House)

Appropriations subcommittees Foreign Operations (Senate and House)

Primary agency U.S. Information Agency

Account International Broadcasting Operations

(67-0206)

Spending type Discretionary

Budget subfunction Foreign Information and Exchange

Activities

Framework theme Reassess objectives

The United States broadcasts over 1,600 hours of radio programming in 53

languages and over 400 hours of television in several languages weekly to

support U.S. foreign policy objectives. In fiscal year 1996, $405 million, or

38 percent of the U.S. Information Agency’s budget supported the Voice of

America (VOA) (47 languages), Radio Free Europe/Radio Liberty

(RFE/RL)(21 languages), Radio and TV Marti broadcasts to Cuba, and

Worldnet television broadcasts. Also, Radio Free Asia (RFA) began

broadcasting to China in September 1996 and to Tibet in December 1996.

VOA, RFE/RL, and RFA have different purposes and therefore broadcast in

some of the same languages. VOA’s mission is to provide accurate and

objective world news and present a balanced portrayal of U.S. institutions

and policies. In contrast, RFE/RL’s and RFA’s mission is to present accurate

news about political, social, and economic developments within the

countries themselves in the absence of fully functional or free media.

Funding for international broadcasting has dropped considerably since

fiscal year 1994 as VOA and RFE/RL consolidated functions such as

engineering, eliminated overlapping broadcast hours to the same target

audience, and cut 1,500 positions. Further savings would require changes

in the number of language services and/or broadcast hours. Over the years,

very few language services have been terminated despite changing world

conditions. The Broadcasting Board of Governors is developing a plan to

review all language services and broadcast entities to determine their

continued need and effectiveness. This review may identify less necessary

language services that could be eliminated. Estimated annual savings that

would result from reducing the number of broadcast languages would

range from $230,000 for VOA’s Slovene language broadcast to $12.7 million

for both VOA and RFE/RL’s Russian language broadcasts.

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Related GAO Products U.S. Information Agency: Options for Addressing Possible Budget

Reductions (GAO/NSIAD-96-179, September 23, 1996).

International Broadcasting: Downsizing and Relocating Radio Free

Europe/Radio Liberty (GAO/NSIAD-95-53, April 5, 1995).

Voice of America: Station Modernization Projects Need to Be Justified

(GAO/NSIAD-94-69, January 24, 1994).

Voice of America: Management Actions Needed to Adjust to a Changing

Environment (GAO/NSIAD-92-150, July 24, 1992).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

Risk-Based Exposure

Fees for

Export-Import Bank

Authorizing committees Banking, Housing, and Urban Affairs

(Senate) 

Banking and Financial Services (House)

Appropriations subcommittees Foreign Operations (Senate)

Foreign Operations, Export Financing, and

Related Programs (House)

Primary agency U.S. Export-Import Bank

Account Export-Import Bank Program Account

(83-0100)

Spending type Discretionary

Budget subfunction International Financial Programs

Framework theme Redefine beneficiaries

The U.S. Export-Import Bank’s (Eximbank) fees are currently lower than

those charged by most foreign export credit agencies because Eximbank

has interpreted its broad congressional mandate to be “fully competitive”

by setting its sovereign fees as low or lower than about 75 percent of those

offered by other major export credit agencies.

Decision makers will need to address several trade and foreign policy

issues before making changes in Eximbank’s programs. Eximbank officials

said that any proposed fee increases need to be considered within the

broader context of current international efforts to gradually reduce

government export finance subsidies. They also stated that these options

could make Eximbank programs less competitive relative to foreign

export credit agencies but acknowledged that it would be difficult to

determine the precise trade effects of such actions.

Using 1995 Eximbank transaction data, we estimated that the bank could

have saved about $84 million in fiscal year 1995 if it had raised its fees to a

level in the mid-range of fees charged by other major export credit

agencies of other nations. Any fee increases are likely to reduce demand

for Eximbank financing and the savings associated with such an increase

would depend on its magnitude and on other variables, such as the

sensitivity of demand to the price increase as well as the risk levels, terms,

and conditions of future transactions. CBO estimates that changing the fee

structure accordingly could save more than $450 million over 5 years.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 90 90 90 90 90

Outlays 10 24 36 46 56

Savings from the 1997 funding level adjusted for inflation

Budget authority 92 95 97 100 103

Outlays 10 25 37 49 60

Source: Congressional Budget Office.

Related GAO Products Export-Import Bank: Options for Achieving Possible Budget Reductions

(GAO/NSIAD-97-7, December 20, 1996).

Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures

(GAO/NSIAD-97-6, November 8, 1996).

Export Finance: Comparative Analysis of U.S. and European Union Export

Credit Agencies (GAO/GGD-96-1, October 24, 1995).

Export Finance: The Role of the U.S. Export-Import Bank (GAO/GGD-93-39,

December 23, 1992).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

Export-Import Bank

Programs

Authorizing committees Banking, Housing, and Urban Affairs

(Senate) 

Banking and Financial Services (House)

Appropriations subcommittees Foreign Operations (Senate)

Foreign Operations, Export Financing, and

Related Programs (House)

Primary agency U.S. Export-Import Bank

Account Export-Import Bank Loans Program

Account (83-0100)

Spending type Discretionary

Budget subfunction International Financing Programs

Framework theme Reassess objectives

The U.S. Export-Import Bank (Eximbank) was created to facilitate exports

of U.S. goods and services by offering a wide range of financing at terms

competitive with those of other governments’ export financing agencies.

Eximbank is to absorb risks that the private sector is unwilling or unable

to assume. Higher risk markets, such as the Newly Independent States of

the Former Soviet Union, constitute a relatively small share of the

Eximbank’s total financing commitments yet absorb a relatively large

share of its subsidy costs. From fiscal year 1992 to 1996, Eximbank has

used an average of $750 million of its credit subsidy appropriation to

support an average of $13.3 billion in export financing commitments

(loans, loan guarantees, and insurance). Eximbank’s congressional

mandate is to supplement, not compete with, private capital. Thus it

provides financing in a wide variety of markets, including more markets in

higher-risk categories than those of any of its major competitors.

The level and scope of the risks of the Eximbank’s programs could be

reduced by several means, such as placing a ceiling on the maximum

subsidy rate allowed in Eximbank programs, reducing or eliminating

program availability offered in high-risk markets, and offering less than

100-percent risk protection. These changes would have only a slight effect

(less than 5 percent) 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 Eximbank’s programs. Eximbank officials noted

that these options could undermine U.S. government efforts to provide

support in some higher-risk markets, such as the Newly Independent

States of the Former Soviet Union, that exhibit promising long-term

potential.

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The specific level of savings resulting from these program changes would

be dependent on several factors, including the willingness of exporters

and participating banks to absorb increased costs and risks, and the

reaction of foreign export credit agencies. We estimated, based on 1995

transaction levels, that $157 million in program subsidy savings could be

achieved annually if Eximbank provided only short-term cover in high-risk

markets. The following CBO estimates are based on an increase in

Eximbank transaction levels in these markets.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 244 244 244 244 244

Outlays 27 66 97 125 150

Savings from the 1997 funding level adjusted for inflation

Budget authority 248 255 262 269 276

Outlays 28 68 101 133 162

Source: Congressional Budget Office.

Related GAO Products Export-Import Bank: Options for Achieving Possible Budget Reductions

(GAO/NSIAD-97-7, December 20, 1996).

Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures

(GAO/NSIAD-97-6, November 8, 1996).

Export Finance: Comparative Analysis of U.S. and European Union Export

Credit Agencies (GAO/GGD-96-1, October 24, 1995).

Export Finance: The Role of the U.S. Export-Import Bank (GAO/GGD-93-39,

December 23, 1992).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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250 General

Science, Space, and

Technology

• Space Station

• NASA’s Earth Observing System Data and Information System

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Option:

Space Station Authorizing committees Commerce, Science and Transportation

(Senate)

Science (House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency National Aeronautics and Space

Administration

Account Human Space Flight (80-0111)

Spending type Discretionary

Budget subfunctions Space Flight, Research, and Supporting

Activities

Framework theme Reassess objectives

In 13 reports and testimonies issued since 1991, GAO has expressed

concerns about various aspects of the space station, including rising cost

estimates that have prompted several redesigns since the project was first

funded in fiscal year 1985. In 1993, the station was redesigned again and

Russia was brought in as a partner. The National Aeronautics and Space

Administration (NASA) believed that Russian participation would improve

the station’s capabilities and reduce the estimated cost to complete its

assembly. Subsequently, annual funding through completion of assembly

was capped at about $2.1 billion and the total project cost was capped at

$17.4 billion.

Since 1993, GAO has reported that NASA has made some progress on the

space station, but it still has considerable challenges to overcome,

including lower financial reserves and significant risk related to the space

shuttle’s ability to support the space station’s launch and assembly

schedule. Most recently, in July 1996, GAO reported that the cost and

schedule threats have continued. The cost threat is particularly severe

over the next few years, due to the limited reserves for additional cost

risks such as possible reduced Russian participation.

The Congress may wish to closely monitor NASA’s efforts to manage station

development to enable it to act quickly should estimated costs to complete

the project increase substantially. Such actions could include acceptance

of the cost increases, further reduction in the project’s scope, or

terminating the project. If the project were terminated, the following

savings would result.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 1,449 2,149 2,149 2,149 2,149

Outlays 947 1,884 2,136 2,148 2,149

Savings from the 1997 Defense Plan adjusted for inflation

Budget authority 1,503 2,263 2,323 2,385 2,450

Outlays 982 1,976 2,289 2,362 2,426

Note: This estimate assumes termination costs of $700 million.

Source: Congressional Budget Office.

Related GAO Products Space Station: Cost Control Difficulties Continue (GAO/T-NSIAD-96-210,

July 24, 1996).

Space Station: Cost Control Difficulties Continue (GAO/NSIAD-96-135, July 17,

1996).

Space Station: Declining Budgets and Tight Schedules Could Jeopardize

Space Station Support (GAO/NSIAD-95-171, July 28, 1995).

Space Station: Estimated Total U.S. Funding Requirements

(GAO/NSIAD-95-163, June 12, 1995).

Space Station: Plans to Expand Research Community Do Not Match

Available Resources (GAO/NSIAD-94-33, November 22, 1994).

Space Station: Update on the Impact of the Expanded Russian Role

(GAO/NSIAD-94-248, July 29, 1994).

Space Station: Impact of the Expanded Russian Role on Funding and

Research (GAO/NSIAD-94-220, June 21, 1994).

Space Station: Information on National Security Applications and Cost

(GAO/NSIAD-93-208, May 18, 1993).

Space Station: Program Instability and Cost Growth Continue Pending

Redesign (GAO/NSIAD-93-187, May 18, 1993).

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NASA: Large Programs May Consume Increasing Share of Limited Future

Budgets (GAO/NSIAD-92-278, September 4, 1992).

Space Station: Status of Financial Reserves (GAO/NSIAD-92-279, July 20, 1992).

NASA Budget: Potential Shortfalls in Funding NASA’s 5-Year Plan

(GAO/T-NSIAD-92-18, March 17, 1992).

Questions Remain on the Costs, Uses, and Risks of the Redesigned Space

Station (GAO/T-NSIAD-91-26, May 1, 1991).

GAO Contact Louis J. Rodrigues, (202) 512-4841

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Option:

NASA’s Earth

Observing System

Data and Information

System

Authorizing committees Commerce, Science and Transportation

(Senate) 

Science (House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency National Aeronautics and Space

Administration (NASA)

Account Space, Aeronautics, and Technology

(80-0110)

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Reassess objectives

NASA’s Earth Observing System (EOS) is a comprehensive program to study

global change by gathering and analyzing data about how the earth

functions as a single, integrated system. About a third of the cost for EOS

will go to the Earth Observing System Data and Information System

(EOSDIS), which will operate EOS satellites and instruments and provide

ground acquisition, processing, storage, management, and distribution of

the EOS data. In addition to the EOS data, EOSDIS will incorporate and make

available data from previous NASA missions, non-NASA systems, and

atmosphere-, ocean-, and land-based sensors. Developing EOSDIS is a

massive undertaking; its intended scope far exceeds that of any previous

civilian data management system. Over its lifetime, EOSDIS could

accumulate information comparable to more than 1,000 times the amount

of text stored in the Library of Congress. A major objective of EOSDIS is to

make this enormous quantity of data easily accessible and usable to many

earth scientists.

The bulk of EOSDIS development is being carried out under a single,

comprehensive contract, known as the EOSDIS Core System contract. The

Core System contract was awarded to Hughes Applied Information

Systems in early 1993 and will cost NASA an estimated $930 million through

2003. Hughes is responsible for building and integrating the major

elements of EOSDIS, including hardware and software to be installed at

eight data centers around the country.

In March 1995, GAO observed that NASA’s emphasis on large-scale

development in the near term may be unwise and recommended deferring

full-scale development until technology and standards have further

advanced and user needs are better known. Also, in 1995, the National

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Research Council expressed its concerns about the EOSDIS development

effort and recommended a new approach to EOSDIS, which would

streamline some EOSDIS functions and transfer other functions to a

competitively selected federation of partners in government, academia,

and the private sector. Since that time, NASA has been changing its plans

for EOSDIS to try to accommodate the vision of a federation of partners

recommended by the National Research Council. Given that these changes

should lead to a less intensive near-term systems development effort, it is

reasonable to consider reducing planned funding for EOSDIS. However, GAO

has not made a determination of the exact size of the most appropriate

reduction.

Related GAO Products Earth Observing System: Funding Requirements for NASA’s EOSDIS

(GAO/AIMD-95-153FS, June 8, 1995).

Earth Observing System: Concentration on Near-term EOSDIS Development

May Jeopardize Long-term Success (GAO/T-AIMD-95-103, March 16, 1995).

GAO Contact Jack L. Brock, Jr., (202) 512-6240

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270 Energy • Clean Coal Technology Funds

• Department of Energy’s National Laboratories

• Use of Carryover Balances to Offset Future Budget Needs

• Department of Energy’s Overtime Costs

• Department of Energy’s Cleanup Studies

• Department of Energy’s Contractors’ Separation Benefits Package

• Federal Exemption to Certain State Taxes for Department of Energy’s

Operating Contractors

• Nuclear Waste Disposal Fees

• Power Marketing Administrations Cost Recovery

• Federal Investment in Successfully Commercialized Technologies

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Option:

Clean Coal

Technology Funds

Authorizing committees Energy and Natural Resources (Senate)

Science (House)

Appropriations subcommittees Interior and Related Agencies (Senate and

House)

Primary agency Department of Energy

Account Clean Coal Technology (89-0235)

Spending type Discretionary

Budget subfunction Energy Supply

Framework theme Reassess objectives

A number of clean coal technology demonstration projects are

experiencing problems and difficulties in meeting cost, schedule, and

performance goals. DOE has extended deadlines several times on some

projects to allow their sponsors to restructure the projects, find suitable

alterative project sites, and firm up financing commitments to make the

projects economically viable. In April 1995, the Congress rescinded

$200 million of this program’s budget authority which DOE achieved by

using unobligated funds associated with projects that were subsequently

terminated. DOE’s fiscal year 1997 budget request proposed an additional

$325 million rescission, but the Congress only rescinded $123 million. As

of October 1996, DOE had achieved this rescission and also accumulated

about $159 million of unobligated funds in the clean coal reserve as a

result of terminated projects. DOE expects additional savings ranging from

about $50 million to $100 million or more from combining or terminating

certain other ongoing projects. DOE plans to use the reserve funds to pay

for program direction beginning in fiscal year 1998 through the end of the

program (which DOE estimates could total about $50 million) and to help

pay for cost growth for selective ongoing projects. To the extent that the

reserve funds are not used for cost growth, about $160 million to about

$210 million in unobligated funds may be available for rescission. If the

Congress chose to rescind $160 million in budget authority, the following

savings could occur.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 160 0 0 0 0

Outlays 0 0 25 25 50

Savings from the 1997 funding level adjusted for inflation

Budget authority 160 0 0 0 0

Outlays 0 0 25 25 50

Source: Congressional Budget Office.

Related GAO Products Fossil Fuels: Lessons Learned in DOE’s Clean Coal Technology Program

(GAO/RCED-94-174, May 26, 1994).

Fossil Fuels: Improvements Needed in DOE’s Clean Coal Technology

Program (GAO/RCED-92-17, October 30, 1991).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Department of

Energy’s National

Laboratories

Authorizing committees Energy and Natural Resources (Senate)

Commerce (House)

Appropriations subcommittees Energy and Water Development 

(Senate and House)

Primary agency Department of Energy

Account Energy Supply, R&D Activities 

(89-0224)

Spending type Discretionary

Budget subfunction Atomic Energy Defense Activities

Framework theme Reassess objectives

The Department of Energy’s (DOE) laboratory network is comprised of

approximately 30 labs, with a budget of about $8 billion and employing

over 25,000 scientists and engineers. Recent shifts in national

priorities—principally, the dramatic reduction in the arms race and

proposed cutbacks in energy and nuclear research funding—raise

questions about the need for all these labs. In particular, DOE’s three large

defense labs, costing about $1 billion annually, were created to design and

test nuclear weapons, a role which has greatly diminished over time.

Currently, these labs allocate less than half their budgets to nuclear

weapons design, development, and testing—the principal reasons they

were created. Yet, as GAO has reported, DOE still maintains a redundant

structure with respect to nuclear weapons work, an arrangement that may

no longer be the most efficient alternative for meeting defense

requirements.

The 1995 Galvin Task Force, commissioned by DOE, also argued for more

focused missions for the national laboratories. In addition, the task force

said that the national laboratory system is oversized for its current mission

assignments. Several congressional bills have been introduced in recent

years calling for the creation of a separate structure for determining the

best way to streamline national laboratories.

Aside from deciding on the ideal number of labs, most experts GAO

consulted agree that the missions of the laboratories now need to be

clarified if their resources are to be used most effectively. Some are

suggesting the current laboratory structure may not be the most rational if

the labs are to move into newer mission areas. Suggestions for

restructuring range from converting some labs into private or quasi-public

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entities, transferring labs to universities, or assigning them to different

agencies whose missions better match lab strengths.

In addition to supporting DOE’s efforts to streamline individual labs, the

Congress should reconsider the role and mission of the laboratories as a

group, which could be restructured in various ways. For example, the

Galvin Task Force examined a transfer of most of the nuclear weapons

functions of Lawrence Livermore to the Los Alamos laboratory. Los

Alamos officials estimated that having both facilities design weapons but

only one engineer and test them would eventually save about $200 million

in annual operating costs. The table below reflects savings from phasing in

such a consolidation over a 5-year period.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 32 66 102 140 179

Outlays 24 58 93 131 169

Savings from the 1997 funding level adjusted for inflation

Budget authority 33 70 110 156 205

Outlays 25 60 100 144 192

Source: Congressional Budget Office.

Related GAO Products Federal R&D Laboratories (GAO/RCED/NSIAD-96-78R, February 29, 1996).

National Laboratories Need Clearer Mission and Better Management

(GAO/RCED-95-10, January 27, 1995).

DOE’s National Laboratories: Adopting New Missions and Managing

Effectively Pose Significant Challenges (GAO/T-RCED-94-113, February 3,

1994).

Department of Energy: Management Problems Require a Long-term

Commitment to Change (GAO/RCED-93-72, August 31, 1993).

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Nuclear Weapons Complex: Issues Surrounding Consolidating Los Alamos

and Lawrence Livermore National Laboratories (GAO/RCED-92-98,

September 24, 1992).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Use of Carryover

Balances to Offset

Future Budget Needs

Authorizing committees Armed Services (Senate)

Energy and Natural Resources (Senate)

National Security (House)

Commerce (House)

Appropriations subcommittees Energy and Water Development 

(Senate and House) 

Interior and Related Agencies (Senate and

House)

Primary agency Department of Energy

Accounts Multiple

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Improve efficiency

Carryover balances represent funding from prior years’ budgets and

consist of both unobligated balances and uncosted obligations. Each fiscal

year, the Department of Energy (DOE) requests obligational authority from

the Congress to meet the costs of running its programs. Once DOE receives

this authority, it obligates funds by placing orders or awarding contracts

for goods and services that will require payment during the same fiscal

year or in the future. Unobligated balances represent the portion of its

authority that the Department has not obligated. Uncosted obligations

represent the portion of the Department’s authority that it has obligated

for goods and services but for which it has not yet incurred costs.

Uncosted obligations may occur because goods and services have not yet

been provided or they may reflect amounts no longer needed because of

cost underruns, reductions in the projects’ scope, or cancellation of

projects. DOE’s carryover balances are distributed among operating

activities, capital equipment procurement, and construction projects. At

the beginning of fiscal year 1996, DOE’s carryover balances totaled

$9.6 billion.

Over the past several years, GAO has audited DOE’s carryover balances and

found amounts that were no longer needed for their original purposes, and

thus, could be used to offset future funding requirements. For example, a

1994 GAO review of two DOE program areas—Environmental Management

and Defense Programs—identified over $500 million in unneeded funds. In

its most recent review, GAO found that while DOE programs need some

carryover balances to pay for commitments made in prior years that have

not been completed, the Department may have had as much as $2.1 billion

in operating activity and capital procurement carryover balances that were

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potentially available to offset the Department’s fiscal year 1997 budget

request. Of this total, $1.6 billion was contained in the Energy Research,

Energy Efficiency, and Fossil Energy programs. GAO also found that the

Department had $73.5 million in funding for construction projects that was

available. Future appropriations could be reduced to reflect these

carryover balances.

While GAO recognizes that the $2.1 billion in potentially available balances

represents a starting point from which to identify the amount of balances

that could actually be used to offset DOE’s budget, the Congress may wish

to consider reducing fiscal year 1998 appropriations to reflect some

portion of these available funds. Based on GAO’s prior work, reducing

appropriations by $500 million in fiscal year 1998 could achieve the

following savings.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 Defense Plan

Budget authority 500 0 0 0 0

Note: The budget authority reduction for this option is based on GAO’s estimate. CBO does not

estimate any corresponding reduction in outlays for the five-year period as the carryover balance

is reduced.

Source: Congressional Budget Office.

Related GAO Products DOE’s Carryover Balances and Fiscal Year 1997 Budget (GAO/RCED-96-239R,

September 6, 1996).

DOE Management: DOE Needs to Improve Its Analysis of Carryover

Balances (GAO/RCED-96-57, April 12, 1996).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Department of

Energy’s Overtime

Costs

Authorizing committees Armed Services (Senate)

Energy and Natural Resources (Senate)

National Security (House)

Commerce (House)

Appropriations subcommittees Energy and Water Development (Senate

and House)

Interior and Related Agencies (Senate and

House)

Primary agency Department of Energy

Accounts Multiple

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Improve efficiency

The Department of Energy’s (DOE) direct overtime costs for its federal

employees increased from $15.5 million in 1989 to $26.5 million in 1993. In

1995, overtime costs dropped to about $21.9 million.

In the past, DOE’s efforts to manage and minimize such costs have been

limited. DOE has (1) incurred costs for questionable overtime work, such as

driving DOE officials to the airport from their homes on weekends, (2) not

fully utilized compensatory time as a less costly alternative to paid

overtime, and (3) not consistently planned annual leave to minimize the

use of overtime. In order to better manage overtime and minimize costs,

DOE should (1) ensure that the types of work driving overtime costs are

essential, (2) increase the use of compensatory time as an alternative to

paid overtime, and (3) ensure that annual leave is planned to minimize the

use of overtime. The Congress may wish to reduce DOE appropriations in

anticipation of changes in DOE’s direct overtime costs practices. The

following table illustrates the savings that could be realized over 5 years if

DOE reduced its overtime expenditures annually by 6 percent.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 1 3 4 5 7

Outlays 1 2 4 5 6

Savings from the 1997 funding level adjusted for inflation

Budget authority 1 3 4 6 7

Outlays 1 2 4 5 7

Source: Congressional Budget Office.

Related GAO Product Energy Management: Department of Energy’s Efforts to Manage Overtime

Costs Have Been Limited (GAO/RCED-94-282, September 27, 1994).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Department of

Energy’s Cleanup

Studies

Authorizing committees Armed Services (Senate)

Energy and Natural Resources (Senate)

National Security (House)

Commerce (House)

Appropriations subcommittees Energy and Water Development (Senate

and House)

Interior and Related Agencies (House)

Primary agency Department of Energy

Accounts Multiple

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Improve efficiency

The Department of Energy’s (DOE) Environmental Management (EM)

program oversees and directs all aspects of the agency’s nuclear weapons

complex cleanup. DOE has been criticized for the high cost of the program

and for spending too much money studying sites, rather than cleaning

them up.

Remediation activities at DOE’s facilities are governed by the

Comprehensive Environmental Response, Compensation, and Liability Act

(CERCLA) of 1980, as amended, and the Resource Conservation and

Recovery Act (RCRA) of 1976, as amended. These laws lay out requirements

for identifying waste sites, studying the extent of their contamination and

identifying possible remedies, and involving the public in making decisions

about the sites. CERCLA offers three methods for determining how a waste

site will be remediated: the full CERCLA process, interim remedial measures,

and removal actions. Removal actions are the most abbreviated of the

three processes.

Removal actions save time and money and can provide other benefits,

such as quickly reducing continued risks to the environment. For example,

GAO found that removal actions cost from 80 to 90 percent less than the

other approaches. While DOE has a policy that encourages the greater use

of removal actions, DOE has made limited use of removal actions for a

variety of reasons, including requirements in interagency agreements and

contracts with DOE’s cleanup contractors that do not encourage the use of

removal actions. GAO also found that while complete, reliable data on the

number of sites where removal actions could be used is not available,

many of DOE’s cleanup sites share the same characteristics as the sites

where removal actions have been used. For example, at DOE’s Hanford

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facility about 33 percent of all clean-up sites are similar to those where

removal actions were used.

In fiscal year 1995, DOE spent about $845 million on studying cleanup sites

under CERCLA and/or RCRA. Assuming that 25 percent of these studies could

be performed as removal actions and that cost reductions of 85 percent

could be achieved for these sites, the Congress could require DOE’s EM

program to increase the use of removal actions and reduce DOE’s budget by

about $190 million.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 190 190 190 190 190

Outlays 143 190 190 190 190

Savings from the 1997 funding level adjusted for inflation

Budget authority 195 200 206 211 217

Outlays 146 199 204 210 216

Source: Congressional Budget Office.

Related GAO Product Nuclear Waste: Greater Use of Removal Actions Could Cut Time and Cost

for Cleanups (GAO/RCED-96-124, May 23, 1996).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Department of

Energy’s Contractors’

Separation Benefits

Package

Authorizing committees Armed Services (Senate)

National Security (House)

Appropriations subcommittees Energy and Water Development (Senate

and House)

Primary agency Department of Energy

Accounts Multiple

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Redefine beneficiaries

Since 1993, the Department of Energy (DOE) has spent nearly $600 million

to provide benefits to contractor employees separated in workforce

restructuring and downsizing efforts at its facilities. About 88 percent of

the costs were for enhanced retirement incentives or severance pay.

Enhanced retirement programs typically added 3 years to age and service

for the purpose of calculating pension benefits. Some enhanced retirement

programs included an additional incentive payment. Other benefits

included extended medical insurance and help with retraining, relocating,

and finding new jobs for affected employees. More than half of the

workforce restructuring plans provided more generous severance pay than

would have normally been provided by the contractors under existing

contracts, and all facilities provided other benefits not normally provided

by contractors. Moreover, benefits provided under the workforce

restructuring plans exceeded those that would be provided to federal

employees in a reduction in force.

As DOE continues to align its contractor workforce because of its reduced

defense mission and as it completes environmental cleanup efforts, it will

undergo further downsizing. The Congress could take action to bring

separation benefits in line with existing DOE contracts or with those

benefits provided federal employees. CBO estimates such action would

result in the following savings.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 26 4 10 15 10

Outlays 26 4 10 15 10

Savings from the 1997 funding level adjusted for inflation

Budget authority 27 4 11 17 12

Outlays 27 4 11 17 12

Source: Congressional Budget Office.

Related GAO Product Department of Energy: Value of Benefits Paid to Separated Contractor

Workforce Varied Widely (GAO/RCED-97-33, January 23, 1997).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Federal Exemption to

Certain State Taxes

for Department of

Energy’s Operating

Contractors

Authorizing committees Armed Services (Senate) 

Energy and Natural Resources (Senate) 

National Security (House) 

Commerce (House)

Appropriations subcommittees Energy and Water Development (Senate

and House)

Interior and Related Agencies (Senate and

House)

Primary agency Department of Energy

Accounts Multiple

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Redefine beneficiaries

The federal government is exempt from paying certain state taxes, such as

gross receipts and use taxes. However, the Department of Energy’s (DOE)

contractor-operated laboratories and production plants, although wholly

government-owned and dedicated exclusively to government programs,

are subject to such taxes. Because DOE has fully reimbursable contracts

with its operating contractors, DOE is, in effect, paying these taxes. The

amounts reimbursed can be significant. For example, in fiscal year 1995,

the contractors at DOE’s Oak Ridge and Sandia facilities were reimbursed

almost $69 million for gross receipts, sales, and/or use taxes. The Congress

could take action to designate DOE operating contractors as

“instrumentalities of the federal government.” Such action would make the

contractors immune from state taxation and thereby eliminate this

expense.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 90 90 90 90 90

Outlays 90 90 90 90 90

Savings from the 1997 funding level adjusted for inflation

Budget authority 90 90 90 90 90

Outlays 90 90 90 90 90

Source: Congressional Budget Office.

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Related GAO Product Energy Management: DOE Controls Over Contractor Expenditures Need

Strengthening (GAO/RCED-87-166, August 28, 1987).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Nuclear Waste

Disposal Fees

Authorizing committees Energy and Natural Resources (Senate)

Commerce (House)

Resources (House)

Primary agency Department of Energy

Spending type Direct

Framework theme Improve efficiency

Utilities pay a fee to the Nuclear Waste Fund to finance the development

of storage and permanent disposal facilities for high-level radioactive

wastes. The amount of this fee has not changed since 1983, making the

fund susceptible to future budget shortfalls. To help ensure that sufficient

revenues are collected to cover increases in cost estimates caused by price

inflation, the Congress should amend the Nuclear Waste Policy Act of 1982

to direct the Secretary of Energy to automatically adjust for inflation the

nuclear waste disposal fee that utilities pay into the Nuclear Waste Fund.

If the fee were indexed to inflation, the following additional receipts could

be expected.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Added receipts 16 33 51 69 88

Source: Congressional Budget Office.

Related GAO Products Status of Actions to Improve DOE User-Fee Assessments (GAO/RCED-92-165,

June 10, 1992).

Changes Needed in DOE User-Fee Assessments (GAO/T-RCED-91-52, May 8,

1991).

Changes Needed in DOE User-Fee Assessments to Avoid Funding Shortfall

(GAO/RCED-90-65, June 7, 1990).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Power Marketing

Administrations Cost

Recovery

Authorizing committees Energy and Natural Resources (Senate)

Resources (House)

Primary agency Department of Energy

Spending type Direct

Framework theme Redefine beneficiaries

Three of the Department of Energy’s (DOE) power marketing

administrations (PMAs)—the Southeastern Power Administration, the

Southwestern Power Administration, and the Western Area Power

Administration—market primarily wholesale power in 30 states produced

at large, multiple-purpose water projects. The three PMAs receive annual

appropriations to cover operating and maintenance (O&M) expenses and, if

applicable, the capital investment in transmission assets. Federal law

requires the PMAs to repay these appropriations as well as the

power-related O&M and the capital appropriations expended by the

operating agencies generating the power.

GAO identified five major power-related costs that have not been fully

recovered by one or more of the three PMAs through rates: (1) pensions

and postretirement health benefits for current employees; (2) construction

costs for some power-generating and transmission projects;

(3) construction and O&M costs that have been allocated to irrigation

facilities at the Pick-Sloan Program that are incomplete and infeasible;

(4) costs of mitigating the environmental impact of certain water projects;

and (5) certain O&M costs and interest expense payments due from the

Western Area Power Administration. In some cases, the PMAs are not

required to recover these costs because of legislation or DOE policy. GAO

estimated that these unrecovered costs amounted to about $83 million for

fiscal year 1995 and cumulatively as much as $1.8 billion as of

September 30, 1995. GAO has also determined that financing of

power-related capital projects is subsidized by the federal government and

estimates that the financing subsidies were about $200 million in fiscal

year 1995. GAO estimates that the cumulative financing subsidy over the

last 30 years has been several billion dollars.

The Congress and/or the Secretary of Energy may wish to consider

directing the PMAs to more fully recover power-related costs or revising

DOE’s policy on high-interest debt repayment. For example, changes could

be implemented to recover the full costs to the federal government of

providing postretirement health benefits and pensions for current

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employees and operating agency employees engaged in producing and

marketing the power sold by the PMAs. CBO estimates that such action

would result in the following savings.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Added receipts 16 16 17 17 18

Source: Congressional Budget Office.

Related GAO Products Power Marketing Administrations: Cost Recovery, Financing, and

Comparison to Nonfederal Utilities (GAO/AIMD-96-145, September 19, 1996).

Federal Power: Outages Reduce the Reliability of Hydroelectric Power

Plants in the Southeast (GAO/T-RCED-96-180, July 25, 1996).

Federal Power: Recovery of Federal Investment in Hydropower Facilities

in the Pick-Sloan Program (GAO/T-RCED-96-142, May 2, 1996).

Federal Electric Power: Operating and Financial Status of DOE’s Power

Marketing Administrations (GAO/RCED/AIMD-96-9FS, October 13, 1995).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Federal Investment in

Successfully

Commercialized

Technologies

Authorizing committees Energy and Natural Resources (Senate)

Science (House) 

Commerce (House)

Appropriations subcommittees Energy and Water Development (Senate

and House)

Interior and Related Agencies (Senate and

House)

Primary agency Department of Energy

Accounts Multiple

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Redefine beneficiaries

The Department of Energy (DOE) and the private sector are involved in

hundreds of cost-shared projects aimed at developing a broad spectrum of

cost-effective, energy-efficiency 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. In June 1996, GAO reported that DOE generally does not require

repayment of its investment in technologies that are successfully

commercialized. GAO’s review identified only four DOE programs that

require industry repayment if the technologies are ultimately

commercialized. The offices in which GAO focused most of its work

planned to devote about $8 billion in federal funds to cost-shared projects

over their lifetime, of which about $2.5 billion is subject to repayment.

GAO’s report discussed the advantages and disadvantages of having a

repayment policy and pointed out that many of the disadvantages can be

mitigated by structuring a flexible repayment requirement with the

disadvantages in mind. It also discussed the types of programs and

projects that would be the most appropriate or suitable for repayment of

the federal investment.

Because opportunities exist for substantial repayment in some of DOE’s

programs, requiring repayment under a flexible policy would allow the

government to share in the benefits of successfully commercialized

technologies that could amount to hundreds of millions of dollars. The

potential for repayment can be illustrated by assuming that if only 50

percent of the $5.5 billion planned for projects that are currently not

subject to repayment lend themselves to repayment and if about 15

percent of research and development funds result in commercialized

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technologies (which DOE officials say is about average), then about

$400 million could be repaid to the federal government. However, a 5-year

savings estimate cannot be developed at this time because new repayment

provisions would only apply to future technology development projects

not yet negotiated with industry.

Related GAO Product Energy Research: Opportunities Exist to Recover Federal Investment in

Technology Development Projects (GAO/RCED-96-141, June 26, 1996).

GAO Contact Victor S. Rezendes, (202) 512-3841

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300 Natural

Resources and

Environment

• Federal Land Policies

• Collaborative Federal Land Management Approach

• Federal Timber Sales

• Fair Market Value for Natural Resources

• Recreation Fees at Federal Sites

• Hardrock Mining Royalties

• Natural Resources Revenue Sharing

• Federal Water Policies

• Water Transfers

• Pollution Fees and Taxes

• Hazardous Waste Cleanup Cost Recovery

• Non-Time-Critical Removals in Superfund Cleanups

• Excess Funds in Superfund Contracts

• Weather Service Modernization Project

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Option:

Federal Land Policies Authorizing committees Agriculture, Nutrition and Forestry (Senate)

Energy and Natural Resources (Senate)

Agriculture (House)

Resources (House)

Transportation and Infrastructure (House)

Primary agencies Department of the Interior

Department of Agriculture

Spending type Direct

Framework theme Improve efficiency

The federal government owns and manages about 650 million

acres—nearly one-third of the U.S. landmass. For many years, these lands

have been sold or otherwise made available for a variety of purposes to

private citizens, corporations, and state and local governments. In many

cases, the rate of return received by the government for the sale or use of

these valuable natural resources has fallen far below reasonable

market-based levels.

This option has two components: increased fees for patenting hardrock

mining claims and higher fees for concessionaires operating on federal

lands. Descriptions of each component follow.

Increased Fees for

Patenting Hardrock Mining

Claims

The Mining Law of 1872 allows holders of economically minable claims to

obtain all rights and interests to both the land and the minerals by

patenting them for $2.50 or $5.00 an acre—an amount that approximated

the fair market value for western grazing land and farmland in 1872. Over

the last 124 years, the federal government has sold about 3.2 million acres

of public lands, or an area about the size of Connecticut, under this patent

provision. As a result, some patent holders have reaped huge profits at the

government’s expense. At the time of GAO’s 1989 study, 265 patent

applications were pending for more than 80,000 acres of public land. At

just 12 of these sites, if all the land applied for was patented, the

government would have received about $16,000 for land appraised in 1988

at between $14.4 million and $47.1 million.

The 104th Congress considered several bills that address patenting of

hardrock mining claims. Two companion bills (H.R. 1580 and S.

506) would have repealed the current congressional moratorium against

new mining patents. Four other bills (H.R. 357 and its companion S. 504, as

well as H.R. 721 and H.R. 3102) would have eliminated patenting of mining

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claims. Under a seventh bill (S. 639), patenting would have granted the

claimholder title to the mineral only.

Revising the patent fees for hardrock mining claims could take many

forms (assuming the current moratorium on patenting is lifted). For

example, fees could be set to recover the agency’s administrative costs to

process the patents, or the fees could be set to capture the fair market

value of selling the land and/or the mineral resources. The amount of

additional receipts from increased fees would depend on the specific

proposal implemented. In any case, estimating savings is difficult because

of the large variation in surface land values, the lack of essential data

about the mineral resources on current claims, and the lack of multiple

bidders on any claim to allow a competitive process. CBO cannot develop a

5-year estimate of additional receipts due to increased fees for patenting

hardrock mining claims at this time.

Higher Fees for

Concessionaires Operating

on Federal Lands

The federal government enters into agreements with concessionaires to

provide key services in parks, forests, and other recreation areas. In 1991,

GAO reported that concessionaires generated about $1.4 billion in gross

revenues and paid the government about $35 million in concession

fees—an average return to the government of about 2 percent. The

Department of the Interior’s follow-on report to the Vice President’s

National Performance Review concluded that receipts from concession

franchise fees must be actively pursued by the National Park Service,

estimating that substantial revenue could be generated by promoting

competition, expediting contract renegotiations, and boosting the

government’s return.

The 104th Congress considered several bills that would reform concession

policies. All of these bills were intended to increase the return to the

government by limiting preferential rights of renewal, thus increasing

competition. H.R. 773 and S. 309 focused only on the National Park Service

and would have allowed the agency to keep increased fee revenue. H.R.

2028, which was included in the fiscal year 1996 omnibus budget

reconciliation bill (H.R. 2491), would have increased fees for several land

management agencies. Under H.R. 2028, fees up to a minimum amount

would have been credited to the U. S. Treasury and fees above that level

would have stayed within the agencies.

CBO cannot provide a savings estimate for higher fees at this time. The

Park Service has recently renegotiatied many of its existing agreements

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with concessionaires. Therefore, some of the savings from this option may

occur beyond the year 2002.

Related GAO Products

Land Ownership Land Ownership: Information on the Acreage, Management, and Use of

Federal and Other Lands (GAO/RCED-96-40, March 13, 1996).

Hardrock Mining Patents Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

Federal Land Management: The Mining Law of 1872 Needs Revision

(GAO/RCED-89-72, March 10, 1989).

Concessionaires Operating on

Federal Lands

Federal Lands: Concession Reform Is Needed (GAO/T-RCED/GGD-96-223,

July 18, 1996).

NPS Projected Returns From Concessionaires (GAO/RCED-96-48R,

November 28, 1995).

National Parks: Difficult Choices Need to Be Made About the Future of the

Parks (GAO/RCED-95-238, August 30, 1995).

Federal Lands: Views on Reform of Recreation Concessionaires

(GAO/T-RCED-95-250, July 25, 1995).

National Parks: Difficult Choices Need to Be Made About the Future of the

Parks (GAO/T-RCED-95-124, March 7, 1995).

Federal Lands: Little Progress Made in Improving Oversight of

Concessionaires (GAO/T-RCED-93-42, May 27, 1993).

Forest Service: Little Assurance That Fair Market Value Fees Are

Collected From Ski Areas (GAO/RCED-93-107, April 16, 1993).

Federal Lands: Improvements Needed in Managing Concessionaires

(GAO/RCED-91-163, June 11, 1991).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Collaborative Federal

Land Management

Approach

Authorizing committees Agriculture, Nutrition, and Forestry (Senate) 

Energy and Natural Resources (Senate)

Agriculture (House)

Resources (House)

Appropriations subcommittees Interior and Related Agencies (Senate and

House)

Primary agencies Department of the Interior

Department of Agriculture

Accounts Multiple

Spending type Discretionary

Budget subfunction Conservation and Land Management

Framework theme Improve efficiency

The responsibilities of the four major federal land management

agencies—the National Park Service, Bureau of Land Management (BLM),

Fish and Wildlife Service within the Department of Interior, and the Forest

Service within the Department of Agriculture—have grown more similar

over time. Most notably, the Forest Service and BLM now provide more

noncommodity uses, including recreation and protection for fish and

wildlife, on their lands. In addition, managing federal lands has become

more complex. Managers have to reconcile differences among a growing

number of laws and regulations, and the authority for these laws is

dispersed among several federal agencies and state and local agencies.

These changes have coincided with two other developments—the federal

government’s increased emphasis on downsizing and budgetary constraint

and scientists’ increased understanding of the importance and functioning

of natural systems whose boundaries may not be consistent with existing

jurisdictional and administrative boundaries. Together, these changes and

developments suggest a basis for reexamining the processes and

structures under which the federal land management agencies currently

operate.

Over the last 26 years, two basic strategies have been proposed to improve

federal land management: (1) streamlining the existing structure by

coordinating and integrating functions, systems, activities, programs, and

field locations and (2) reorganizing the structure by combining agencies.

The two strategies are not mutually exclusive and some prior proposals

have encompassed both.

Over the last several years, the Forest Service and BLM have collocated

some offices or shared space with other federal agencies. They have also

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pursued other means of streamlining, sharing resources, and saving rental

costs. However, no significant legislation has been enacted to streamline

or reorganize federal land management agencies and the four major

federal land management agencies have not, to date, developed a strategy

to coordinate and integrate their functions, systems, activities, and

programs.

Without a specific restructuring proposal that would eliminate certain

programs or revise how the land is managed, CBO does not estimate

savings due to sharing resources between the four major land management

agencies. Savings would depend on the extent of a workforce

restructuring and implementation proposal.

Related GAO Products Federal Land Management: Streamlining and Reorganization Issues

(GAO/T-RCED-96-209, June 27, 1996).

National Park Service: Better Management and Broader Restructuring

Efforts Are Needed (GAO/T-RCED-95-101, February 9, 1995).

Forestry Functions: Unresolved Issues Affect Forest Service and BLM

Organizations in Western Oregon (GAO/RCED-94-124, May 17, 1994).

Forest Service Management: Issues to Be Considered in Developing a New

Stewardship Strategy (GAO/T-RCED-94-116, February 1, 1994).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Federal Timber Sales Authorizing committees Agriculture, Nutrition and Forestry (Senate)

Agriculture (House)

Appropriation subcommittees Interior and Related Agencies (Senate and

House)

Primary agency Department of Agriculture

Accounts National Forest System (12-1106)

National Forest Service Receipts (12-9990)

Spending type Discretionary/Direct

Budget subfunction Conservation and Land Management

Framework theme Improve efficiency

The Department of Agriculture’s Forest Service does not always recover

all of its timber-related costs from the sale of timber. Currently, the

Service receives most of its timber funding from timber sales and from

appropriated funds linked primarily to timber management and harvest.

GAO estimated that in fiscal year 1990, under the most conservative

definition of costs, $35.6 million in Forest Service preparation and

administration expenses went unrecovered. GAO’s estimates ranged as high

as $112.2 million when all operating costs and payments to states were

considered. According to the Forest Service’s fiscal year 1995 Timber Sale

Program Annual Report, timber sale program costs exceeded revenues by

about $195 million when payments to states are considered as costs of the

program.

The escalating costs of the Forest Service’s timber sale program has long

been a concern of the Congress. In response to this concern, the Forest

Service has taken efforts to achieve cost efficiencies and is reviewing its

policy regarding below-cost timber sales. The primary objective of some

timber sales is to achieve forest stewardship objectives such as forest

health—generating revenues is secondary. However, notwithstanding

these types of timber sales, at some forests, the costs to prepare and

administer timber sales still exceed total receipts.

The Congress may wish to cease all below-cost federal timber sales. For

example, all future timber sales could be eliminated in three of the Forest

Service’s nine regions where, on average over the last decade, cash

expenditures have exceeded cash receipts. This also would reduce Forest

Service outlays for timber management, reforestation, construction of

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logging roads, and other program costs. CBO estimates that the following

net 5-year savings in federal outlays could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 25 35 40 50 60

Outlays 20 30 35 45 55

Savings from the 1997 funding level adjusted for inflation

Budget authority 25 35 40 50 60

Outlays 20 30 35 45 55

Source: Congressional Budget Office.

Related GAO Products Forest Service: Observations on the Emergency Salvage Sale Program

(GAO/T-RCED-96-38, November 29, 1995).

Forest Service: Distribution of Timber Sales Receipts Fiscal Years 1992-94

(GAO/RCED-95-237FS, September 8, 1995).

Forest Service: Status of Efforts to Achieve Cost Efficiency

(GAO/RCED-94-185FS, April 26, 1994).

Forest Service Management: Issues to Be Considered in Developing a New

Stewardship Strategy (GAO/T-RCED-94-116, February 1, 1994).

Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

Comments on Below-Cost Timber Bills (GAO/RCED-92-160R, April 1, 1992).

Forest Service Needs to Improve Efforts to Reduce Below-Cost Timber

Sales (GAO/T-RCED-91-43, April 25, 1991).

Forest Service Needs to Improve Efforts to Protect the Government’s

Financial Interest and Reduce Below-Cost Timber Sales (GAO/T-RCED-91-42,

April 24, 1991).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Fair Market Value for

Natural Resources

Authorizing committees Agriculture, Nutrition and Forestry (Senate)

Energy and Natural Resources (Senate)

Agriculture (House)

Resources (House)

Primary agencies Department of Agriculture

Department of the Interior

Spending type Direct

Framework theme Improve efficiency

Implementing market-based incentives and management practices may

encourage more economically and environmentally sound use of federal

lands and resources. The existing arrangement for use of the public

domain provides subsidies to users—such as grazers, miners, and

communication site lessees—that may encourage poor use of scarce

resources and/or deprive the government of revenues to which it is

entitled. In addition, certain non fee-related provisions of the governing

laws may also encourage less than optimal use of those lands and

resources. For example, currently livestock operators on Forest Service

lands are required to graze livestock on their allotments or lose their

permits. Removing this “use-it-or-lose-it” requirement would not only

promote economically efficient use of the resources, but also improve

ecological conditions on Forest Service lands since environmental groups

may often outbid ranchers for the permits in order to rest the land.

Many proposals have been advanced to alter the existing arrangements to

stress better use of the lands and/or increased revenue to the federal

government including: implementing new user fees for a variety of uses;

charging fair market value for goods and recovering costs for services;

opening certain uses to competitive bidding and removing restrictions on

how the land must be used; funding land management units out of net

receipts; and entering into partnership arrangements with other

governmental and non-governmental entities. Some of these ideas would

require specific new statutory authority, while others could be

implemented under current authority.

According to the Thoreau Institute, charging fair market value for all uses,

including timber, grazing, recreation, and minerals and subsequently

funding forests, parks, and public lands out of the net income would save

taxpayers more than $21 billion over 5 years. No more funds would be

appropriated for these uses.

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In this report, GAO presents several specific options that illustrate how

market-based incentives could be implemented. See the options “Federal

Land Policies,” “Federal Timber Sales,” “Recreation Fees at Federal Sites,”

“Hardrock Mining Royalties,” “Federal Water Policies,” and “Water

Transfers.”

Related GAO Product Forest Service Management: Issues to Be Considered in Developing a New

Stewardship Strategy (GAO/T-RCED-94-116, February 1, 1994).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Recreation Fees at

Federal Sites

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)

Energy and Natural Resources (Senate)

Agriculture (House)

Resources (House)

Transportation and Infrastructure (House)

Primary agencies Department of the Interior

Department of Agriculture

Spending type Direct

Framework theme Improve efficiency

Improved pricing of user fees at recreational sites could help defray direct

costs to the government, shift the cost burden from the taxpayers to the

beneficiaries of the services, and alleviate overcrowding at many sites.

Entrance and user fees are charged at some sites, but the fees generally

cover only a small portion of the costs for services provided to visitors.

For example, in 1993, the Department of the Interior’s National Park

Service spent an estimated $230 million on services for visitors but

recovered only an estimated $90 million in fees.

Interior’s follow-on report to the Vice President’s National Performance

Review concluded that reform in the nature, level, and collection of fees in

national parks could generate substantial revenues.

Fiscal year 1996 and 1997 appropriations legislation for the Park Service,

as well as some other land management agencies, included language that

permits these agencies to experiment with increased entrance fees at a

number of locations. In addition, legislation was introduced in the 104th

Congress to permanently authorize higher fees throughout the Park

Service and several other land management agencies.

Requiring the Park Service to charge fees to cover direct as well as

associated costs and disallowing their use for increased park spending

would yield net new receipts over the fiscal year 1998 through 2002 period

as shown in the following table. Any spending increases resulting from

increased fees would be subject to future appropriations action.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Added receipts 200 207 215 222 231

Source: Congressional Budget Office.

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Related GAO Products Comments on H.R. 2107 (GAO/RCED-96-189R, June 11, 1996).

National Parks: Difficult Choices Need to Be Made About the Future of the

Parks (GAO/RCED-95-238, August 30, 1995).

National Parks: Difficult Choices Need to Be Made About the Future of the

Parks (GAO/T-RCED-95-124, March 7, 1995).

Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

Forest Service: Difficult Choices Face the Future of the Recreation

Program (GAO/RCED-91-115, April 15, 1991).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Hardrock Mining

Royalties

Authorizing committees Agriculture, Nutrition and Forestry (Senate)

Energy and Natural Resources (Senate)

Agriculture (House)

Resources (House)

Primary agencies Department of the Interior

Department of Agriculture

Spending type Direct

Framework theme Improve efficiency

The government receives no financial compensation for hardrock minerals

extracted from federal lands. In 1990, hardrock minerals worth at least

$1.2 billion were extracted from federal lands, while known, economically

recoverable reserves of hardrock minerals remaining on federal lands

were valued at $64.9 billion.

The 104th Congress considered several bills that would have imposed

royalties on hardrock minerals extracted from federal lands. H.R. 1580 and

S. 506 would have imposed a royalty of 3 percent of the net proceeds for

mines grossing at least $500,000 annually. Two other bills (H.R. 721 and S.

504) would have imposed a royalty fee of 8 percent of the gross income.

H.R. 357 and H.R. 3102 would have imposed a royalty of 8 percent of the

net smelter return. Another bill, S. 639, would have assessed royalties for

gold at 3 percent of the gross value, and for minerals other than gold at

2 percent of the gross value.

Assuming that the Congress adopted an 8-percent royalty on gross profits,

CBO estimates that the following receipts would be gained. CBO’s estimate

reflects a reduction since 1990 in the expected amount of hardrock

minerals produced on federal lands as a result of patenting.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Added receipts 12 55 39 39 39

Source: Congressional Budget Office.

Related GAO Products Mineral Royalties: Royalties in the Western States and in Major

Mineral-Producing Countries (GAO/RCED-93-109, March 29, 1993).

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Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

Mineral Resources: Value of Hardrock Minerals Extracted From and

Remaining on Federal Lands (GAO/RCED-92-192, August 24, 1992).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Natural Resources

Revenue Sharing

Authorizing committees Agriculture, Nutrition and Forestry (Senate)

Energy and Natural Resources (Senate)

Agriculture (House)

Resources (House)

Appropriations subcommittees Agriculture, Rural Development, and

Related Agencies (Senate)

Interior and Related Agencies (Senate and

House)

Agriculture, Rural Development, Food and

Drug Administration, and Related

Agencies (House)

Primary agencies Department of the Interior

Department of Agriculture

Accounts Multiple

Spending type Direct

Budget subfunction Conservation and Land Management

Framework theme Improve efficiency

The federal government collects fees from private interests for the sale or

use of natural resources on federal lands. A percentage of these fees is,

under certain conditions, allocated to states and counties as an offset for

tax revenues not received from the federal lands.

Federal land-managing agencies typically do not deduct the full costs of

their programs from the gross receipts that the programs generate before

sharing the receipts with states and counties. Sharing federal receipts on a

gross, rather than a net, basis often reduces the federal government’s

share of the revenues.

According to CBO, changing revenue sharing from a gross-receipt to a

net-receipt basis would reduce net federal outlays and produce the savings

shown as follows.17

17The projected savings do not include a potential federal cost increase under the Payment in Lieu of

Taxes (PILT) program. Payments under the discretionary PILT program would increase by about

$30 million per year beginning in fiscal year 1999 if net program receipts were shared and the Congress

appropriated such an increase.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 180 190 195 200 205

Outlays 180 190 195 200 205

Savings from the 1997 funding level adjusted for inflation

Budget authority 180 190 195 200 205

Outlays 180 190 195 200 205

Source: Congressional Budget Office.

Related GAO Products Forest Service: Distribution of Timber Sales Receipts Fiscal Years 1992-94

(GAO/RCED-95-237FS, September 8, 1995).

Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

Rangeland Management: Current Formula Keeps Grazing Fees Low

(GAO/RCED-91-185BR, June 11, 1991).

Forest Service Needs to Improve Efforts to Reduce Below-Cost Timber

Sales (GAO/T-RCED-91-43, April 25, 1991).

Mineral Revenues: Collection and Distribution of Revenues From Acquired

Lands (GAO/RCED-90-7, August 2, 1990).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Federal Water Policies Authorizing committees Energy and Natural Resources (Senate)

Resources (House)

Primary agency Department of the Interior

Accounts Multiple

Spending type Direct

Budget subfunction Water Resources

Framework theme Improve efficiency

This broad option has five components: increased fees for subsidized

federal water to large farms, subsidized water to produce subsidized

crops, repayment of water project construction costs, recovery of federal

investment in hydropower facilities, and federal water subsidies.

Descriptions of each of the components follow.

Subsidized Federal Water

to Large Farms

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

irrigation water. The act limits to 960 the maximum number of owned or

leased acres that individuals or legal entities (such as partnerships or

corporations) can irrigate with federal water at rates that exclude interest

on the government’s investment in the irrigation component of its water

resource projects. However, due to the vague definition of the term “farm,”

the flow of federally subsidized water to land holdings above the 960

acre-limit has not been stopped, and the federal government is not

collecting revenues to which it is entitled under the act.

Subsidized Water to

Produce Subsidized Crops

The use of federally subsidized water to produce federally subsidized

crops results in the government paying double subsidies. According to the

Department of the Interior, between 1976 and 1985, an average of 38

percent of the acreage served by the Bureau of Reclamation nationwide

was used to produce crops that are also eligible for subsidies through the

Department of Agriculture’s commodity programs. Estimates of the cost of

federal water subsidies vary but are substantial. The Department of the

Interior estimated that irrigation subsidies used to produce subsidized

crops throughout the 17 western states totaled $203 million in 1986; the

Bureau of Reclamation placed the figure at $830 million.

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Time Frame for Repaying

Water Project Construction

Costs

By the end of fiscal year 1990, after receiving water from the Central Valley

Project (CVP) in California’s Central Valley Basin for over 40 years,

irrigators had repaid only $10 million, 1 percent, of the over $1 billion in

construction costs that they owe the federal government. In 1986, the

Congress required irrigators and other users to pay their share of the

federal investment in the CVP by 2030. While construction costs ultimately

may be recovered by 2030, the dollars that eventually flow to the Treasury

could be worth much less than if they had been repaid sooner. The

Congress may wish to accelerate the repayment schedule.

Recovery of Federal

Investment in Hydropower

Facilities

Under the current repayment criteria, approximately $454 million of the

federal investment in the Pick-Sloan Basin Program (a comprehensive plan

to manage the water and hydropower resources of the Missouri River

basin) is unrecoverable. A portion of Pick-Sloan’s completed facilities

were intended for use with irrigation facilities that have not been

completed and are no longer considered feasible. In addition, as the

overall federal investment in the other aspects of the completed

hydropower facilities increases because of changes such as renovations

and replacements, the amount of the federal investment that is

unrecoverable will increase. Changing the terms of repayment to recover

any of the $454 million investment would require congressional action.

Consistent with previous congressional action concerning the program,

the Congress could direct the Western Area Power Administration to

recover the investment through power revenues and to take action to

minimize any impact on power rates.

Federal Interest Subsidies

for Irrigators

Estimates of the current cost of federal water subsidies are substantial.

For example, the Department of the Interior reported that irrigation

subsidies throughout the 17 western states totaled $534 million in 1986,

while the Bureau of Reclamation placed the cost at $2.2 billion. Estimates

differ because of different definitions of an irrigation subsidy, different

interest rates used to calculate the subsidies, and different methods for

compounding unpaid interest. Much has changed in the West since the

subsidies were established in 1902, and it is not known whether the

subsidies are still warranted or whether irrigators could pay more of the

cost of the water delivered.

The added receipts shown in the tables below would be achieved if the

Congress collected the full cost of federally subsidized water to large

farms, required CVP irrigators to repay the costs of the CVP by 2020 (roughly

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two-thirds the time required under current law), recovered the investment

in the Pick-Sloan Basin Program, and/or phased out the interest subsidy

for western irrigators.18

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Increased fees for subsidized water to large farms

Added receipts 4 8 8 8 8

Source: Congressional Budget Office.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Time frame for repaying water project construction costs

Added receipts 0 3 8 11 11

Source: Congressional Budget Office.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Recovery of federal investment in hydropower facilities

Added receipts 0 18 18 18 18

Source: Congressional Budget Office.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Federal interest subsidies for irrigators

Added receipts 0 4 11 14 14

Source: Congressional Budget Office.

Related GAO Products

Subsidized Federal Water to

Large Farms

Water Subsidies: The Westhaven Trust Reinforces the Need to Change

Reclamation Law (GAO/RCED-90-198, June 5, 1990).

18Implementing some of these options would affect the potential savings from the remaining options.

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Water Subsidies: Basic Changes Needed to Avoid Abuse of the 960-Acre

Limit (GAO/RCED-90-6, October 12, 1989).

Subsidized Water to Produce

Subsidized Crops

Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

Reclamation Law: Changes Needed Before Water Service Contracts Are

Renewed (GAO/RCED-91-175, August 22, 1991).

Time Frame for Repaying

Water Project Construction

Costs

Water Subsidies: Impact of Higher Irrigation Rates on Central Valley

Project Farmers (GAO/RCED-94-8, April 19, 1994).

Reclamation Law: Changes Needed Before Water Service Contracts Are

Renewed (GAO/RCED-91-175, August 22, 1991).

Recovery of Federal Investment

in Hydropower Facilities

Federal Power: Recovery of Federal Investment in Hydropower Facilities

in the Pick-Sloan Program (GAO/T-RCED-96-142, May 2, 1996).

Federal Interest Subsidies for

Irrigators

Water Subsidies: Impact of Higher Irrigation Rates on Central Valley

Project Farmers (GAO/RCED-94-8, April 19, 1994).

Natural Resources Management Issues (GAO/OCG-93-17TR, December 1992).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Water Transfers Authorizing committees Energy and Natural Resources (Senate)

Resources (House)

Primary agency Department of the Interior

Spending type Direct

Framework theme Improve efficiency

Water transfers, in which rights to use water are bought and sold, are a

mechanism for relocating scarce water to new users by allowing those

who place the highest economic value on it to purchase it. Water transfers

from irrigation to municipal and industrial uses can increase federal

revenues because municipal and industrial users pay rates based on their

full share of the project’s construction cost plus interest. In contrast, many

irrigators pay only a portion of their share of the construction costs and

are exempt from paying interest. However, increasing federal revenues

will reduce the net benefits to the buyers and sellers, thereby discouraging

some transfers. Deciding how much the Bureau of Reclamation should

charge for transferred water involves balancing the increase in federal

revenues with retaining incentives for water transfers to occur.

A 5-year estimate of additional receipts cannot be developed at this time.

The difficulties of estimating the highest economic value of water and

which users are willing to pay that value inhibit estimation.

Related GAO Product Water Markets: Increasing Federal Revenues Through Water Transfers

(GAO/RCED-94-164, September 21, 1994).

GAO Contact Victor S. Rezendes, (202) 512-3841

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Option:

Pollution Fees and

Taxes

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Environmental Protection Agency

Spending type Direct

Framework theme Improve efficiency

User fees, cost reimbursement mechanisms, and pollution taxes could be

designed as a way to control pollutants and harmful substances by

preventing their further generation, thus supplementing regulatory efforts

to meet the objectives of existing environmental laws. These mechanisms

also produce significant revenues which could help defray the costs of

administering environmental protection programs or ultimately reduce the

budget deficit. Based on audit work, GAO has identified several specific

areas where fees and taxes might be effective, including, but not limited to

(1) requiring states to collect permit fees on industrial and municipal

dischargers to surface waters and (2) establishing a pollution tax on

dischargers, based on volume, toxicity, or both.

Based on our work, an example of a pollution fee which the Congress may

wish to consider is an excise tax on toxic water pollutants. Savings below

illustrate a tax on water pollution discharges whose rate increases with

the toxicity of the discharge, effective on discharges of water pollutants

made after December 31, 1997. Rates range from $0.65 per pound for the

least toxic pollutant to $63.40 per pound for the most toxic pollutant. Over

time, revenue from a pollution fee tax should decline since the intent of

such a tax is to provide an incentive to reduce the amount of pollutants

generated.

Five-Year Revenues

Dollars in billions

FY98 FY99 FY00 FY01 FY02

Revenue gain 0.2 0.2 0.2 0.2 0.2

Note: JCT provided its revenue estimates in billions of dollars.

Source: Joint Committee on Taxation (JCT).

Related GAO Products Environmental Protection: Implications of Using Pollution Taxes to

Supplement Regulation (GAO/RCED-93-13, February 17, 1993).

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Hazardous Waste: Much Work Remains to Accelerate Facility Cleanups

(GAO/RCED-93-15, January 19, 1993).

Drinking Water: Widening Gap Between Needs and Available Resources

Threatens Vital EPA Program (GAO/RCED-92-184, July 6, 1992).

Water Pollution: Stronger Efforts Needed by EPA to Control Toxic Water

Pollution (GAO/RCED-91-154, July 19, 1991).

Environmental Protection: Meeting Public Expectations With Limited

Resources (GAO/RCED-91-97, June 18, 1991).

GAO Contact Peter F. Guerrero, (202) 512-6111

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Option:

Hazardous Waste

Cleanup Cost

Recovery

Authorizing committees Environment and Public Works (Senate) 

Commerce (House) 

Transportation and Infrastructure (House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency Environmental Protection Agency

Account Hazardous Substance Superfund 

(20-8145)

Spending type Discretionary

Budget subfunction Pollution Control and Abatement

Framework theme Improve efficiency

The Comprehensive Environmental Response, Compensation and Liability

Act (CERCLA), which created the Superfund program, requires that the

parties responsible for contaminating Superfund sites clean them up or

reimburse the Environmental Protection Agency (EPA) for doing so.

However, through 1995, EPA had reached agreements with responsible

parties to recover only 14 percent of its costs. Recoveries have been low

because EPA has narrowly defined which costs it will seek to

recover—excluding, for example, research and development costs. As a

result, the agency has foregone any opportunity to recover over $3.8

billion in indirect costs. Moreover, CERCLA prevents EPA from charging

polluters hundreds of millions of dollars in additional interest on the cost

EPA incurs to clean up Superfund sites by setting an interest rate

significantly lower than commercial rates and preventing the accrual of

interest on costs until demand for payment is made. If EPA had been

allowed to accrue interest at a commercial rate from the date funds were

expended, GAO estimates that $105 million in interest could have been

accrued in 1990 on the funds EPA expended in fiscal year 1989 alone.

EPA should amend its definition of recoverable costs to permit greater

recoveries. The Congress should amend CERCLA to allow EPA to recover

from responsible parties more interest on the cost it incurs to clean up

Superfund sites.

Savings could not be estimated due to EPA’s varying success in collecting

the full amount of current penalty and interest charges.

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Related GAO Products Superfund: EPA Has Opportunities to Increase Recoveries of Costs

(GAO/RCED-94-196, September 28, 1994).

Superfund: More Settlement Authority and EPA Cost Controls Could

Increase Cost Recovery (GAO/RCED-91-144, July 18, 1991).

Superfund: A More Vigorous and Better Managed Enforcement Program Is

Needed (GAO/RCED-90-22, December 14, 1989).

GAO Contact Peter F. Guerrero, (202) 512-6111

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Option:

Non-Time-Critical

Removals in

Superfund Cleanups

Authorizing committees Environment and Public Works (Senate)

Commerce (House) 

Transportation and Infrastructure (House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency Environmental Protection Agency

Account Hazardous Substance Superfund (20-8145)

Spending type Discretionary

Budget subfunction Pollution Abatement and Control

Framework theme Improve efficiency

Superfund is the Environmental Protection Agency’s (EPA) program for

cleaning up the nation’s highly contaminated hazardous waste sites, either

through undertaking a cleanup action itself or compelling responsible

private parties to do so. After spending more than 16 years and $15 billion

on Superfund, cleanups have been completed at only about 400 of the

1,300 sites currently on EPA’s priority cleanup list.

EPA has two processes for conducting Superfund cleanups: (1) the removal

process which is typically used to respond to urgent situations, and (2) the

remedial process which has traditionally been used for conducting more

comprehensive cleanup actions. To accelerate the cleanup of Superfund

sites, EPA has begun expanding the use of its removal process to conduct

substantial nonemergency cleanup actions. These Non-Time-Critical (NTC)

removals result in equally protective but quicker cleanups than under the

remedial process because they streamline cleanup planning. NTC removals

can be used to clean up at least a portion of almost any Superfund site,

particularly the highest risk portions.

In April 1996, we reported on the 81 cleanup actions that EPA had

conducted under the NTC removal process. We found that compared to the

remedial process, the NTC removal process accelerated cleanup actions by

an average of 2 years per action and, consequently, reduced human health

risks sooner and prevented the further spread of contamination. Using NTC

removals also reduced the cost of the cleanup actions, from $4.1 million to

$3.6 million, on average, for a savings of $500,000 per action.

If NTC removals were consistently used, the backlog of contaminated sites

in the Superfund program could be more quickly addressed. This would

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reduce total costs over the life of the Superfund program but, given the

current backlog, could not be expected to yield short-term savings.

Related GAO Products A Superfund Tool for More Efficient Cleanups (GAO/RCED-96-134R, April 15,

1996).

Superfund: Non-Time-Critical Removals as a Tool for Faster and Less

Costly Cleanups (GAO/T-RCED-96-137, April 17, 1996).

Time and Cost Limits on Superfund Removals (GAO/RCED-96-195R, June 10,

1996).

GAO Contact Peter F. Guerrero, (202) 512-6111

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Option:

Excess Funds in

Superfund Contracts

Authorizing committees Environment and Public Works (Senate)

Commerce (House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency Environmental Protection Agency

Account Hazardous Substances Superfund

(20-8145)

Spending type Discretionary

Budget subfunction Pollution Control and Abatement

Framework theme Improve efficiency

The Environmental Protection Agency’s (EPA) Superfund program, which

the Congress created in 1980, was intended to clean up those sites

considered to be the most serious of the hazardous waste sites identified

in the United States. EPA is authorized to compel parties responsible for

causing the hazardous waste pollution to clean up the sites. If these parties

cannot be found, or if a settlement with them cannot be reached, EPA can

hire contractors to conduct the clean up. EPA has reported spending over

$10 billion for cleaning up nonfederal Superfund sites.

If EPA took more aggressive action in identifying and closing completed

contracts under the Superfund program, excess amounts could be

recovered and used for new Superfund work, obviating the need for

additional appropriations to perform such work. During fiscal years 1990

through 1996, EPA obligated about $4.4 billion dollars for Superfund

contracts. As the work is performed under these contracts, the contractors

are paid and EPA’s obligations are liquidated. For various reasons, the

amount of funds obligated for a particular contract often exceeds the

amount eventually paid to the contractor. In these circumstances, the

unspent funds should be deobligated and used for other Superfund

activities, once the original contracts are closed.

In 1994, EPA’s Office of Inspector General reported that contracts awarded

under the Superfund program had balances of over $100 million in unspent

obligated funds that were no longer needed for their original purposes. In

the same year, an EPA task force was established to develop guidance on

and pursue the recovery of excess funds. However, in May 1996 we

reported that substantial amounts remained obligated for completed

projects. Using EPA data systems, we identified $164 million in potential

recoveries, and we encouraged EPA to aggressively pursue these

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recoveries. EPA’s failure to take aggressive actions in identifying and

closing completed contracts in the past has contributed greatly to its

failure to recover unneeded funds. For example, in some cases, contracts

had not been closed when work had been completed many years ago.

Our current work, which will be completed by May 1997, indicates that

similar excess funds could be available during fiscal year 1998.

Accordingly, in considering EPA’s fiscal year 1998 budget request, the

Congress may wish to consider reducing EPA’s budget to encourage the

agency to aggressively seek recovery of such funds. For example, the

Congress may want to reduce EPA’s fiscal year 1998 appropriation by

$164 million to encourage greater recovery of funds.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 164 0 0 0 0

Outlays 41 57 33 16 8

Savings from the 1997 funding level adjusted for inflation

Budget authority 164 0 0 0 0

Outlays 41 57 33 16 8

Source: Congressional Budget Office.

Related GAO Product Environmental Protection: Selected Issues Related to EPA’s Fiscal Year

1997 Appropriation (GAO/T-RCED-96-164, May 1, 1996).

GAO Contact Peter F. Guerrero, (202) 512-6111

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Option:

Weather Service

Modernization Project

Authorizing committees Commerce, Science, and Transportation

(Senate)

Science (House)

Appropriations subcommittees Commerce, Justice, State, and the

Judiciary (Senate) 

Commerce, Justice, State, the Judiciary,

and Related Agencies (House)

Primary agency Department of Commerce

Account Operations, Research and Facilities

(13-1450)

Spending type Discretionary

Budget subfunction Other Natural Resources

Framework theme Reassess objectives

The National Weather Service (NWS) uses a variety of systems and manual

processes to collect, process, and disseminate weather data to and among

its network of field offices and regional and national centers. Many of

these systems and processes are outdated, and during the 1980s, NWS

began modernizing its systems. NWS’ current modernization project

includes four new major system development programs including the

Advanced Weather Interactive Processing System (AWIPS). AWIPS is

designed to integrate for the first time satellite, radar, and other data to

support weather forecaster decision-making and communications. NWS

estimates that the AWIPS workstations and network will cost $525 million

and be fully deployed in 1999.

GAO reports and testimony note that NWS has not demonstrated that all

AWIPS capabilities will result in the promised mission improvements, such

as better forecasts, fewer field offices, and reduced staffing levels.

Therefore, GAO recommended that NWS (1) expand ongoing AWIPS

requirements review activities to include validation that proposed

capabilities are justified on the basis of mission impact and (2) implement

only those capabilities that are validated. NWS disagreed with this

recommendation stating that completed and ongoing requirements

reviews and risk reduction activities as well as operational test and

evaluation of each AWIPS software release are sufficient to ensure that

unneeded AWIPS capabilities are revised or not implemented. However, GAO

believes that none of the NWS-cited activities were or are intended to

demonstrate the mission impact of AWIPS capabilities.

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Recently, the Congress, in conference report language accompanying the

National Oceanic and Atmospheric Administration’s 1997 appropriations

bill, placed a cap of $525 million on AWIPS and recommended that the

Commerce Department delay a decision to deploy AWIPS nationwide until it

conducts more operational testing. Unless NWS validates AWIPS capabilities

to measurable mission improvements, it runs the risk of wasting

taxpayers’ money. Savings could potentially be achieved depending on the

outcome of the capabilities validation.

Related GAO Products Weather Forecasting: Recommendations to Address New Weather

Processing System Development Risks (GAO/AIMD-96-74, May 13, 1996).

Weather Forecasting: NWS Has Not Demonstrated That New Processing

System Will Improve Mission Effectiveness (GAO/AIMD-96-29, February 29,

1996).

Weather Forecasting: New Processing System Faces Uncertainties and

Risks (GAO/T-AIMD-96-47, February 29, 1996).

Weather Forecasting: Radars Far Superior to Predecessors, but Location

and Availability Questions Remain (GAO/T-AIMD-96-2, October 17, 1995).

Weather Service Modernization Staffing (GAO/AIMD-95-239R, September 26,

1995).

Weather Forecasting: Radar Availability Requirements Not Being Met

(GAO/AIMD-95-132, May 31, 1995).

Weather Forecasting: Unmet Needs and Unknown Costs Warrant

Reassessment of Observing System Plans (GAO/AIMD-95-81, April 21, 1995).

Weather Service Modernization Questions (GAO/AIMD-95-106R, March 10,

1995).

Weather Service Modernization: Despite Progress, Significant Problems

and Risks Remain (GAO/T-AIMD-95-87, February 21, 1995).

Weather Forecasting: Improvements Needed in Laboratory Software

Development Processes (GAO/AIMD-95-24, December 14, 1994).

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Weather Forecasting: Systems Architecture Needed for National Weather

Service Modernization (GAO/AIMD-94-28, March 11, 1994).

Weather Forecasting: Important Issues on Automated Weather Processing

System Need Resolution (GAO/IMTEC-93-12BR, January 6, 1993).

GAO Contact Joel C. Willemssen, (202) 512-6253

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350 Agriculture • Food Aid: Public Law 480 Title I Program

• The Market Access Program

• Export Credit Guarantee Programs

• Agricultural Research Service Funding

• USDA Telecommunications and Information Systems

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Option:

Food Aid: Public

Law 480 Title I

Program

Authorizing committees Agriculture, Nutrition and Forestry (Senate)

Commerce, Science and Transportation

(Senate)

Agriculture (House)

Appropriations subcommittees Agriculture, Rural Development, and

Related Agencies (Senate)

Agriculture, Rural Development, Food and

Drug Administration, and Related

Agencies (House)

Primary agency Department of Agriculture

Accounts P.L. 480 Grants (12-2278)

P.L. 480 Program (12-2277)

Spending type Discretionary/Direct

Budget subfunction Farm Income Stabilization

Framework theme Reassess objectives

Through the Public Law 480 Title I Food Aid Program, U.S. agricultural

commodities are sold to developing countries on long-term credit at

below-market interest rates. The current goal of the program is to promote

the foreign policy of the United States by enhancing the food security of

developing countries. The Public Law 480 legislation specifies ways that

agricultural commodities provided under the program can support this

goal, including their use to promote broad-based, sustainable (BBS)

development, and develop and expand markets for U.S. agricultural

commodities.

Title I’s contribution to BBS development and long-term market

development for U.S. agricultural goods is limited for many reasons. The

value of foreign exchange a country might save through purchasing Title I

commodities on concessional terms—the vehicle through which BBS

development could occur—is small relative to the country’s development

needs. Also, the program provides the Department of Agriculture (USDA)

little leverage to influence development activities or initiate policy reforms

in the recipient country. Further, other competing objectives dilute

whatever leverage might be associated with the program.

Title I’s contribution to long-term, foreign market development for U.S.

agricultural commodities has not been demonstrated. Title I commodities

tend to be price sensitive; therefore, it is difficult to transform the

concessional market share established through the Title I program into

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commercial market share, unless the United States can offer competitive

prices and financing.

In addition, legislatively mandated program requirements (particularly

cargo preference rules and reexport restrictions) impose constraints on

recipients that undermine market development efforts.

Title II of the Federal Agriculture Improvement and Reform (FAIR) Act of

1996 amended the Title I program to provide greater program flexibility,

make improvements in operations and administration, and extend

authority to enter into new agreements through 2002. Notably, the FAIR Act

(1) authorized agreements with private entities in addition to foreign

governments, (2) eliminated the minimum repayment period of 10 years

for Title I concessional credits and reduced the maximum grace period

from 7 to 5 years, (3) permitted an agricultural trade organization to carry

out a project or program in a developing country using funds derived from

Title I sales if the organization has a market development plan approved

by the Secretary of Agriculture, and (4) simplified the process by which

the Secretary determines the commodities eligible for the program.

Despite these reforms, and the management streamlining required in 1990

amendments to the Title I program, multiple and sometimes competing

objectives, as well as contradictory program requirements, continue to

encumber the Title I program, making it difficult to create and implement

an effective program strategy. Furthermore, the reforms did not address

primary concerns regarding the program’s level of effectiveness in

developing long-term foreign markets and achieving economic

development. Thus, from this perspective, the Congress may wish to

consider reducing or eliminating funding for the Title I program. The

savings presented below assume that the program authority would not be

extended beyond fiscal year 1998.19 The delay would permit USDA to lower

production through an increased acreage set-aside in 1998 which would

not build surpluses or otherwise affect the budget.

19The savings include $14 million for ocean freight differential costs for the shipment of agricultural

commodities.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 0 200 200 200 200

Outlays 0 110 190 200 200

Savings from the 1997 funding level adjusted for inflation

Budget authority 0 210 216 221 227

Outlays 0 116 203 219 224

Source: Congressional Budget Office.

Related GAO Products Farm Bill Export Options (GAO/GGD-96-39R, December 15, 1995).

Food Aid: Competing Goals and Requirements Hinder Title I Program

Results (GAO/GGD-95-68, June 26, 1995).

Cargo Preference Requirements: Objectives Not Significantly Advanced

When Used in U.S. Food Aid Programs (GAO/GGD-94-215, September 29,

1994).

Public Law 480 Title I: Economic and Market Development Objectives Not

Met (GAO/T-GGD-94-191, August 3, 1994).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

The Market Access

Program

Authorizing committees Agriculture, Nutrition and Forestry (Senate)

Agriculture (House)

Primary agency Department of Agriculture

Accounts Commodity Credit Corporation Fund

(12-4336)

Spending type Direct

Budget subfunction Farm Income Stabilization

Framework theme Redefine beneficiaries

Under the Agriculture Trade Title (Title II) of the Federal Agriculture

Improvement and Reform (FAIR) Act of 1996, the Congress changed the

name of the Market Promotion Program to the Market Access Program.

The Market Access Program is an export promotion program that

subsidizes overseas promotional activities for U.S. agricultural products.

The program uses government funds to help U.S. producers, exporters,

and trade associations finance cost-share promotional activities for U.S.

agricultural products abroad. The Foreign Agricultural Service (FAS)

operates the Market Access Program through 65 not-for-profit associations

that either run the programs themselves or pass funds through to other

entities.

Adequate assurance does not exist to demonstrate that Market Access

Program funds are supporting additional promotional activities rather than

simply replacing company/industry funds. Moreover, FAS has not provided

adequate guidance or oversight in targeting Market Access Program funds

to smaller and new-to-export industries which are less likely to supplant

them.

Under Title II of the FAIR Act, the Congress cut annual program funding

from $110 million to $90 million for fiscal years 1996 through 2002. The

legislation also prohibits program funding for direct assistance of branded

promotions from being provided to foreign companies for promotion of

foreign produced products or to companies that are not recognized as

small business concerns under the Small Business Act, with the exception

of cooperatives and nonprofit trade associations.

Based on the examinations of the program since its inception, members of

Congress have asked GAO to continue monitoring this program to ensure

that executive and legislative branch reforms are effectively and efficiently

implemented, particularly those pertaining to funding additionality,

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graduation of private companies out of the program, and greater small

company participation. Because questions have been raised as to whether

continued substantial funding of large cooperatives is consistent with the

intent of the program, further program funding reductions might be

considered. In addition, based on graduation criteria effective in fiscal

year 1999, some companies may no longer be eligible for subsidies. This

could facilitate the reduction of program funding levels. For example, if

the Congress were to reduce the annual program funding to $50 million for

fiscal years 1998 through 2002, the following savings could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 40 40 40 40 40

Outlays 3 31 40 40 40

Source: Congressional Budget Office.

Related GAO Products Agricultural Trade: Competitor Countries Foreign Market Development

Programs (GAO/T-GGD-95-184, June 14, 1995).

Farm Bill Export Options (GAO/GGD-96-39R, December 15, 1995).

International Trade: Changes Needed to Improve Effectiveness of the

Market Promotion Program (GAO/GGD-93-125, July 7, 1993).

U.S. Department of Agriculture: Improvements Needed in Market

Promotion Program (GAO/T-GGD-93-17, March 25, 1993).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

Export Credit

Guarantee Programs

Authorizing committees Agriculture, Nutrition and Forestry (Senate)

Agriculture (House)

Primary agency Department of Agriculture

Accounts Commodity Credit Corporation Loans

Program Account (12-1336)

Commodity Credit Corporation Fund

(12-4336)

Spending type Direct

Budget subfunction Farm Income Stabilization

Framework theme Reassess objectives

Under the U.S. Department of Agriculture (USDA), the Export Credit and

Intermediate Export Credit Guarantee Programs are major agricultural

export promotion programs. The main objective of these programs is to

increase U.S. agricultural exports. Based on legislative requirements, USDA

is required to make a total of $5.5 billion in government loan guarantees

available each year to foreign country buyers of U.S. agricultural

commodities.

Since the programs began in the 1980s, and as of January 1997, the

government had paid out approximately $7.8 billion in claims because of

loan repayment defaults and reschedulings by foreign country buyers. Past

operations of the programs have incurred high costs because USDA had

provided a large amount of guarantees to high-risk countries, such as Iraq

and the former Soviet Union. Guarantees had been extended to such

high-risk countries for market development reasons and foreign policy

considerations. Extending guarantees and increasing exposure to new and

existing high-risk participants will result in higher program costs.

The Agriculture Trade Provisions (Title II) of the Federal Agriculture

Improvement and Reform Act of 1996 reformed the operations of the

Export Credit Guarantee Programs. Notably, the Act: (1) authorized

short-term supplier credit guarantees; (2) listed criteria to be used by the

Secretary of Agriculture in deciding whether a country is creditworthy for

intermediate-term credit guarantees; (3) mandated annual program levels

at $5.5 billion through 2002 but allowed for flexibility in how much is

provided for each program; (4) clarified that the 1 percent maximum

origination fee is to be applied to the amount of short-term credit to be

guaranteed and removed the cap on the origination fee charged for

Commodity Credit Corporation Facilities Financing Guarantees; and

(5) permitted the use of credit guarantees for high-value products with at

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least 90 percent U.S. content by weight. Minimum amounts of credit

guarantees will be required to be available for processed and high-value

products: 25 percent in 1996 and 1997; 30 percent in 1998 and 1999; and

35 percent thereafter. Minimum requirements are not applicable if they

cause a reduction in total commodity sales under the program.

It is unclear that the export credit guarantee programs have resulted in

increased agricultural exports. Also, there is a history of poor management

control of these programs, principally because USDA officials viewed the

export credit guarantee programs as “commercial” programs that are

subject to the normal controls that exist for commercial sales

transactions. USDA is taking steps to improve program management.

The Congress may wish to reduce the programs’ budgets. For example,

reducing guarantees for sales to high-risk countries would permit

reductions in annual loan guarantees to about $3 billion, about

$800 million less than current levels assumed in CBO’s baseline. The

Congress may also wish to consider whether such beneficiary countries

might be more appropriately assisted with food aid programs. However,

this would offset some or all of the savings cited in the following table.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 108 143 147 154 159

Outlays 108 143 147 154 159

Source: Congressional Budget Office.

Related GAO Products Farm Bill Export Options (GAO/GGD-96-39R, December 15, 1995).

Former Soviet Union: Creditworthiness of Successor States and U.S.

Export Credit Guarantees (GAO/GGD-95-60, February 24, 1995).

GSM Export Credit Guarantees (GAO/GGD-94-211R, September 29, 1994).

U.S. Department of Agriculture: Issues Related to the Export Credit

Guarantee Programs (GAO/T-GGD-93-28, May 6, 1993).

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Loan Guarantees: Export Credit Guarantee Programs’ Costs Are High

(GAO/GGD-93-45, December 22, 1992).

GAO Contact Benjamin F. Nelson, (202) 512-4128

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Option:

Agricultural Research

Service Funding

Authorizing committees Agriculture, Nutrition, and Forestry

(Senate) Agriculture (House)

Appropriations subcommittees Agriculture, Rural Development, and

Related Agencies (Senate)

Agriculture, Rural Development, Food and

Drug Administration, and Related

Agencies (House)

Primary agency Department of Agriculture

Account Agricultural Research Service (12-1400)

Spending type Discretionary

Budget subfunction Agricultural Research and Services

Framework theme Reassess objectives

The U.S. agricultural research system is decentralized and diverse,

spanning federal, state, and private institutions. The Agricultural Research

Service (ARS), which was appropriated about $717 million for its fiscal year

1997 research activities, conducts most federal in-house agricultural

research in laboratories located nationwide and in several foreign

countries. ARS’ role is to develop the knowledge essential to solving

technical agricultural problems that are broad in scope and have high

national priority.

In June 1996, GAO provided information on ARS’ fiscal year 1996 research

projects that the Congress could use if it chose to reduce ARS funding. As

of January 29, 1996, ARS had used about 91 percent of its fiscal year 1996

research appropriations to fund 1,198 projects at an estimated cost of

$648 million. Of the projects, 495 (valued at $257 million) involved mostly

nonbasic research.20 Similarly, 432 projects (valued at $220 million) were

outside the high-priority research areas designated in ARS’ 6-year

implementation plan. GAO identified 148 projects valued at $78 million

which fell into both of these categories.

Should the Congress wish to reduce nonbasic federal agricultural research

and/or research that is not high-priority, we believe the ARS budget could

sustain a commensurate reduction. For example, the Congress could

eliminate the 148 projects which involved mostly nonbasic research and

were outside high-priority research areas.

20Nonbasic research is applied and developmental research, which produces knowledge relevant to a

technology or service and is generally completed in a few years. In contrast, basic research creates

new knowledge and may take years to complete.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 78 78 78 78 78

Outlays 61 73 78 78 78

Savings from the 1997 funding level adjusted for inflation

Budget authority 81 83 86 89 92

Outlays 63 78 85 88 91

Source: Congressional Budget Office.

Related GAO Products ARS’ Research Activities (GAO/RCED-96-153R, June 14, 1996).

Agricultural Research: Information on Research System and USDA’s Priority

Setting (GAO/RCED-96-92, March 28, 1996).

GAO Contact Robert A. Robinson, (202) 512-5138

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Option:

USDA

Telecommunications

and Information

Systems

Authorizing committees Agriculture, Nutrition, and Forestry

(Senate) 

Agriculture (House)

Appropriations subcommittees Agriculture, Rural Development, and

Related Agencies (Senate)

Agriculture, Rural Development, Food and

Drug Administration, and Related

Agencies (House)

Primary agency Department of Agriculture

Accounts Multiple

Spending type Discretionary

Budget subfunction Multiple

Framework theme Improve efficiency

The U.S. Department of Agriculture (USDA) and its 29 component agencies

spend over $100 million on telecommunications annually, including more

than $50 million for commercial telecommunications services obtained

from over 1,500 telephone companies.

We have reported that USDA does not cost-effectively manage and plan its

telecommunications resources. USDA agencies are spending hundreds of

millions of dollars continuing to develop their own telecommunications

networks that overlap and perpetuate long-standing information sharing

problems. We also found that USDA agencies waste millions of dollars each

year paying for (1) unnecessary telecommunications services, (2) leased

equipment that is not used and services billed for but never provided, and

(3) commercial carrier services that cost more than 3 times what they

would under the Federal Telecommunications System 2000 program. In

addition, USDA pays tens of thousands of dollars each month for collect and

long-distance calls without knowing whether such calls are appropriate.

We found that about 50 percent of all collect calls accepted by USDA

officials in the Washington, D.C., metropolitan area over a 4-month period

were from callers at correctional institutions. We also found that USDA

wasted tens of thousands of dollars because it had not established

adequate procedures for reviewing bills to verify the appropriateness of

telephone charges made by private vendors.

Although the full extent of USDA’s telephone fraud, waste, and abuse

problem is unknown, USDA officials have indicated that as much as

$15 million to $30 million could be saved annually by eliminating

redundant commercial telecommunications services and by sharing

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resources. If our recommendations to the Secretary to take aggressive

action to improve USDA’s management of telecommunications and

information systems were fully implemented, we believe substantial

savings could be achieved. However, the amount of such savings cannot

be known with certainty until USDA takes action to fully identify and

eliminate spending on fraudulent and wasteful telecommunications

services.

Related GAO Products USDA Telecommunications: More Effort Needed to Address Telephone

Abuse and Fraud (GAO/AIMD-96-59, April 16, 1996).

USDA Telecommunications: Better Management and Network Planning

Could Save Millions (GAO/AIMD-95-203, September 22, 1995).

USDA Telecommunications (GAO/AIMD-95-219R, September 5, 1995).

USDA Telecommunications: Missed Opportunities to Save Millions

(GAO/AIMD-95-97, April 24, 1995).

GAO Contact Joel C. Willemssen, (202) 512-6253

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370 Commerce and

Housing Credit

• Rural Housing Loans Interest Recapture

• Use of Sampling for the 2000 Decennial Census

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Option:

Rural Housing Loans

Interest Recapture

Authorizing committees Banking, Housing, and Urban Affairs

(Senate) 

Banking and Financial Services (House)

Appropriations subcommittees Agriculture, Rural Development, and

Related Agencies (Senate)

Agriculture, Rural Development, Food and

Drug Administration, and Related

Agencies (House)

Primary agency Department of Agriculture

Account Rural Housing Insurance Fund (12-2081)

Spending type Direct

Budget subfunction Mortgage Credit

Framework theme Redefine beneficiaries

The Housing Act of 1949, as amended, requires the U.S. Department of

Agriculture’s Rural Housing Service (RHS) to recapture a portion of the

subsidy provided over the life of direct housing loans it makes when the

borrower sells or vacates a property. The rationale being that because

taxpayers paid a portion of the mortgage, they are entitled to a portion of

the property’s appreciation.

In a recent report, we pointed out that because recapture is not mandated

when homes are refinanced, RHS’ policy allows borrowers who pay off

direct RHS loans but continue to occupy the properties to defer the

payments for recapturing the subsidies. As of June 30, 1995, RHS’ records

showed that about $119 million was owed by borrowers who had

refinanced their mortgages but continue to occupy the properties. RHS

does not charge interest on the amounts owed by these borrowers.

Legislative changes could be made to allow RHS to charge market rate

interest on recapture amounts owed by borrowers to help recoup the

government’s administrative and borrowing costs. CBO’s estimate of the

savings for this option is presented on a net present value basis as required

by the Federal Credit Reform Act of 1990. Actual savings could differ

depending on how this proposal would affect the rate at which homes are

sold.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Budget authority 50 0 0 0 0

Outlays 50 0 0 0 0

Source: Congressional Budget Office.

Related GAO Product Rural Housing Programs: Opportunities Exist for Cost Savings and

Management Improvement (GAO/RCED-96-11, November 16, 1995).

GAO Contact Judy A. England-Joseph, (202) 512-7631

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Option:

Use of Sampling for

the 2000 Decennial

Census

Authorizing committees Governmental Affairs (Senate) 

Government Reform and Oversight (House)

Appropriations subcommittees Commerce, Justice, State, and the

Judiciary and Related Agencies (Senate

and House)

Primary agency Department of Commerce

Account Periodic Censuses and Programs

(13-0450)

Spending type Discretionary

Budget subfunction Other Advancement of Commerce

Framework theme Improve efficiency

Since 1992, GAO reports and testimonies have identified opportunities to

reduce the cost of the 2000 Decennial Census without decreasing

accuracy. The Census Bureau estimated that using the 1990 census-taking

approach without modification could cost about $4.8 billion in current

dollars for the 2000 Decennial Census.

GAO believes the Census Bureau should pursue several cost-saving options

currently being evaluated by the Bureau. Census Bureau estimates suggest

that the use of these options could result in savings for the 2000 Decennial

Census. These options are as follows:

• Promoting a higher mail response rate by simplifying and streamlining the

census questionnaire and using a strategy of multiple mail contacts. A

simplified, more user-friendly questionnaire could promote better

response rates by reducing the time and effort needed for respondents to

understand and complete the form. Additionally, tests have shown that the

use of multiple contacts, such as targeted reminder cards and second

mailings, improves response rates.

• Using the Postal Service to identify vacant and invalid addresses during

the mailing of questionnaires to avoid costly and unnecessary follow-up

efforts. In order to maximize savings, the Census Bureau must ascertain

the earliest point at which vacant and invalid housing units are accurately

classified to eliminate futile follow-up on them.

• Gathering data on only a sample of those households not responding by

mail, rather than attempting to contact them all in person. Savings

estimates would vary according to the initial percentage of households

responding by mail and the sampling rate and method selected.

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The Census Bureau estimates that it could have saved between

$700 million and $800 million of the $2.6 billion that it spent on the 1990

Decennial Census if it had incorporated the procedures listed above.

Almost all of these savings would have occurred in fiscal year 1990. With

inflation and workload adjustments, this figure should be somewhat

higher for fiscal year 2000.

In addition, by eliminating or reducing costly labor-intensive address list

operations through greater reliance on the Postal Service and local

communities, the Census Bureau estimates that it could save as much as

$188 million for the 2000 Census. This cooperative effort will be

permissible under 1994 legislation (P.L. 103-430). To realize these savings,

the Census Bureau estimated in 1995 that it would incur costs of about

$5.1 million in fiscal years 1995, 1996, and 1997. However, thereafter, the

Bureau will generate net savings of $13.5 million in fiscal year 1998,

between $129.4 million and $179.4 million in fiscal year 1999, and another

$10.8 million in fiscal year 2000.

The dollar amounts above are Census Bureau estimates. The Census

Bureau will have to spend several million each year to prepare for the

change. However, the Census Bureau should require less in budget

authority to accomplish the 2000 Decennial Census than it would without

implementing this proposal. Because of the unique nature of the census, a

cyclical program with the majority of spending occurring once every 10

years, estimates against an interim year baseline would be inappropriate.

To illustrate the potential savings, CBO estimates that using sampling for

nonresponse follow-up for the 2000 Decennial Census could result in the

following savings.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Budget authority 0 0 500 0 0

Outlays 0 0 395 105 0

Source: Congressional Budget Office.

Related GAO Products Decennial Census: Fundamental Design Decisions Merit Congressional

Attention (GAO/T-GGD-96-37, October 25, 1995).

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Decennial Census: 1995 Test Census Presents Opportunities to Evaluate

New Census-Taking Methods (GAO/T-GGD-94-136, September 27, 1994).

Decennial Census: Promising Proposals, Some Progress, but Challenges

Remain (GAO/T-GGD-94-80, January 26, 1994).

Decennial Census: Test Design Proposals Are Promising, but Fundamental

Reform Is Still at Risk (GAO/T-GGD-94-12, October 7, 1993).

Decennial Census: Focused Action Needed Soon to Achieve Fundamental

Breakthroughs (GAO/T-GGD-93-32, May 27, 1993).

Decennial Census: Fundamental Reform Jeopardized by Lack of Progress

(GAO/T-GGD-93-6, March 2, 1993).

Transition Series: Commerce Issues (GAO/OCG-93-12TR, December 1992).

Decennial Census: 1990 Results Show Need for Fundamental Reform

(GAO/GGD-92-94, June 9, 1992).

GAO Contact L. Nye Stevens, (202) 512-7824

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400 Transportation • State Share of State-Supported Intercity Rail Passenger Service

• Amtrak Subsidies

• Military Airport Program Funds

• Cargo Preference Laws

• Fees Paid by Foreign-Flagged Cruise Ships

• Department of Transportation’s Oversight of Its University Research

• Fees for Certification of New Airlines

• Fees for Registering Aircraft

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Option:

State Share of

State-Supported

Intercity Rail

Passenger Service

Authorizing committees Commerce, Science, and Transportation

(Senate)

Transportation and Infrastructure (House)

Appropriations subcommittees Transportation (Senate)

Transportation and Related Agencies

(House)

Primary agency Department of Transportation

Account Grants to National Railroad Passenger

Corporation

(69-0704)

Spending type Discretionary

Budget subfunction Ground Transportation

Framework theme Redefine beneficiaries

Section 403(b) of the Rail Passenger Service Act authorizes Amtrak to

initiate and/or operate intercity rail services, in addition to its basic

system, when such services are financially supported by the states. As of

January 1996, Amtrak had contracts with 11 states to operate such service

over 15 routes.21 These operations account for about 15 percent of

Amtrak’s ridership. Under the provisions of the Rail Passenger Service Act,

the states contribute at least 45 percent of section 403(b) service operating

losses in the first year of operation and 65 percent of these losses in

subsequent years. For service that began prior to 1989, states reimburse

Amtrak for short-term avoidable losses, while for service that began after

1989, states reimburse Amtrak for long-term avoidable losses. Although

long-term avoidable losses are a larger amount than short-term avoidable

losses, they are only about 55 percent of losses that are based on fully

allocated costs—including capital costs. The states do pay 50 percent of

the capital equipment costs (primarily depreciation and interest)

associated with section 403(b) service.

In fiscal year 1994, Amtrak sustained about $82.2 million in losses on

section 403(b) services and this increased to $88.2 million in fiscal year

1995. The states receiving section 403(b) services contributed $32.6 million

in 1994 and $35.7 million in 1995. These amounts are consistent with

Amtrak’s experience in recent years. However, Amtrak is planning to

substantially increase the share of section 403(b) service losses that the

individual states will bear. In fiscal year 1996, Amtrak planned to collect

$72.6 million in state contributions to cover section 403(b) losses.

21These states were Alabama, California, Illinois, Michigan, Missouri, New York, North Carolina,

Wisconsin, Oregon, Washington, and Vermont.

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However, it actually collected $64.2 million. Amtrak plans to eventually

recover the fully allocated losses from section 403(b) services, but has not

yet secured the states’ agreement.

The Congress could require that the states reimburse Amtrak for the fully

allocated costs of providing section 403(b) services. While this is Amtrak’s

goal, supporting legislation would pave the way for fully allocated loss

reimbursement. Currently, Amtrak must negotiate reimbursement with

each state and the state contributions vary widely. On the basis of

Amtrak’s experience in recent years (as opposed to its plan for the current

year), the following savings would apply if federal subsidies were reduced

by the estimated 403(b) losses that Amtrak now must absorb.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 46 46 46 46 46

Outlays 46 46 46 46 46

Savings from the 1997 funding level adjusted for inflation

Budget authority 47 48 50 51 52

Outlays 47 48 50 51 52

Source: Congressional Budget Office.

Related GAO Products Amtrak’s Strategic Business Plan: Progress to Date (GAO/RCED-96-187,

July 24, 1996).

Northeast Rail Corridor: Information on Users, Funding Sources, and

Expenditures (GAO/RCED-96-144, June 27, 1996).

Intercity Passenger Rail: Amtrak’s Financial and Operating Conditions

Threaten Its Longterm Viability (GAO/RCED-95-71, February 6, 1995).

GAO Contact John H. Anderson, Jr., (202) 512-2837

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Option:

Amtrak Subsidies Authorizing committees Commerce, Science, and Transportation

(Senate) 

Transportation and Infrastructure (House)

Appropriations subcommittees Transportation (Senate)

Transportation and Related Agencies

(House)

Primary agency Department of Transportation

Account Grants to National Railroad Passenger

Corporation

(69-0704)

Spending type Discretionary

Budget subfunction Ground Transportation

Framework theme Reassess objectives

Amtrak’s financial condition has deteriorated rapidly in the first half of the

decade, seriously threatening Amtrak’s ability to provide high-quality

passenger rail service nationwide. The time has come for Amtrak and the

federal government to make key long-term decisions concerning the

quality and extent of passenger rail service and the government’s

commitment to subsidize such operations. Recognizing Amtrak’s need for

financial support, the Congress has provided significant funding since

Amtrak began operating in 1971. Since 1990, however, Amtrak’s federal

subsidy has not covered the gap between operating expenses and

revenues. Total operating deficits had exceeded federal operating

subsidies by $175 million. This imbalance occurred because passenger

revenues have been lower than projected while expenses have been higher

than expected. Furthermore, between 1990 and 1994, Amtrak steadily

reduced its working capital by $254 million. Although Amtrak’s working

capital position improved in fiscal year 1995, current liabilities still

exceeded current assets by $149 million.

Over the next few years, Amtrak will face difficult and costly challenges

that could impede its financial recovery. At the same time, Amtrak faces

few opportunities to substantially increase revenues. The challenges

include (1) maintaining its aging passenger cars, (2) modernizing the

Beech Grove, Indiana, repair facility, which services all equipment used

outside the Northeast Corridor, (3) modernizing its locomotive and

passenger car fleet, acquiring high-speed trains, and continuing rail

improvements in the Northeast Corridor, (4) negotiating new operating

agreements with the freight railroads, which own about 97 percent of the

track over which Amtrak operates, (5) negotiating labor issues and work

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rules with Amtrak’s union employees, and (6) incurring higher costs for

employee health benefits and environmental clean-up.

To address its financial and operating problems, Amtrak has developed a

strategic and business plan that is designed to eliminate the need for

federal operating subsidies by the year 2002. To facilitate the proposed

changes, Amtrak has been reorganized into strategic business units (SBU)

which are responsible for different “product lines.” The West Coast SBU is

responsible for operations in California, Washington, and Oregon; the

Northeast Corridor SBU is responsible for the Metroliners and other

operations between Washington and Boston; and the Intercity SBU has

responsibility for the remaining rail passenger operations. The parent SBU

in Washington, D.C., handles the corporate operations, such as legal affairs

and national advertising, that transcend the geographic areas covered by

the SBUs. Amtrak believes that decentralization of authority and

responsibility, combined with route, service, and fare changes, will allow it

to achieve operating self-sufficiency. However, Amtrak’s plan is predicated

on continued availability of federal funds for capital improvements,

greater state support for 403(b) services, and significant productivity

savings. While Amtrak continues to work toward eliminating federal

operating subsidies by the year 2002, it remains to be seen whether it can

achieve self-sufficiency if its assumptions are not wholly fulfilled.

If substantially increasing the level of federal funding for Amtrak,

especially for capital investments, is not possible in today’s budgetary

environment, now may be the time for the Congress to consider refocusing

Amtrak’s efforts and reducing its current route system, retaining service in

locations where Amtrak can carry the largest number of passengers in the

most cost-effective manner. The Congress could consider establishing a

temporary commission similar to the military base closure commission to

restructure Amtrak’s operations and reduce the route network so that

efficient and quality service can be provided within the available funding

from all sources—federal, state and local, and private.

Savings estimates cannot be made until specific proposals are developed

regarding changes in Amtrak operations and routes. These estimates

cannot be made because restructuring proposals would affect the amount

of the reduction in federal funding for Amtrak’s capital, operating, and

Northeast Corridor activities.

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Related GAO Products Amtrak’s Strategic Business Plan: Progress to Date (GAO/RCED-96-187,

July 24, 1996).

Northeast Rail Corridor: Information on Users, Funding Sources, and

Expenditures (GAO/RCED-96-144, June 27, 1996).

Intercity Passenger Rail: Amtrak’s Financial and Operating Conditions

Threaten Its Longterm Viability (GAO/RCED-95-71, February 6, 1995).

Amtrak: Key Decisions Need to be Made in the Face of Deteriorating

Financial Condition (GAO/T-RCED-94-186, April 13, 1994).

Amtrak: Deteriorated Financial Condition and Costly Future Challenges

(GAO/T-RCED-94-145, March 23, 1994).

Amtrak: Financial Condition has Deteriorated and Future Costs Make

Recovery Difficult (GAO/T-RCED-94-155, March 17, 1994).

GAO Contact John H. Anderson, Jr., (202) 512-2834

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Option:

Military Airport

Program Funds

Authorizing committees Commerce, Science, and Transportation

(Senate) 

Transportation and Infrastructure (House)

Primary agency Department of Transportation

Account Grants-in-Aid for Airports (Airport and

Airway Trust Fund)

(69-8106)

Spending type Discretionary/Direct

Budget subfunction Air Transportation

Framework theme Improve efficiency

The Airport Improvement Program (AIP), the nation’s multibillion dollar

program for planning and improving its airport infrastructure, includes

legislatively established funding categories for specific uses. One such

category—the Military Airport Program (MAP)—was established in 1990 to

assist current and former military airports located in congested

metropolitan areas in converting to viable civilian airports.

However, 9 of the 12 airports selected by the Federal Aviation

Administration (FAA) to participate in MAP do not meet key legislatively

established program goals. Five of the airports are not located in

congested air traffic areas and are unlikely to increase capacity, either in

major metropolitan areas or systemwide. Nine airports selected had

already been operating as joint or civilian airports for 10 or more years,

and many of these already had the types of facilities in place that the

program was designed to develop.

The Congress could suspend participation in MAP or further limit

participation. In extending authorization for the AIP in 1996, the Congress

reduced from 15 to 12 the number of airports that could participate in MAP

during a fiscal year. The Congress retained the criteria that to participate

in MAP an airport would reduce congestion at airports experiencing 20,000

hours of annual delays in their commercial passenger traffic. Also, the

Congress revised the criteria to allow MAP designation for recently closed

and realigned military airfields under the Defense Base Closure and

Realignment Acts that could be classified as civil commercial or reliever

airports. The Congress also could limit participation to those airports

where first civilian use occurred after the 1988 and later base closure and

realignment processes. If the Congress did not wish airports participating

in MAP to receive AIP funding in lieu of MAP funding, it would need to specify

this. However, because any or all of these actions could result in a

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redirection rather than a reduction in AIP spending, the Congress also

would need to reduce the contract authority and obligation limitation for

the AIP to achieve savings. Given past problems in selecting airports that

meet legislatively-established criteria, one option the Congress could

consider is eliminating MAP as shown in the table below.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 19 19 19 19 19

Outlays 3 11 15 17 18

Savings from the 1997 funding level adjusted for inflation

Budget authority 19 19 20 21 21

Outlays 3 11 16 18 20

Source: Congressional Budget Office.

Related GAO Product Airport Improvement Program: The Military Airport Program Has Not

Achieved Intended Impact (GAO/RCED-94-209, June 30, 1994).

GAO Contact John H. Anderson, Jr., (202) 512-2834

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Option:

Cargo Preference

Laws

Authorizing committees Commerce, Science, and Transportation

(Senate) 

Transportation and Infrastructure (House)

Appropriations subcommittees Multiple

Primary agency Multiple

Accounts Multiple

Spending type Discretionary

Budget subfunction Water transportation

Framework theme Reassess objectives

Cargo preference laws require that certain government-owned or financed

cargo shipped internationally be carried on U.S.-flagged vessels. This

guarantees a minimum amount of business for the U.S. merchant fleet.

This promotes other sectors of the maritime industry because U.S.-flagged

vessels are required by law to be crewed by U.S. mariners, are generally

required to be built in U.S. shipyards, and are encouraged to be maintained

and repaired in U.S. shipyards. In addition, U.S.-flag carriers commit to

providing capacity in time of national emergencies.

However, because U.S.-flagged vessels often charge higher rates to

transport cargo than foreign-flagged vessels, cargo preference laws

increase the government’s transportation costs. For fiscal years 1989

through 1993, four federal agencies—the Departments of Defense,

Agriculture, and Energy and the Agency for International

Development—were responsible for more than 99 percent, by tonnage, of

government cargo subject to cargo preference laws.22 Cargo preference

laws increased these federal agencies’ transportation costs by an

estimated $578 million per year in fiscal years 1989 through 1993 because

U.S.-flagged vessels generally charge more to carry cargo than their

foreign-flagged counterparts. The average was about $710 million per year

when the costs associated with the Persian Gulf War were included. In an

October 1996 letter to GAO, the Maritime Administrator claimed that CBO’s

estimate23 of savings from the elimination of cargo preference laws was

too high but agreed that savings would occur.

22Currently, the Departments of Defense and Agriculture, the Agency for International Development,

and the Export-Import Bank are responsible for most of the payments made to shippers under cargo

preference laws.

23See Addressing the Deficit: Updating the Budgetary Implications of Selected GAO Work

(GAO/OCG-96-5, June 28, 1996) for CBO’s previous estimate of savings for this option.

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The effect of cargo preference laws on the U.S. merchant marine industry

is mixed. On one hand, the share of international oceanborne cargo

carried by U.S. vessels has declined despite cargo preference laws because

most oceanborne international cargo is not subject to cargo preference

laws. On the other hand, these laws appear to have a substantial impact on

the U.S. merchant marine industry by providing incentive for vessels to

remain in the U.S. fleet.

If the Congress eliminated cargo preference laws, federal agencies would

save hundreds of millions of dollars yearly, but the U.S. fleet would be

significantly smaller and shipboard jobs would be lost. If the laws were

eliminated, the following savings could be achieved.24

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 216 266 317 367 418

Outlays 154 238 295 346 397

Savings from the 1997 funding level adjusted for inflation

Budget authority 221 279 341 406 477

Outlays 157 250 315 381 450

Source: Congressional Budget Office.

Related GAO Products Management Reform: Implementation of the National Performance

Review’s Recommendations (GAO/OCG-95-1, December 5, 1994).

Maritime Industry: Cargo Preference Laws—Their Estimated Costs and

Effects (GAO/RCED-95-34, November 30, 1994).

Cargo Preference: Effects of U.S. Export-Import Cargo Preference Laws

on Exporters (GAO/GGD-95-2BR, October 31, 1994).

24The termination of cargo preference requirements for all government-sponsored cargoes would

probably cause additional defaults on outstanding loans guaranteed by the Maritime Administration.

CBO estimates that such defaults would increase mandatory spending by between $2 million and

$20 million over the next several years.

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Cargo Preference Requirements: Objectives Not Significantly Advanced

When Used in U.S. Food Aid Programs (GAO/GGD-94-215, September 29,

1994).

GAO Contact John H. Anderson, Jr., (202) 512-2834

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Option:

Fees Paid by

Foreign-Flagged

Cruise Ships

Authorizing committees Judiciary (Senate and House)

Primary agency Department of Justice

Spending type Direct

Framework theme Redefine beneficiaries

The multibillion dollar passenger cruise market in the United States is

almost exclusively served by foreign-flagged cruise vessels. With the

exception of two, there are no oceangoing U.S.-flagged cruise vessels of

any substantial size. Access to the U.S. market is, therefore, a very

lucrative privilege, which is made even more so because the vessels and

their crews pay virtually no corporate or personal U.S. income tax.

To ensure adequate shoreside facilities, the safety of U.S. passengers and

property, and enforcement of immigration laws, the federal government

has enacted laws and dispersed responsibility for their administration and

enforcement throughout several departments and agencies of the federal

government. This raises the question of whether the foreign-flagged cruise

vessels, which are enjoying substantial profits as a result of their

monopoly, are paying their fair share of the cost to the federal government

of ensuring that this extremely valuable U.S. market operates safely and in

accordance with our laws and regulations.

Seven agencies provide services to foreign-flagged cruise vessels. For

fiscal year 1993, we found that all but two agencies—the Coast Guard and

the Immigration and Naturalization Service (INS)—charged fees for these

services that were about equal to or exceeded their costs to provide the

services. In 1996, the Congress authorized the Coast Guard to begin

collecting fees for its inspection services. However, INS is still not

collecting fees that recover the cost of passenger inspections because

passengers are exempt from its fee when arriving at a port of entry in the

United States on a cruise originating in Canada, Mexico, a territory or

possession of the United States, or any adjacent island. If the Congress

lifted this exemption, the following savings would occur.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Added receipts 37 37 37 37 37

Source: Congressional Budget Office.

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Related GAO Product None

GAO Contact John H. Anderson, Jr., (202) 512-2834

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Option:

Department of

Transportation’s

Oversight of Its

University Research

Authorizing committees Commerce, Science and Transportation

(Senate) 

Transportation and Infrastructure (House)

Appropriations subcommittees Transportation (Senate)

Transportation and Related Agencies

(House)

Primary agency Department of Transportation

Accounts Multiple

Spending type Discretionary

Budget subfunction Ground, Air, Water, and Other

Transportation

Framework theme Improve efficiency

The Department of Transportation (DOT) conducts a variety of research to

enhance safety, mobility, environmental quality, efficiency, and economic

growth in the nation’s transportation system. The results of DOT’s research

programs include prototypes of systems, new operating procedures, data

used to focus policy decisions, and regulations. Within DOT several offices

are responsible for the oversight of research and development activities. In

addition, each of DOT’s operating administrations is responsible for

reviewing and monitoring its own research to ensure that the university

awards’ objectives are met and the costs are appropriate.

While DOT’s spending on research at universities has grown significantly

between fiscal years 1988 and 1993, DOT does not have an integrated plan

to ensure that sponsored research is needed to meet departmental goals.

In addition, a lack of oversight on some university awards led to

overcharges of almost $450,000 and unpaid cost-sharing totaling $3 million

in a sample of awards reviewed in detail. More effective planning and

management of the research program could reduce costs by limiting

duplicate research and ensuring that recipients follow award guidelines on

allowable costs and cost sharing.

As GAO recommended, DOT has completed the development of a

departmentwide database to track the purpose and costs associated with

each university research award. GAO continues to recommend that DOT

evaluate the operating administrations’ processes to ensure that they have

adequate policies and procedures to carry out their responsibilities for

monitoring awards.

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CBO does not disagree that improved monitoring and oversight of DOT’s

university research can reduce outlays. GAO findings of overcharges and

unpaid cost sharing for a sample of grants suggest that the Congress could

slow DOT’s university research spending by reducing appropriations until

improvements in necessary planning and management processes are

made. However, savings from this option would depend on which among

many small accounts are reduced and the amounts of these reductions.

Related GAO Product Department of Transportation: University Research Activities Need

Greater Oversight (GAO/RCED-94-175, May 13, 1994).

GAO Contact John H. Anderson, Jr., (202) 512-2834

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Option:

Fees for Certification

of New Airlines

Authorizing committees Commerce, Science, and Transportation

(Senate) 

Transportation and Infrastructure (House)

Primary agency Department of Transportation

Spending type Direct

Framework theme Redefine beneficiaries

To obtain the necessary certification to begin operations, applicants

currently pay nominal fees to the Department of Transportation’s (DOT)

Office of the Secretary (OST) but nothing to the Federal Aviation

Administration (FAA). The fees that applicants currently pay represent only

a small fraction of what it costs the government to conduct certification

activities. For example, applicants that completed OST’s and FAA’s

certification processes paid an average fee of $760 for certification, less

than 1 percent of the government’s average estimated cost of $154,000 to

certify each applicant.

Department of Transportation officials said that a portion of the

certification costs is recouped from ticket and fuel taxes paid by the

operating airlines. These taxes are deposited into the Airport and Airway

Trust Fund. Even so, applicants do not pay into the fund until they begin

operations; therefore, applicants that never begin operations never

contribute to the fund. For example, 80 of the 180 applicants that filed

applications with OST between January 1990 and July 1995 never began

operations and thus had never contributed to the fund.

OST and FAA officials recognize that the existing fees are insufficient to

cover certification costs but have not yet determined the appropriateness

of the current fee structures. OST has recently undertaken a review of all

fees it charges for aviation licensing activities, which were last updated 10

years ago, and plans to issue a notice of proposed rulemaking to update

the fees. According to the Deputy Director of the Flight Standards Service,

FAA plans to examine all services, such as new airlines, pilot training, and

aircraft inspection requiring certificates and to review the existing fee

structures to determine the extent to which the government’s costs have

been or should be recouped. Legislation introduced in the 104th Congress

would have allowed FAA to charge fees for various aviation services,

including new airline certification fees.

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If the Congress were to direct OST and FAA to fully recover the costs of

airline certification from applicants, the following revenue could be

achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Added receipts 3 3 3 3 3

Source: Congressional Budget Office.

Related GAO Product Certification of New Airlines: Department of Transportation Has Taken

Action to Improve Its Certification Process (GAO/RCED-96-8, January 11,

1996).

GAO Contact John H. Anderson, Jr. (202) 512-2834

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Option:

Fees for Registering

Aircraft

Authorizing committees Commerce, Science, and Transportation

(Senate) 

Transportation and Infrastructure (House)

Primary agency Department of Transportation

Spending type Direct

Framework theme Redefine beneficiaries

In 1977, the Congress amended the Federal Aviation Act and identified

three categories of aircraft owners—U.S. citizens, resident aliens, and

U.S.-based foreign companies—that may register aircraft in the United

States. To register an aircraft, an eligible owner submits a $5 fee. As of the

end of fiscal year 1996, 307,503 aircraft were registered in the United

States. From fiscal year 1993 to 1996, the number of registrations

processed annually has ranged from about 45,000 to 49,000.

In 1993, we reported that the Federal Aviation Administration (FAA) was

not fully recovering the cost of processing aircraft registration

applications and estimated that, by not increasing fees since 1968 to

recover costs, FAA had foregone about $6.5 million in additional revenue.

In 1993, we recommended that FAA accelerate implementation of rules it

proposed in 1990 for increasing aircraft registration fees. FAA now expects

that a Notice of Proposed Rulemaking will be issued in November 1997,

with an effective date of January 1998. The Congress may want to

encourage FAA to meet these milestones in order to avoid any further

losses in revenues.

If FAA recovered the full cost of processing aircraft registration

applications, the following additional revenue could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Added receipts 1 1 1 1 1

Source: Congressional Budget Office.

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Related GAO Product Aviation Safety: Unresolved Issues Involving U.S.-Registered Aircraft

(GAO/RCED-93-135, June 18, 1993).

GAO Contact John H. Anderson, Jr. (202) 512-2834

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450 Community and

Regional

Development

• Eligibility for Federal Emergency Management Agency Public Assistance

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Option:

Eligibility for Federal

Emergency

Management Agency

Public Assistance

Authorizing committees Environment and Public Works (Senate)

Transportation and Infrastructure (House)

Appropriations subcommittees VA, HUD and Independent Agencies

(Senate and House)

Primary agency Federal Emergency Management Agency

Account Disaster Relief Fund (58-0104)

Spending type Discretionary

Budget subfunction Disaster relief and insurance

Framework theme Redefine beneficiaries

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 natural

disasters. It also pays other disaster-related costs, such as debris removal,

emergency protective measures, and the administrative costs of managing

the recovery effort. Many private nonprofit organizations, such as schools,

hospitals, and utilities are also eligible for assistance. The cost of the

Public Assistance Program has increased dramatically in recent years—in

constant 1995 dollars, FEMA obligated over $6.5 billion in public assistance

for 246 disasters and emergencies declared during fiscal years 1989

through 1994, as compared with about $1 billion for 151 disasters and

emergencies declared during the preceding 6 fiscal years. Although much

of this is due to increased disaster activity, changes in the amount and

types of assistance provided and eligible recipients of assistance have also

been a factor.

In a May 1996 report, GAO presented a number of options identified by

public assistance program officials in FEMA’s 10 regional offices that, if

implemented, could reduce the cost of the program. Among the options

recommended most strongly were: placing limits on the appeals process;

eliminating eligibility for some facilities that generate revenue, lack

required insurance, or are not delivering government services; and limiting

the impact of codes and standards. Savings for all of these options could

not be estimated because it is difficult to isolate the effects of fluctuating

disaster activity versus changes in eligibility and because FEMA’s data base

does not enable the separation of costs related to some of these options.

However, CBO estimates that eliminating eligibility for all private nonprofit

organizations—many of which are revenue-generating facilities such as

utilities, hospitals, and universities—would yield the following savings.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 52 52 52 52 52

Outlays 10 23 34 42 47

Savings from the 1997 funding level adjusted for inflation

Budget authority 53 55 56 58 59

Outlays 11 24 36 45 51

Source: Congressional Budget Office.

Related GAO Products Disaster Assistance: Improvements Needed in Determining Eligibility for

Public Assistance (GAO/RCED-96-113, May 23, 1996).

Disaster Assistance: Improvements Needed in Determining Eligibility for

Public Assistance (GAO/T-RCED-96-166, April 30, 1996).

GAO Contact Judy A. England-Joseph, (202) 512-7631

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500 Education,

Training,

Employment, and

Social Services

• Consolidation of Student Aid Programs

• Consolidation of Employment and Training Programs

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Option:

Consolidation of

Student Aid Programs

Authorizing committees Labor and Human Resources Committee

(Senate) 

Economic and Educational Opportunities

Committee (House)

Appropriations subcommittees Labor, Health and Human Services,

Education, and Related Agencies (Senate

and House)

Primary agency Department of Education

Account Student Financial Assistance (91-0200)

Spending type Discretionary/Direct

Budget subfunction Higher Education

Framework theme Improve efficiency

The Department of Education provides loans and grants to students to

help finance their higher education. The federal government’s role in

supporting higher education is contributing about 50 percent of its

education budget to postsecondary education programs and activities,

most of which are for student financial aid. The largest programs provide

federally insured loans and Pell grants for students. The Federal Family

Education Loan (FFEL) and Federal Direct Student Loan (FDSL) programs

compose the largest source of federal student financial aid. FFEL and FDSL

programs are entitlements, but Pell grants, the largest federal grant-in-aid

program, are awarded to the most needy eligible students, dependent on

the availability of appropriated funds.

Although the student loan and Pell grant programs provide the majority of

federal financial aid to students for postsecondary education, another 22

smaller programs are targeted to specific segments of the postsecondary

school population. These programs were collectively funded at $1.1 billion

for fiscal year 1995. The programs fund remedial and support services for

prospective students from disadvantaged families, programs to enhance

the labor pool in designated specialties, grants to students for volunteer

activities, and grants to women and minorities who are underrepresented

in graduate education.

These smaller grant programs may be considered candidates for

consolidation. They could be consolidated with other larger programs or

among themselves. For example, programs directed to attracting minority

and disadvantaged students could be consolidated into one program. Or a

certain amount of funds could be provided to states through a single grant,

in lieu of several smaller grants, to cover some or all of the purposes of

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several small grant programs. In 1995, we identified 22 programs that

could be candidates for consolidation. In anticipation of the administrative

savings that could be achieved through consolidation, funding for these

programs could be reduced 10 percent each year as part of the

consolidation. Since all savings achieved through consolidation would be

administrative in nature, we assume that there would be no adverse

impact on students’ access to postsecondary education—a principal

objective of the enabling legislation, the Higher Education Act of 1965, as

amended.

Five-Year Savings

Dollars in millions

FY 98 FY 99 FY00 FY01 FY02

Savings from 1997 funding level

Budget authority 101 101 101 101 101

Outlays 12 81 99 100 101

Savings from 1997 funding level adjusted for inflation

Budget authority 104 107 110 113 116

Outlays 12 84 105 108 112

Source: Congressional Budget Office.

Related GAO Products Department of Education: Information on Consolidation Opportunities

and Student Aid (GAO/T-HEHS-95-130, April 6, 1995).

Department of Education: Opportunities to Realize Savings

(GAO/T-HEHS-95-56, January 18, 1995).

GAO Contact Carlotta C. Joyner, (202) 512-7002

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Option:

Consolidation of

Employment and

Training Programs

Authorizing committees Multiple

Appropriations subcommittees Labor, Health and Human Services, and

Education (Senate and House)

Primary agencies Multiple

Accounts Multiple

Spending type Discretionary/Direct

Budget subfunction Training and Employment

Framework theme Improve efficiency

The challenges posed by increased global competition and a changing

economy call for a renewed commitment to invest in the American

workforce. The federal government’s effort to meet this commitment has

been to increase investment in a wide array of programs that target people

experiencing barriers to employment and to add other new programs that

target particular groups. Since 1992 GAO has issued numerous reports and

testimonies commenting on federal employment and training programs.

Most recently, GAO identified more than 150 federal programs and funding

streams providing employment and training assistance. These programs

are spread across 15 departments and independent agencies with a total

budget of about $20 billion.

GAO’s analysis of programs that target the economically disadvantaged

showed that those programs had similar goals, often served the same

categories of people, and provided many of the same services using

separate, yet parallel, delivery structures. This overlap can add

unnecessary administrative costs at each level of government—federal,

state, and local.

In the 104th Congress, the House and the Senate passed bills that would

consolidate many of the federally funded employment training programs.

The House bill would have created three block grants by consolidating 74

employment training programs and eliminating 52 higher education

programs. The Senate bill would have consolidated 83 programs into a

single block grant. Although final passage was not accomplished before

the Congress adjourned, it is likely that this issue will reemerge in the

105th Congress.

The amount of any savings from consolidating programs will depend on

how many programs are included, the degree and kind of reductions, and

the level of federal involvement. To illustrate the potential for savings from

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consolidating employment and training programs, one option would be to

consolidate the following programs for the economically disadvantaged:

Job Training Partnership Act (JTPA) IIA Training Services for the

Disadvantaged Adult, JTPA IIA State Education Programs, JTPA IIA

Incentive Grants, Food Stamp Employment and Training, Family

Self-Sufficiency Program, Vocational Education—Basic State Programs,

Educational Opportunity Centers, and Student Literacy and Mentoring

Corps. A second option could consolidate the following programs for

dislocated workers: JTPA Economic Dislocation and Worker Adjustment

Assistance (EDWAA) (substate allotment), JTPA EDWAA (governor’s

discretionary), JTPA EDWAA (Secretary’s discretionary), JTPA Defense

Conversion Adjustment Program, JTPA Clean Air Employment Transition

Assistance, JTPA Defense Diversification, Trade Adjustment

Assistance—Workers, Vocational Education—Demonstration Centers for

the Training of Dislocated Workers, and the Transition Assistance

Program.

Consolidating similar employment and training programs would result in

administrative efficiencies to the states as well as improved opportunities

to reduce fragmentation and increase effectiveness in service delivery. In

consolidating programs, the Congress would also want to consider the

implications for federal agency workloads and responsibilities. In

anticipation of the benefits states will receive, funding for the programs

included could be reduced 10 percent each year as part of the

consolidation. Savings from the consolidations are shown in the two sets

of tables that follow, which separately identify direct and discretionary

spending.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Disadvantaged adults

Discretionary spending

Savings from the 1997 funding level

Budget authority 195 195 195 195 195

Outlays 14 168 193 196 196

Savings from the 1997 funding level adjusted for inflation

Budget authority 199 205 211 216 222

Outlays 15 173 203 211 217

Note: The Family Self Sufficiency Program did not receive an appropriation for fiscal year 1997.

Source: Congressional Budget Office.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Dislocated workers

Direct spending

Budget authority 9 8 8 8 8

Outlays 3 7 8 8 8

Source: Congressional Budget Office.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Dislocated workers

Discretionary spending

Savings from the 1997 funding level

Budget authority 133 133 133 133 133

Outlays 9 94 127 133 133

Savings from the 1997 funding level adjusted for inflation

Budget authority 136 140 144 148 152

Outlays 9 97 132 143 147

Note: JTPA Defense Conversion, JTPA Clean Air, JTPA Defense Diversification, and Vocational

Education Demonstration Centers did not receive appropriations in fiscal year 1997.

Source: Congressional Budget Office.

Related GAO Products Employment Training: Successful Projects Share Common Strategy

(GAO/HEHS-96-108, May 7, 1996).

Block Grants: Characteristics, Experience, and Lessons Learned

(GAO/HEHS-95-74, February 9, 1995).

Multiple Employment Training Programs: Major Overhaul Is Needed to

Create a More Efficient, Customer-Driven System (GAO/T-HEHS-95-70,

February 6, 1995).

Multiple Employment Training Programs: Major Overhaul Is Needed to

Reduce Costs, Streamline the Bureaucracy, and Improve Results

(GAO/T-HEHS-95-53, January 10, 1995).

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Multiple Employment Training Programs: Basic Program Data Often

Missing (GAO/T-HEHS-94-239, September 28, 1994).

Multiple Employment Training Programs: Overlap in Programs Raises

Questions About Efficiency (GAO/HEHS-94-193, July 11, 1994).

Department of Labor: Rethinking the Federal Role in Worker Protection

and Workforce Development (GAO/T-HEHS-95-125, April 4, 1994).

Multiple Employment Training Programs: Major Overhaul Is Needed

(GAO/T-HEHS-94-109, March 3, 1994).

Multiple Employment Training Programs: Most Federal Agencies Do Not

Know if Their Programs Are Working Effectively (GAO/HEHS-94-88, March 2,

1994).

Multiple Employment Training Programs: Overlapping Programs Can Add

Unnecessary Administrative Costs (GAO/HEHS-94-80, January 28, 1994).

Multiple Employment Training Programs: Conflicting Requirements

Hamper Delivery of Services (GAO/HEHS-94-78, January 28, 1994).

Multiple Employment Programs: National Employment Training Strategy

Needed (GAO/T-HRD-93-27, June 18, 1993).

Multiple Employment Programs (GAO/HRD-93-26R, June 15, 1993).

Multiple Employment Programs (GAO/HRD-92-39R, July 24, 1992).

GAO Contact Carlotta C. Joyner, (202) 512-7002

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550 Health • Prescription Drug and Medicaid Fraud

• Medicaid: States Use Illusory Approaches to Shift Program Costs to the

Federal Government

• Medicaid Formula: Fairness Could Be Improved

• Automated Drug Utilization Reviews

• Payments to Rural Health Clinics

• Public Health Service Commissioned Corps

• Unified Risk-Based Food Safety System

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Option:

Prescription Drug and

Medicaid Fraud

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of Health and Human Services

Account Grants to States for Medicaid

(75-0512)

Spending type Direct

Budget subfunction Health care services

Framework theme Improve efficiency

The Medicaid program typically includes prescription drugs in its covered

services, and diversion of these medications has been a problem for at

least a decade. Such diversion can involve pharmacists routinely adding

drugs to legitimate prescriptions and keeping the overage for themselves

or for sale to others; clinics providing inappropriate prescriptions to

Medicaid recipients who trade them for cash or merchandise or have them

filled and then sell the drugs themselves; and individuals who provide

recipients with abusable drugs in exchange for subsequent illicit use of

their Medicaid recipient numbers. Participants in drug diversion schemes

therefore frequently face added charges of fraud, false claims, or other

related violations of state or federal law.

The financial incentives for diverting drugs are substantial and apply to

both controlled and noncontrolled substances. Legal controlled

drugs—those with significant potential for physical or psychological

harm—are appealing because they are relatively cheap and chemically

pure compared to illicit drugs. Profits from street sales can amount to

several thousand percent of initial investment. One drug costing the

pharmacy less than 50 cents per pill sold on the street for $85 per pill.

Noncontrolled drugs, also, have recently become popular targets for

diversion because they are comparatively easier to obtain and are

particularly desirable if obtained under an insurance program—such as

Medicaid—requiring little or no copayment. With no or minimal outlay on

the part of the recipient, the street price—while typically lower than the

pharmacy price and thus attractive to buyers—is entirely profit.

Medicaid accounts for 80 percent of all federal spending on prescription

drugs. In fiscal year 1995, Medicaid’s drug benefit cost more than

$10 billion. While precise dollar losses due to diversion—as with all

fraud—are impossible to identify, New York State officials estimate that in

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1990, these losses represented about 10 percent of the state’s total

Medicaid spending for prescription drugs.

States have various initiatives under way to curb Medicaid prescription

drug diversion but are hampered by insufficient resources, lengthy and

frequently unproductive investigations, and the prevalence of repeat

offenders and resilient schemes. GAO believes that the Health Care

Financing Administration should assume an active leadership role in

orchestrating and encouraging states’ efforts and fostering the

development and implementation of preventive measures. The Department

of Health and Human Services (HHS) generally agrees with the GAO findings

and recommendation, but believes it is not feasible unless new staff

resources can be identified and allocated.

The Congress should encourage HHS to take a stronger role. If states

curbed these losses by even a small percentage, future Medicaid costs

would be reduced substantially. However, CBO cannot develop an estimate

for this option until specific strategies are identified. Moreover, savings

would be net of the additional resources required to curb fraudulent

activities.

Related GAO Products Prescription Drugs and Medicaid: Automated Review Systems Can Help

Promote Safety, Save Money (GAO/AIMD-96-72, June 11, 1996).

Medicare and Medicaid: Opportunities to Save Program Dollars by

Reducing Fraud and Abuse (GAO/T-HEHS-95-110, March 22, 1995).

Prescription Drugs: Automated Prospective Review Systems Offer

Significant Potential Benefits for Medicaid (GAO/AIMD-94-130, August 5, 1994).

Medicaid: A Program Highly Vulnerable to Fraud (GAO/T-HEHS-94-106,

February 25, 1994).

Medicaid Drug Fraud: Federal Leadership Needed to Reduce Program

Vulnerabilities (GAO/HRD-93-118, August 2, 1993).

Medicaid Prescription Drug Diversion: A Major Problem, but State

Approaches Offer Some Promise (GAO/T-HRD-92-48, July 29, 1992).

GAO Contact William J. Scanlon, (202) 512-7114

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Option:

Medicaid: States Use

Illusory Approaches

to Shift Program

Costs to the Federal

Government

Authorizing committees Finance (Senate) 

Commerce (House)

Primary agency Department of Health and Human Services

Account Grant to States for Medicaid

(75-0512)

Spending type Direct

Budget subfunction Health care services

Framework theme Reassess objectives

GAO raised a concern that in fiscal year 1993, Michigan, Texas, and

Tennessee used illusory financing approaches to obtain about $800 million

in federal Medicaid funds without effectively committing their share of

matching funds. Under these approaches, facilities that received increased

Medicaid payments from the states, in turn, paid the states almost as much

as they received. Consequently, the states realized increased revenue that

was used to reduce their state Medicaid contributions, fund other health

care needs, and supplement general revenue funding. For the period from

fiscal year 1991 to fiscal year 1995, Michigan alone reduced its share of

Medicaid costs by almost $1.8 billion through financing partnerships with

medical providers and local units of government. GAO’s analysis of

Michigan’s transactions showed that even though legislation curtailed

certain creative financing practices, the state was able to reduce its share

of Medicaid costs at the expense of the federal government by $428 million

through other mechanisms.

The practices that involve payments to state-owned facilities are restricted

by Omnibus Budget Reconciliation Act of 1993 provisions that limit such

payments to unreimbursed Medicaid and uninsured costs. However, states

can continue to make payments to local government-owned facilities,

including payments that exceed costs, and have the facilities return the

payments to the states. States are not required to justify the need for

increased reimbursements, nor is the Health Care Financing

Administration required to verify that moneys are used for the purpose for

which they were obtained.

GAO believes that the Medicaid program should not allow states to benefit

from illusory arrangements and that Medicaid funds should only be used

to help cover the costs of medical care incurred by those medical facilities

that provide the care. GAO believes the Congress should enact legislation to

minimize the likelihood that states can develop arrangements whereby

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providers return Medicaid payments to the states, thus effectively reducing

the state’s share of Medicaid funding. This legislation should prohibit

Medicaid payments that exceed costs to any government-owned facility.

Savings are difficult to estimate for this option because national data on

these practices are not readily available. In addition, Medicaid spending is

influenced by the use of waivers from federal requirements, which allows

states to alter Medicaid financing formulas. Future requests and use of

waivers by states are uncertain.

Related GAO Products State Medicaid Financing Practices (GAO/HEHS-96-76R, January 23, 1996).

Michigan Financing Arrangements (GAO/HEHS-95-146R, May 5, 1995).

Medicaid: States Use Illusory Approaches to Shift Program Costs to the

Federal Government (GAO/HEHS-94-133, August 1, 1994).

Medicaid: The Texas Disproportionate Share Program Favors Public

Hospitals (GAO/HRD-93-86, March 30, 1993).

GAO Contact William J. Scanlon, (202) 512-7114

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Option:

Medicaid Formula:

Fairness Could Be

Improved

Authorizing committees Finance (Senate) 

Commerce (House)

Primary agency Department of Health and Human Services

Account Grant to States for Medicaid

(75-0512)

Spending type Direct

Budget subfunction Health care services

Framework theme Reassess objectives

The Medicaid program provides medical assistance to current

beneficiaries of the Temporary Assistance for Needy Families (TANF)

program who qualified under their states’ pre-reform AFDC plans,

low-income people who receive Supplemental Security Income, and

certain other low-income individuals. The federal government and the

states share the financing of the program. Under current law, the federal

commitment is open-ended: federal outlays rise with the costs and use of

Medicaid services. The federal share of the program costs varies with the

per capita income of the state. Consequently, high-income states pay a

larger share of the benefits than low-income states. By law, the federal

share can be no less than 50 percent and no more than 83 percent.

Since 1986, GAO has issued numerous reports and testimonies that identify

ways in which the fairness of federal grant formulas could be improved.

With respect to Medicaid, GAO believes that the fairness of the matching

formula in the open-ended program could be improved by replacing the

per capita income factor with three factors—the number of people living

below the official poverty line, the total taxable resources of the state, and

the differences in health care costs across states—and by reducing the

minimum federal share to 40 percent. These changes could reduce federal

reimbursements by reducing the federal share in states with the most

generous benefits, the fewest low-income people in need, and the greatest

ability to fund benefits from state resources. These changes could redirect

federal funding to states with the highest concentration of people in

poverty and the least capability of funding these needs from state

resources.

To illustrate the savings that could be achieved from changes in the

Medicaid formula, CBO estimates that if the minimum federal share were

reduced to 40 percent, the following savings could be achieved.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 7,040 7,590 8,210 8,880 9,630

Outlays 7,040 7,590 8,210 8,880 9,630

Source: Congressional Budget Office.

Related GAO Products Medicaid: Matching Formula’s Performance and Potential Modifications

(GAO/T-HEHS-95-226, July 27, 1995).

Medicaid Formula: Fairness Could Be Improved (GAO/T-HRD-91-5,

December 7, 1990).

GAO Contact William J. Scanlon, (202) 512-7114

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Option:

Automated Drug

Utilization Reviews

Authorizing committees Finance (Senate) 

Commerce (House)

Primary agency Department of Health and Human Services

Account Grants to States for Medicaid

(75-0512)

Spending type Direct

Budget subfunction Health Care Services

Framework theme Improve efficiency

Amendments to Title XIX of the Social Security Act required that states

implement drug utilization review (DUR) programs in their Medicaid

programs by January 1, 1993. Under DUR, states must review Medicaid

prescriptions to (1) determine whether they are appropriate, medically

necessary, and not likely to result in adverse medical reactions and

(2) identify fraud, waste, and abuse. Reviews must be performed

prospectively (before prescriptions are filled) and retrospectively (on a

quarterly basis after prescriptions are filled).

The amendments encourage, but do not require, states to use statewide

automated systems to conduct prospective reviews. However, use of these

systems by some states shows significant potential to both improve patient

safety and reduce Medicaid program costs. Automated prospective DUR

systems operated by five geographically diverse states—Maryland,

Missouri, New Mexico, Oregon, and Pennsylvania—together cancel

hundreds of thousands of Medicaid prescriptions annually that represent

potential inappropriate drug therapy or instances of waste, fraud, and/or

abuse. Moreover, additional cancellations result from companion on-line

screening capabilities that ensure recipients are eligible for Medicaid

benefits at the time a prescription is presented. During 12-month periods

for these five states, automated prospective DUR systems cancelled

prescriptions totaling over $30 million due to drug overutilization and

Medicaid ineligibility. In contrast, the total one-time costs to install these

systems was only $1.9 million. Although these results are impressive, the

greatest potential savings for the Medicaid program would result from

avoiding hospitalizations due to inappropriate drug therapy (estimates of

which range from 3 percent for the general population to 28 percent for

the elderly). With Medicaid’s fiscal year 1995 inpatient hospitalizations

totaling about $42 billion, even a limited implementation of automated

prospective DUR systems could have a significant impact.

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Most states have currently implemented or plan to implement automated

prospective DUR systems, however, states implement these systems

differently. The absence in some states of some types of drug therapy

reviews, such as those for pregnancy conflict (use of prescribed drug is

not recommended during pregnancy) and underutilization (an indication

of noncompliance with a prescribed drug regimen), could have dramatic

effects on patient safety. Also, whether or not states automatically deny

early refill claims (request for prescription refill before a predetermined

amount of a drug—such as 75 percent—has been consumed) can

substantially affect the relative amount of the savings and the prevention

of potential waste, fraud, and abuse.

Responsible for overseeing the states’ implementation of DUR programs,

the Health Care Financing Administration (HCFA) has encouraged the use

of statewide automated prospective DUR systems through such

statutorily-required efforts as conducting a demonstration project and

issuing guidance to the states on prospective DUR cost and benefit

reporting. However, given both the substantial safety benefits that can

accrue to Medicaid recipients and savings to the Medicaid program

through the effective use of automated prospective DUR systems, HCFA

could more actively facilitate states’ coordination and sharing of

experiences and best practices for the effective implementation and use of

these systems.

GAO work shows that the use of automated prospective DUR systems in five

states saved millions of dollars by cancelling prescriptions which could

have been inappropriate or fraudulent or where the recipient was not

eligible for Medicaid benefits. The following table shows potential annual

savings that would result from operating automated prospective DUR

systems in all states for fiscal years 1998 through 2002.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 10 40 80 110 120

Outlays 10 40 80 110 120

Source: Congressional Budget Office.

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Related GAO Products Prescription Drugs and Medicaid: Automated Review Systems Can Help

Promote Safety, Save Money (GAO/AIMD-96-72, June 11, 1996).

Prescription Drugs and the Elderly: Many Still Receive Potentially Harmful

Drugs Despite Recent Improvements (GAO/HEHS-95-152, July 24, 1995).

Prescription Drugs: Automated Prospective Review Systems Offer

Potential Benefits for Medicaid (GAO/AIMD-94-130, August 5, 1994).

GAO Contact Joel C. Willemssen, (202) 512-6253

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Option:

Payments to Rural

Health Clinics

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of Health and Human Services

Accounts Federal Supplemental Insurance Trust

Fund Account (20-8004)

Grants to States for Medicaid (75-0512)

Spending type Direct

Budget subfunction Health Care Services and Medicare

Framework theme Redefine beneficiaries

In 1977, the Rural Health Clinics (RHC) program was established to provide

Medicare and Medicaid reimbursement to health clinics in underserved

rural communities. Today, Medicare and Medicaid continue to reimburse

RHC providers on the basis of their actual costs of providing care, while

most other providers receive lower Medicare and Medicaid payments

limited by set fee schedules. RHCs continue to receive cost-based

reimbursement out of recognition that a fee schedule approach does not

help ensure financial viability of low volume rural health care providers.

Since 1989, the number of RHCs has grown by over 30 percent a year to

nearly 3,000, with total Medicare and Medicaid payments to them expected

to be over $1 billion annually by the year 2000.

We found that contrary to its purpose, the RHC program is generally not

focused on serving populations that have difficulty obtaining primary care

in isolated rural areas. Rather, our work suggests that the additional

Medicare and Medicaid funding provided to RHCs each year (estimated at

$295 million in 1996) increasingly benefits well-staffed, financially viable

clinics in populated areas that already have extensive health care delivery

systems in place. For example, almost half of the RHCs are located in areas

with a nearby population of over 25,000. The program’s broad eligibility

criteria entitles RHCs to be reimbursed at cost, even if they are already

financially viable using standard Medicare/Medicaid payment methods.

Further, once designated as an RHC, the clinic remains eligible for cost

reimbursement indefinitely, even if the area no longer qualifies as rural or

underserved.

We recommended that the Congress eliminate cost-based reimbursement

to RHCs unless they are located in areas with no other Medicare and

Medicaid providers or can demonstrate that existing providers will not

accept new Medicare and Medicaid patients and that the funding would be

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used to expand access to them. Assuming such improvements in the

targeting of payments, the following savings could be achieved.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Medicaid (Outlays) 20 30 30 30 30

Medicare (Outlays) 30 40 40 40 50

Total 50 70 70 70 80

Source: Congressional Budget Office.

Related GAO Product Rural Health Clinics: Rising Program Expenditures Not Focused on

Improving Care in Isolated Areas (GAO/HEHS-97-24, November 22, 1996).

GAO Contact Bernice Steinhardt, (202) 512-7119

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Option:

Public Health Service

Commissioned Corps

Authorizing committees Labor and Human Resources (Senate) 

Commerce (House)

Appropriations subcommittees Labor, Health and Human Services,

Education, and Related Agencies (Senate

and House)

Primary agency Department of Health and Human Services

Accounts Multiple

Spending type Discretionary/Direct

Budget subfunction Health Care Services

Framework theme Improve efficiency

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. Over the ensuing years, the Corps’ responsibilities have

grown, and Corps officers today are involved in a wide range of PHS

programs, such as providing medical care to Native Americans at tribal

and Indian Health Service facilities, psychiatric, medical, and other

services in federal prisons, and health sciences research. As the result of

their 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, including retirement eligibility (at any

age) after 20 years of service. Corps officers continue to receive virtually

the same pay and benefits as military officers, including retirement.

GAO found that the functions of the Corps are 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, and

the Department of Defense (DOD) has no specific plans for how the Corps

might be used in future emergency mobilizations;

• generally, the Corps does not meet the criteria and principles cited in a

DOD report as justification for the military compensation system; and

• other than Corps officers who are detailed to the Coast Guard and DOD,

Corps members are not subject to the Uniform Code of Military Justice,

which underlies how military personnel are managed.

Corps officials maintained that uniformed Corps members are needed as

mobile cadres of professionals who can be assigned with little notice to

any location and function, often in hazardous or harsh conditions.

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However, other agencies, such as the Environmental Protection Agency,

the National Transportation Safety Board, and the Federal Emergency

Management Agency, use civilian employees to respond quickly to

disasters and other emergency situations that could involve both

hazardous or harsh conditions.

GAO’s analysis showed that, based on 1994 costs, when all of the

components of personnel costs—basic pay and salaries; special pay,

allowances, and bonuses; retirement; health care; life insurance; and

Corps members’ tax advantages—are considered, PHS personnel costs

could be reduced by converting the PHS Corps to civilian status. The

amount of any cost reductions would depend on various factors, including

the method by which any changes are implemented, the accuracy of the

data PHS and DOD provided GAO, the applicability of 1994 costs to future

years, how closely GAO’s underlying assumptions match actual

relationships between Corps and civilian personnel costs, and the manner

in which any transition to civilian employment would be carried out.

Any decision to convert the Corps could be implemented in a number of

ways, including

• requiring all officers to immediately convert to civilian employment;

• allowing all current officers to remain in place until retirement or other

separation and requiring all new entrants to be civilian employees;

• allowing all officers with a specific number of years in the Corps to

continue in the Corps until retirement or other separation; or

• retaining a permanent smaller Corps to provide medical services in areas

that are difficult to staff with civilian employees.

The Congress may wish to refer to this information when considering the

merits of converting the PHS Commissioned Corps to civilian status. If the

Congress does in fact choose to convert the Corps, the following savings

could result, depending upon the factors mentioned above.

To illustrate the savings that could be achieved through conversion to

civilian status, CBO estimated that if officers with less than 15 years of

service were converted to civilian status effective January 1, 1998, the

following savings would apply.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Discretionary spending

Savings from the 1997 funding level adjusted for inflation

Budget authority 15 23 26 28 31

Outlays 9 18 24 26 29

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Direct spending (Retirement Fund)

Agency contributions

(Outlays) 18 27 30 34 37

Five-Year Revenues

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Change in revenues (Retirement Fund)

Employee contributions –1 –2 –2 –2 –3

Source: Congressional Budget Office.

Related GAO Product Federal Personnel: Issues on the Need for the Public Health Service’s

Commissioned Corps (GAO/GGD-96-55, May 7, 1996).

GAO Contact L. Nye Stevens, (202) 512-8676

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Option:

Unified Risk-Based

Food Safety System

Authorizing committees Agriculture, Nutrition, and Forestry

(Senate) Agriculture (House)

Appropriations subcommittees Agriculture, Rural Development, and

Related Agencies (Senate) 

Agriculture, Rural Development, Food and

Drug Administration, and Related

Agencies (House)

Primary agency Department of Agriculture

Accounts Multiple

Spending type Discretionary

Budget subfunctions Consumer and Occupational Health and

Safety

Framework theme Improve efficiency

GAO has issued 14 reports and testimonies on food safety issues. This work

leads us to conclude that the federal system to ensure the safety and

quality of the nation’s food—at an annual cost of over $1 billion a year—is

inefficient and outdated and does not adequately protect the consumer

against food-borne illness. GAO has reported that as many as 12 different

agencies administering over 35 different laws oversee food safety. As a

result, the current food safety system suffers from overlapping and

duplicative inspections, poor coordination, and inefficient allocation of

resources.

To improve the effectiveness and efficiency of the federal food safety

system, GAO has recommended the consolidation of federal food safety

agencies and activities. Specifically, GAO has recommended

(1) consolidating food safety activities under a single, risk-based food

safety agency with a uniform set of food safety laws, (2) establishing a

Hazard Analysis and Critical Control Point system (HACCP) which

emphasizes building safety into food production, and (3) placing

responsibility for the system’s implementation on the industry, with the

government retaining an oversight role. Since December 1995, federal

rules and regulations have been revised to move the seafood and meat and

poultry industries under a HACCP-based system. The seafood industry is

required to adopt and implement HACCP systems by the end of

December 1997, and all meat and poultry plants are required to implement

HACCP systems by 2000. While HACCP may eliminate the need for some food

safety inspectors, resulting in government cost savings, no move has been

made to consolidate these activities in a single food safety agency which

would further reduce costs.

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A 5-year estimate of savings from consolidating food inspection programs

cannot be developed at this time. The amount of any savings will depend

on how many programs are included, the degree and kind of reductions,

and the level of federal involvement. In addition, the amount of savings

will depend on the extent to which administrative cost savings are used to

offset overall program costs.

Related GAO Products Food Safety: Reducing the Threat of Foodborne Illnesses (GAO/T-RCED-96-185,

May 23, 1996).

Food Safety: Information on Foodborne Illnesses (GAO/RCED-96-96, May 8,

1996).

Food Safety: New Initiatives Would Fundamentally Alter the Existing

System (GAO/RCED-96-81, March 27, 1996).

Food Safety: Fundamental Changes Needed to Improve Monitoring of

Unsafe Chemicals in Food (GAO/T-RCED-94-311, September 28, 1994).

Food Safety: Changes Needed to Minimize Unsafe Chemicals in Food

(GAO/RCED-94-192, September 26, 1994).

Food Safety: A Unified, Risk-Based Food Safety System Needed

(GAO/T-RCED-94-223, May 25, 1994).

Meat Safety: Inspectors’ Ability to Detect Harmful Bacteria is Limited

(GAO/T-RCED-94-228, May 24, 1994).

Food Safety: Risk-Based Inspections and Microbial Monitoring Needed for

Meat and Poultry (GAO/RCED-94-110, May 19, 1994).

Food Safety: Risk-Based Inspections and Microbial Monitoring Needed for

Meat and Poultry (GAO/T-RCED-94-189, April 19, 1994).

Meat Safety: Inspection System’s Ability to Detect Harmful Bacteria

Remain Limited (GAO/T-RCED-94-123, February 10, 1994).

Food Safety: A Unified Risk-Based System Needed to Enhance Food

Safety (GAO/T-RCED-94-71, November 4, 1993).

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Food Safety: Building a Scientific, Risk-Based Meat and Poultry Inspection

System (GAO/T-RCED-93-22, March 16, 1993).

Food Safety: Inspection of Domestic and Imported Meat Should Be

Risk-Based (GAO/RCED-93-10, February 18, 1993).

Food Safety and Quality: Uniform, Risk-Based Inspection System Needed

to Ensure Safe Food Supply (GAO/RCED-92-152, June 26, 1992).

GAO Contact Robert A. Robinson, (202) 512-5138

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570 Medicare • Teaching Hospitals’ Medicare Payments

• Medicare Program Safeguards

• Medicare Payments for High Technology Procedures

• Medicare Rate-Setting Methods for HMOs

• Medicare Incentive Payments in Health Care Shortage Areas

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Option:

Teaching Hospitals’

Medicare Payments

Authorizing committees Finance (Senate) 

Commerce (House) 

Ways and Means (House)

Appropriations subcommittees Labor, Health and Human Services, and

Education (Senate and House)

Primary agency Department of Health and Human Services

Account Federal Hospital Insurance Trust Fund

Account (20-8005)

Spending type Direct

Budget subfunction Medicare

Framework theme Improve efficiency

Medicare’s Prospective Payment System pays hospitals with graduate

medical education programs at rates higher than those other hospitals

receive for treating the same conditions. The higher payments are to

compensate for the higher costs teaching hospitals incur, which are

thought to be due to such factors as increased diagnostic testing,

increased number of procedures performed, and higher staffing ratios. The

teaching adjustment is based on the ratio of interns and residents per bed

and currently is set at a 7.65-percent increase in payments for each 0.1

increment in the ratio.

In 1989, GAO found that the present adjustment factor was too high

because it did not explicitly consider all relevant teaching hospital costs

and did not accurately measure all cost factors. Based on its analysis, GAO

found that the adjustment should be no higher than 6.26 percent and could

be as low as 3.73 percent. The 6.26-percent rate would better measure

factors explicitly recognized by the current formula. The 3.73-percent rate

expands on the current formula to reflect additional factors that affect

teaching hospital costs.

CBO’s analysis of Medicare’s indirect medical education payments

discusses rates of 6 percent and 3 percent. Savings for those rates are

reflected in the following table.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Reduce to 6-percent adjustment factor

Outlays 910 970 1,040 1,120 1,120

Option: Reduce to 3-percent adjustment factor

Outlays 2,560 2,740 2,920 3,150 3,400

Source: Congressional Budget Office.

Related GAO Product Medicare: Indirect Medical Education Payments Are Too High

(GAO/HRD-89-33, January 5, 1989).

GAO Contact William J. Scanlon, (202) 512-7114

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Option:

Medicare Program

Safeguards

Authorizing committees Finance (Senate) 

Commerce (House) 

Ways and Means (House)

Appropriations subcommittees Labor, Health and Human Services, and

Education (Senate and House)

Primary agency Department of Health and Human Services

Accounts Federal Hospital Insurance Trust Fund

(20-8005) 

Federal Supplementary Medical Insurance

Trust Fund (20-8004) 

Program Management (75-0511)

Spending type Discretionary/Direct

Budget subfunctions Health and Medicare

Framework theme Improve efficiency

Medicare receives over 800 million claims for reimbursement each year.

When Medicare pays contractors to process claims, one of the contractors’

responsibilities is to ensure that Medicare only pays claims for covered

services that are medically necessary and appropriate and for which

Medicare is the primary payer. Such activities are referred to as program

safeguards.

Recently GAO reported that the funding contractors receive to review each

claim has declined since 1989 by over 20 percent. In response, contractors

apply fewer or less stringent payment controls, and claims are paid that

otherwise would not be. Historically, payment safeguards have returned

$10 in savings for each dollar expended on them. GAO believes additional

program safeguard funding is necessary to better protect the program

against erroneous payments.

The Health Insurance Portability and Accountability Act of 1996 increased

funding to Medicare for program safeguards—a substantial reversal of the

prolonged decline in funding per claim for those activities. CBO estimated a

net savings of over $3 billion from increased resources—for Medicare as

well as for the HHS Office of Inspector General and Federal Bureau of

Investigations—to identify and pursue individuals or entities that defraud

federal health care programs.25 However, the recently enacted increase in

25In prior years, CBO did not score increases in such funding because the proposals violated rules

(established in the conference report on the Omnibus Budget Reconciliation Act of 1993) that preclude

attributing changes in mandatory spending to changes in discretionary funding for program

administration. That prohibition did not apply to this legislation, however, because it establishes

long-term mandatory appropriations to cover all of the enforcement activities proposed.

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Medicare program safeguard funding alone—8.5 percent, or $34 million,

for fiscal year 1997—must be spread over a volume of claims rising in

recent years 5 to 8 percent annually. Coupled with inflation, this growth in

the number of claims will erode part of the effect of the funding increase

enacted for future years. While the Congress has provided safeguard

funding substantially above 1996 levels, fiscal year 2002 funding, adjusted

for projected inflation and claims growth, is projected to be about

10 percent below the 1991-96 average. Consequently, GAO believes that the

potential exists for further funding increases to yield net savings.

Related GAO Products Medicare (GAO/HR-97-10, February 1997).

Funding Anti-Fraud and Abuse Activities (GAO/HEHS-95-263R, September 29,

1995).

Medicare: High Spending Growth Calls for Aggressive Action

(GAO/T-HEHS-95-75, February 6, 1995).

Medicare Claims (GAO/HR-95-8, February 1995).

Medicare: Adequate Funding and Better Oversight Needed to Protect

Benefit Dollars (GAO/T-HRD-94-59, November 12, 1993).

Medicare: Further Changes Needed to Reduce Program and Beneficiary

Costs (GAO/HRD-91-67, May 15, 1991).

Medicare: Cutting Payment Safeguards Will Increase Program Costs

(GAO/T-HRD-89-06, February 28, 1989).

Medicare and Medicaid: Budget Issues (GAO/T-HRD-87-1, January 29, 1987).

GAO Contact William J. Scanlon, (202) 512-7114

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Option:

Medicare Payments

for High Technology

Procedures

Authorizing committees Finance (Senate) 

Commerce (House) 

Ways and Means (House)

Primary agency Department of Health and Human Services

Account Federal Supplementary Medical Insurance

Trust Fund (20-8004)

Spending type Direct

Budget subfunction Medicare

Framework theme Improve efficiency

When new medical technologies first come into use, providers’ unit costs

often are high because of large capital expenditures and low initial

utilization rates. When Medicare sets its payment rates for these new

technologies, the rates typically are based on the high initial unit costs.

Over time, providers’ unit costs decline as equipment improves, utilization

increases, and experience with the technology results in efficiencies.

However, Medicare does not have a process for routinely and

systematically assessing these factors and adjusting its fee schedule

payment rates to reflect the declining unit costs.

The Congress has reacted to the identification of specific overpaid

procedures and services by legislatively reducing rates. For example,

payments have been reduced for overpriced surgeries, selected items of

durable medical equipment, magnetic resonance imaging (MRI) scans, and

intraocular lenses.

The Health Care Financing Administration (HCFA) has three projects

underway which may help bring some Medicare payment rates more in

line with actual costs and market prices. First, by January 1, 1998, HCFA

expects to implement revisions to the Medicare Fee Schedule that will

take into account the actual cost of staff, equipment, and supplies

associated with medical procedures, rather than past charges submitted

for those procedures.

Second, in October 1995, HCFA initiated a project to review 100 items of

medical equipment and supplies to identify and address any excessive

Medicare payments. Under current law, this review requires the use of a

lengthy “inherent reasonableness” process, and the project is expected to

take at least 2 years.

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Third, a HCFA demonstration project will evaluate a competitive bidding

process to set Medicare payment levels for some medical equipment and

supplies. Delays have postponed project implementation at the first of

three proposed sites until August 1997.

These projects may eventually bring some Medicare payment rates more in

line with actual costs and market rates, but none of the three projects

specifically targets expensive, evolving technologies. GAO believes

significant program savings would result from an ongoing, systematic

process for evaluating the reasonableness of Medicare payment rates for

new medical technologies as those technologies mature.

Savings have not been estimated because revising the Medicare Fee

Schedule potentially encompasses all procedures, and any savings would

depend on the particular technologies for which Medicare payment rates

are reduced.

Related GAO Products Medicare Spending: Modern Management Strategies Needed to Curb

Billions in Unnecessary Payments (GAO/HEHS-95-210, September 19, 1995).

Medicare: High Spending Growth Calls for Aggressive Action

(GAO/T-HEHS-95-75, February 6, 1995).

Medicare: Excessive Payments Support the Proliferation of Costly

Technology (GAO/HRD-92-59, May 27, 1992).

Medicare: Further Changes Needed to Reduce Program and Beneficiary

Costs (GAO/HRD-91-67, May 15, 1991).

GAO Contact William J. Scanlon, (202) 512-7114

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Option:

Medicare Rate-Setting

Methods for HMOs

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of Health and Human Services

Account Federal Supplementary Medical Insurance

Trust Fund (20-8004)

Spending type Discretionary/Direct

Budget subfunction Medicare

Framework theme Improve efficiency

Hoping to take advantage of the potential cost savings associated with

health maintenance organizations (HMO), the Congress created the

Medicare risk contract program. Under this program, Medicare pays HMOs

a fixed amount (or capitation rate) for each beneficiary enrolled.

Capitation rates are set at 95 percent of the estimated average cost of

beneficiaries in Medicare’s fee-for-service program. These rates are

adjusted based on enrollees’ demographic traits: age, sex, Medicaid

eligibility, working status, and whether the enrollee is in a nursing home or

other institution. These adjustments, known as “risk adjustments,” are

designed to reduce HMOs’ ability to benefit from “favorable selection”—the

tendency of HMO enrollees to be healthier and less costly to care for than

fee-for-service beneficiaries.

The risk contract program has not achieved its goal of reducing Medicare

costs for two reasons. First, the Health Care Financing Administration’s

(HCFA) risk adjustment methodology has proved insufficient to prevent

HMOs from benefiting from favorable selection. Consequently, Medicare

has paid HMOs more than it would have if HMO enrollees had received

fee-for-service care because the HMO enrollees are healthier and less costly

to treat—by more than 5 percent—than comparable fee-for-service

beneficiaries. GAO has estimated that, for counties containing 36 percent of

risk contract HMO enrollment, Medicare excess payments to HMOs in 1995

were about $1 billion. Excess payments are likely to increase as

enrollment rates in the risk contract program continue to rise. Second, in

many areas, Medicare’s 5-percent “discount” from fee-for-service costs is

too modest. By failing to reflect local market conditions and greater HMO

efficiencies, the capitation rate causes Medicare to overpay HMOs.

GAO has suggested that Medicare address the problem of excess payments

to HMOs by pursuing a number of strategies, including fostering price

competition among HMOs through competitive bidding, introducing more

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accurate risk adjusters, and modifying the current formula for HMO rates to

reflect market competition and HMOs’ local health care costs. These

strategies should be pursued concurrently since barriers exist to the

development and implementation of each strategy, and any one strategy

may not emerge as feasible or best for all areas.

A 5-year estimate of savings from these strategies cannot be made at this

time. Available data are insufficient to permit determining the effect of

many proposed alternate payment strategies on Medicare spending and on

HMO participation in the risk contract program.

Related GAO Products Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by

Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-78,

February 25, 1997).

Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing HMO

Payment Problem (GAO/HEHS-96-21, November 8, 1995).

Medicare: Changes to HMO Rate Setting Method Are Needed to Reduce

Program Costs (GAO/HEHS-94-119, September 2, 1994).

GAO Contact William J. Scanlon, (202) 512-7114

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Option:

Medicare Incentive

Payments in Health

Care Shortage Areas

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of Health and Human Services

Account Federal Supplementary Insurance Trust

Fund (20-8004)

Spending type Direct

Budget subfunction Medicare

Framework theme Reassess objectives

The Medicare Incentive Payment (MIP) program was established in 1987

amid concerns that low Medicare reimbursement rates for primary care

services caused access problems for Medicare beneficiaries in

underserved areas. To encourage physicians to locate and serve Medicare

beneficiaries in such areas, physicians receive an additional 10-percent

payment from Medicare for the services they deliver in urban and rural

Health Professional Shortage Areas (HPSA) designated by the Department

of Health and Human Services (HHS). In 1995, a HCFA representative stated

this program provided about $107 million in bonuses to physicians in

HPSAs, an amount 16 percent higher than the previous year. Our work leads

us to question the appropriateness of the program for the following

reasons.

• The premise on which the program was created may no longer be valid

because the basis for Medicare reimbursement has changed since 1987. In

fact, recent surveys of Medicare population show that neither provider

shortages nor low Medicare reimbursement rates were causing wide

spread access problems.

• The basis on which MIP funds are targeted is inadequate to assure that they

are directed to improve access to care. While nearly two-thirds of the U.S.

counties have HPSAs, we found that at least one-third of these designations

are outdated or erroneous. Furthermore, the HPSA designation system itself

is not an appropriate vehicle to target MIP funds as it does not lend itself to

directing program resources to those providing primary care services to

the medically underserved. HHS said they do not have an alternative system

that would effectively allocate funding under this program.

• Evidence suggests that the MIP program did not play a significant role in

physician decisions to practice in underserved areas. For example, the

median payment to urban and rural physicians in 1992 was about $1,239

and $869, respectively—an amount too low, according to an HHS Inspector

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General’s report, to have a significant effect on physicians’ practice

location decisions.

The savings estimate that follows assumes the Congress eliminates

funding for the Medicare Incentive Payment program beginning in fiscal

year 1998.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 40 70 80 90 100

Outlays 40 70 80 90 100

Source: Congressional Budget Office.

Related GAO Product Health Care Shortage Areas: Designations Not a Useful Tool for Directing

Resources to the Underserved (GAO/HEHS-95-200, September 8, 1995).

GAO Contact Bernice Steinhardt, (202) 512-7119

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600 Income

Security

• Fees for Non-Temporary Assistance to Needy Families (TANF) Child

Support Enforcement Services

• Automated Child Support Enforcement Systems

• Funding for State Automated Welfare Systems

• Benefits for Retirement Eligible FECA Beneficiaries

• Workers’ Compensation Cases Involving Third Parties

• Workers’ Compensation Payments

• Resource Transfers to Qualify for SSI

• Return-to-Work Strategies for People with Disabilities

• Reporting of Federal Employee Payroll Data to State Unemployment

Insurance Programs

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Option:

Fees for

Non-Temporary

Assistance to Needy

Families (TANF)

Child Support

Enforcement Services

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of Health and Human Services

Account Family Support Payments to States

(75-1501)

Spending type Direct

Budget subfunction Other Income Security

Framework theme Redefine beneficiaries

The purpose of the Child Support Enforcement Program is to strengthen

state and local efforts to obtain child support for both families eligible for

Temporary Assistance to Needy Families (TANF) and non-TANF families.

The services provided to clients include locating noncustodial parents,

establishing paternity, and collecting ongoing and delinquent child support

payments. From fiscal year 1984 through 1995, non-TANF caseloads and

costs have risen about 390 percent and 810 percent, respectively. States

have exercised their discretion to charge only minimal application and

service fees and, thus, are doing little to recover the federal government’s

66-percent share of program costs. In fiscal year 1995, for example, state

fee practices returned $33 million of the $1.4 billion spent to provide

non-TANF services.

Since 1992, GAO has reported on opportunities to defray some of the costs

of child support programs. Based on this work, GAO believes that

mandatory application fees should be dropped and that states should

charge a minimum percentage service fee on successful collections for

non-TANF families. Application fees are administratively burdensome, and a

service fee would ensure that families are charged only when the service

has been successfully performed.

If the Congress wishes to recover all of the administrative costs of the

program, states could charge a service fee of about 18 percent on

collections for non-TANF families. The following savings assume states

would be able to implement this option beginning October 1, 1997.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 755 835 915 1,000 1,080

Outlays 755 835 915 1,000 1,080

Source: Congressional Budget Office.

Related GAO Products Child Support Enforcement: Early Results on Comparability of Privatized

and Public Offices (GAO/HEHS-97-4, December 16, 1996).

Child Support Enforcement: Reorienting Management Toward Achieving

Better Program Results (GAO/HEHS/GGD-97-14, October 25, 1996).

Child Support Enforcement: States’ Experience with Private Agencies’

Collection of Support Payments (GAO/HEHS-97-11, October 23, 1996).

Child Support Enforcement: States and Localities Move to Privatized

Services (GAO/HEHS-96-43FS, November 20, 1995).

Child Support Enforcement: Opportunity to Reduce Federal and State

Costs (GAO/T-HEHS-95-181, June 13, 1995).

GAO Contact Jane L. Ross, (202) 512-7215

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Option:

Automated Child

Support Enforcement

Systems

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of Health and Human Services

Account Family Support Payments to States

(75-1501)

Spending type Direct

Budget subfunction Other Income Security

Framework theme Improve efficiency

The Department of Health and Human Services’ (HHS) Office of Child

Support Enforcement (OCSE) oversees states’ efforts to develop automated

systems for the Child Support Enforcement Program. Established for both

welfare and non-welfare clients with children, this program is directed at

locating parents not supporting their children, establishing paternity,

obtaining court orders for the amounts of money to be provided, and

collecting these amounts from noncustodial parents. Achievement of Child

Support Enforcement Program goals depends in part on the effective

planning, design, and operation of automated systems. The federal

government is providing enhanced funding to develop these automated

child support enforcement systems by paying up to 90 percent of states’

development costs. The states have spent about $2.7 billion to develop

these systems, including over $2 billion from the federal government.

The 90-percent funding participation rate was initially discontinued at the

end of fiscal year 1995, the congressionally mandated date for the systems

to be certified and operational. However, the Congress subsequently

extended the deadline for these systems to the end of fiscal year 1997.

Therefore, the 90-percent funding participation rate was continued for

states that had an approved funding plan for systems development at the

end of fiscal year 1995. In addition, the federal government will continue

to reimburse states’ costs to operate these systems at the 66-percent rate

established for administrative expenses. Finally, The Personal

Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L.

104-193) authorized $400 million (with an 80-percent federal funding

participation rate) for the states to meet new systems requirements under

this law. The 66-percent federal funding participation rate was continued

for systems operation and administrative expenses.

HHS estimates that the operation of these state automated systems will cost

about $213 million in fiscal year 1997, including about $140 million in

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federal funds. The Congress could choose to reduce the federal funding

participation rate for operation of the automated child support

enforcement systems from 66 percent to the 50-percent rate now common

for such costs in welfare programs. CBO estimates that doing so would

produce the savings shown in the following table.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 65 70 80 85 95

Outlays 65 70 80 85 95

Source: Congressional Budget Office.

Related GAO Products Child Support Enforcement: Timely Action Needed to Correct System

Development Problems (GAO/IMTEC-92-46, August 13, 1992).

Child Support Enforcement: Opportunity to Defray Burgeoning Federal

and State Non-AFDC Costs (GAO/HRD-92-91, June 5, 1992).

GAO Contact Joel C. Willemssen, (202) 512-6253

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Option:

Funding for State

Automated Welfare

Systems

Authorizing committees Agriculture (Senate and House) 

Finance (Senate) 

Ways and Means (House)

Appropriations subcommittees Labor, Health and Human Services,

Education and Related Agencies (Senate)

Agriculture (House)

Primary agencies Department of Agriculture

Department of Health and Human Services

Account Multiple

Spending type Discretionary/Direct

Budget subfunction Food and Nutrition; Other Income Security

Framework theme Improve efficiency

We reported that, from 1984 to 1992, federal agencies contributed over

$6.8 billion, and $1.8 billion prior to 1984, to help fund development and

operation of automated information systems for welfare and

welfare-related programs. These programs included: Aid to Families with

Dependent Children, Medicaid, Food Stamps, Child Support Enforcement,

Job Opportunities and Basic Skills Training, Child Care, and Child Welfare

Services and Foster Care/Adoption Assistance. The Department of Health

and Human Services (HHS) administers all of these programs except Food

Stamps, which the Department of Agriculture (USDA) administers. As part

of their program administration responsibilities, these departments are to

monitor the development of automated information systems to ensure that

the systems meet federal requirements.

We reported that ineffective oversight of state-developed systems had led

to millions of dollars being spent on systems that did not work and/or did

not meet federal requirements. For example, one state spent $51 million

on a system that could not be implemented as planned because important

user requirements were not incorporated into its original design.

Moreover, even though millions of dollars have been spent on

state-developed systems, the benefits of these systems in reducing

administrative costs and mistakes have not been determined.

Many states operate separate systems for separate programs even though

the welfare clients the programs serve are often the same. The Personal

Responsibility and Work Opportunity Reconciliation Act of 1996, (P.L.

104-193) changed the nation’s welfare system into one that requires work

in exchange for time-limited assistance. This law affects many existing

programs that have traditionally operated individually, but now must

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function together to achieve the legislative mandate. The federal

government continues to provide support for the operation of these

automated systems. However, states now have more responsibility for

funding these welfare programs as well as the automated systems needed

to allow them to function. In addition, many states are now in the process

of upgrading or replacing existing systems or developing or planning to

develop new systems, which they estimate could cost at least $2.2 billion

from 1993 to 1999.

Savings could be achieved and the usefulness of state automated systems

improved if problems were identified and corrected early in the system

development process. In addition, more of these systems could be

integrated, with the federal government providing model systems to

further reduce development costs. If it chooses, the Congress could slow

HHS’ and USDA’s development funding to reflect the anticipated savings

resulting from early detection of problems in the system development

process, greater system integration, and greater use of models to guide

state development efforts. However, a savings estimate for this option

cannot be developed at this time because yearly data on states’ future

spending for automated systems development in the affected welfare and

welfare-related programs are not available.

Related GAO Products Automated Welfare Systems: Historical Costs and Projections

(GAO/AIMD-94-52FS, February 25, 1994).

Welfare Programs: Ineffective Federal Oversight Permits Costly

Automated System Problems (GAO/IMTEC-92-29, May 27, 1992).

GAO Contact Joel C. Willemssen, (202) 512-6253

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Option:

Benefits for

Retirement Eligible

FECA Beneficiaries

Authorizing committees Labor and Human Resources (Senate) 

Economic and Educational Opportunity

(House)

Appropriations subcommittees Labor, Health and Human Services, and

Education (Senate and House)

Primary agency Department of Labor

Account Multiple

Spending type Direct/Discretionary

Budget subfunction Other Income Security

Framework theme Reassess objectives

Federal workers who continue to be disabled as a result of a work-related

injury receive tax-free workers’ compensation benefits under the Federal

Employees’ Compensation Act (FECA). These benefits could continue for

life and would generally be greater than amounts these workers would

receive as retirement benefits. FECA benefits are 75 percent of salary for a

disabled employee with a dependent; Civil Service Retirement System

benefits for a 55-year old employee with 30 years of service are 56 percent

of salary. We reported that 60 percent of the approximately 44,000

long-term FECA beneficiaries were at least age 55, the age at which some

federal employees are eligible for optional retirement with unreduced

retirement benefits. Proponents for changing FECA benefits for older

beneficiaries argue that an inequity is created between federal workers

who retire normally and those who, in effect, “retire” on FECA benefits.

Opponents of such a change argue that reducing benefits would break the

implicit promise that injured workers have exchanged their right to tort

claims for a given level of future benefits.

We identified two prior proposals for reducing FECA benefits to those who

become eligible for retirement. One would convert compensation benefits

received by retirement-eligible disabled workers to retirement benefits.

However, this approach raises complex issues related to the tax-free

nature of workers’ compensation benefits and to the individual’s

entitlement to retirement benefits. The second proposal would convert

FECA benefits to a newly established FECA annuity, thus avoiding the

complexity of shifting from one benefit program to another.

To reduce benefits for retirement-eligible FECA beneficiaries, the Congress

could consider converting from the current FECA benefit structure to a FECA

annuity. The following savings estimate assumes that such an annuity

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would equal two-thirds of the previously provided FECA compensation

benefit and the annuity would begin following the disabled individual’s

eligibility for retirement benefits. The CBO estimate assumes that changes

in benefits would be made prospectively. Additional savings could be

achieved if changes were made to affect individuals who were already

receiving FECA benefits.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Direct spending

Savings from the 1997 funding level adjusted for inflation

Budget authority 4 8 9 9 9

Outlays 4 8 9 9 9

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Discretionary spending

Savings from the 1997 funding level

Budget authority 1 3 9 15 22

Outlays 1 3 9 15 22

Source: Congressional Budget Office.

Related GAO Product Federal Employees’ Compensation Act: Issues Associated With Changing

Benefits for Older Beneficiaries (GAO/GGD-96-138BR, August 14, 1996).

GAO Contact L. Nye Stevens, (202) 512-8676

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Option:

Workers’

Compensation Cases

Involving Third

Parties

Authorizing committees Labor and Human Resources (Senate) 

Economic and Educational Opportunity

(House)

Appropriations subcommittees Labor, Health and Human Services, and

Education (Senate and House)

Primary agency Department of Labor

Account Multiple

Spending type Discretionary

Budget subfunction Other Income Security

Framework theme Improve efficiency

The Federal Employees’ Compensation Act (FECA) authorizes federal

agencies to continue paying employees their regular salaries for up to 45

days when they are absent from work due to work-related traumatic

injuries. In cases in which third parties are responsible for employees’

on-the-job injuries (e.g., dog bites or automobile-related injuries), the

Department of Labor may require that employees pursue collection

actions against these parties. However, based on current interpretations of

FECA by the Employees’ Compensation Appeals Board and a federal

appeals court, the federal government has no legal basis to obtain refunds

from third parties for the first 45 days of absence from work (called the

continuation-of-pay (COP) period). Recoveries from third parties continue

to be allowed for payments of compensation benefits following the COP

period and for medical benefits.

Based on the current interpretation of FECA, employees can receive regular

salary payments from their employing agencies and reimbursements from

third parties—in effect, a double recovery of income for their first 45 days

of absence from work due to an injury for which a third party was

responsible. We recommended that the Congress amend FECA to expressly

provide for refunds of amounts paid as COP when employees receive third

party recoveries. CBO estimates that the following savings could be

achieved if the Congress redefined COP so that it could be included in

amounts employees are required to reimburse the government when they

recover damages from third parties.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 1 1 1 1 1

Outlays 1 1 1 1 1

Savings from the 1997 funding level adjusted for inflation

Budget authority 1 1 1 1 1

Outlays 1 1 1 1 1

Source: Congressional Budget Office.

Related GAO Products Federal Employees’ Compensation Act: Redefining Continuation of Pay

Could Result in Additional Refunds to the Government (GAO/GGD-95-135,

June 8, 1995).

Workers’ Compensation: Selected Comparisons of Federal and State Laws

(GAO/GGD-96-76, April 3, 1996).

GAO Contact L. Nye Stevens, (202) 512-8676

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Option:

Workers’

Compensation

Payments

Authorizing committees Labor and Human Resources (Senate) 

Economic and Educational Opportunity

(House)

Appropriations subcommittees Labor, Health and Human Services, and

Education (Senate and House)

Primary agency Department of Labor

Account Multiple

Spending type Discretionary/Direct

Budget subfunction Other Income Security

Framework theme Reassess objectives

Federal workers who experience job-related injuries are entitled to

workers’ compensation benefits authorized under the Federal Employees’

Compensation Act (FECA). Our review identified three major ways in which

FECA differed from other federal and state workers’ compensation laws

and which resulted in relatively greater benefits under FECA.

First, FECA authorizes maximum weekly benefit amounts that are greater

than those authorized by other federal and state workers’ compensation

laws. As of January 1, 1995, maximum authorized weekly FECA benefits

were equal to $1,274, 75 percent of the base salary of a GS-15, step 10. The

maximum weekly benefit authorized under the other workers’

compensation laws was $817 in Iowa. FECA also authorizes additional

benefits for one or more dependents equal to 8.33 percent of salary. Only

seven states authorize additional benefits for dependents, ranging from $5

to $10 per week per dependent, with total benefits not exceeding

maximum authorized benefit amounts. Finally, FECA provides eligible

workers who suffer traumatic injuries with their regular salary for a period

not to exceed 45 days. Compensation benefits for wage loss begin on the

48th day, after a 3-day waiting period. All other federal and state workers’

compensation laws provide for a 3- to 7-day waiting period following the

injury before paying compensation benefits. In either case, if employees

continue to be out of work for extended periods of time ranging from 5 to

42 days, depending on the jurisdiction, retroactive benefits to cover the

waiting period would be paid.

Reducing FECA’s authorized maximum weekly benefit to make it

comparable to other compensation laws would have little effect on

compensation costs because very few federal workers receive maximum

benefits. However, CBO estimates (1) eliminating augmented compensation

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benefits for dependents and (2) placing a 5-day waiting period immediately

following the injury, and before the continuation of pay period, would

produce savings, as shown in the table below.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Discretionary spending

Savings from the 1997 funding level

Option: Eliminate augmented dependent compensation benefits

Budget authority 2 2 7 8 8

Outlays 2 2 7 8 8

Option: 5-day waiting period

Budget authority 11 11 12 12 12

Outlays 11 11 12 12 12

Source: Congressional Budget Office.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Direct spending

Savings from the 1997 funding level adjusted for inflation

Option: Eliminate augmented dependent compensation benefits

Budget authority 5 5 * * *

Outlays 5 5 * * *

*Savings of less than $500,000

Source: Congressional Budget Office.

Related GAO Product Workers’ Compensation: Selected Comparisons of Federal and State Laws

(GAO/GGD-96-76, April 3, 1996).

GAO Contact L. Nye Stevens, (202) 512-8676

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Option:

Resource Transfers to

Qualify for SSI

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Social Security Administration

Account Supplemental Security Income Program

(28-0406)

Spending type Direct/Discretionary

Budget subfunction Other Income Security

Framework theme Redefine beneficiaries

The Supplemental Security Income (SSI) program is the country’s largest

cash assistance program for the poor and one of the fastest growing

entitlement programs. Program costs grew 20 percent annually from 1991

through 1994. In 1995, more than 6 million SSI recipients received nearly

$25 billion in federal and state benefits. Recent growth in the SSI program

has increased congressional interest in ensuring that the SSI program

focuses on individuals who have no 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.

Currently, the law does not prohibit people from transferring resources to

qualify for SSI benefits. In a recent review, we found that the 3,505 SSI

recipients who transferred resources between 1990 and 1994 transferred

cash, houses, land, and other items valued at an estimated $74 million.

However, we noted that the total amount of resources transferred was

likely to be larger than our estimate because the Social Security

Administration (SSA) is not required to verify the accuracy of resource

transfer information, which is self-reported by individuals.

Without a transfer-of-resource restriction, the 3,505 SSI recipients who

transferred resources to qualify for benefits would receive about

$7.9 million in SSI benefits in the 24 months after they transferred

resources. Although administrative costs may be associated with SSA’s

implementing a transfer-of-resource restriction, in our analysis we

estimated that from 1990 through December 1995, $14.6 million in program

expenditures could have been saved with an SSI transfer-of-resource

restriction similar to Medicaid’s long-term care provision. In addition, an

SSI transfer-of-resource restriction could increase the public’s confidence

in the program’s integrity by ensuring that individuals use their own

resources for self-support before receiving SSI.

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In light of the potential for reduced program expenditures and increased

program integrity, the Congress may wish to consider an SSI

transfer-of-resource restriction. The restriction could be calculated in a

way that takes into account the value of the resource transferred so that

individuals transferring more valuable resources would be ineligible for SSI

benefits for longer periods of time than those who transfer less valuable

resources. The CBO estimate that follows is based on this assumption.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority a 2 4 6 8

Outlays a 2 4 6 8

Administrative costs

(discretionary) –1 –1 –1 –1 –1

aLess than $1 million

Source: Congressional Budget Office.

Related GAO Product Supplemental Security Income: Some Recipients Transfer Valuable

Resources to Qualify for Benefits (GAO/HEHS-96-79, April 30, 1996).

GAO Contact Jane L. Ross, (202) 512-7215

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Option:

Return-to-Work

Strategies for People

With Disabilities

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Social Security Administration

Account Federal Disability Insurance Trust Fund 

(20-8007) 

Supplemental Security Income Program 

(20-0406)

Spending type Direct

Budget subfunction Multiple

Framework theme Reassess objectives

The Social Security Administration (SSA) operates the Disability Insurance

(DI) and Supplemental Security Income (SSI) programs—the nation’s two

largest federal programs providing cash benefits to people with

disabilities. SSA data show that between 1985 and 1994, the number of

working-age people in these disability programs increased 59 percent from

4 million to 6.3 million. Such growth has raised concerns that are

compounded by the fact that less than half of 1 percent of DI beneficiaries

ever leave the disability rolls by returning to work.

We found that return-to-work strategies and practices may hold potential

for improving federal disability programs by helping people with

disabilities return to productive activity in the workplace and, at the same

time, reducing benefit payments. Our analysis of practices advocated and

implemented by the private sector in the United States and by social

insurance programs in Germany and Sweden revealed three common

strategies in the design of their return-to-work programs: intervene as

soon as possible after an actual or potentially disabling event to promote

and facilitate return to work, identify and provide necessary

return-to-work assistance and manage cases to achieve return-to-work

goals, and structure cash and medical benefits to encourage people with

disabilities to return to work.

In line with placing greater emphasis on return to work, the Congress

could direct the Commissioner of SSA to develop a comprehensive

return-to-work strategy that integrates, as appropriate, earlier intervention,

earlier identification and provision of necessary return-to-work assistance

for applicants and beneficiaries, and changes the structure of cash and

medical benefits. The Commissioner should also identify legislative

changes needed to implement such a change. We believe that substantial

savings could be achieved if SSA were to develop such a program.

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However, such savings would be offset by program costs and any net

savings would depend on the program’s participation rate.

Related GAO Products People With Disabilities: Federal Programs Could Work Together More

Efficiently to Promote Employment (GAO/HEHS-96-126, September 3, 1996).

SSA Disability: Return-to-Work Strategies From Other Systems May

Improve Federal Programs (GAO/HEHS-96-133, July 11, 1996).

SSA Disability: Program Redesign Necessary to Encourage Return to Work

(GAO/HEHS-96-62, April 24, 1996).

GAO Contact Jane L. Ross, (202) 512-7215

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Option:

Reporting of Federal

Employee Payroll

Data to State

Unemployment

Insurance Programs

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of Labor

Account State Unemployment Insurance and

Employment Service Operations (16-0179)

Spending type Direct

Budget subfunction Multiple

Framework theme Redefine beneficiaries

The Congress established the national unemployment insurance (UI)

system in the 1930s to provide partial income assistance to many

temporarily unemployed workers with substantial work histories. Today,

UI is the major federal program providing assistance to the unemployed.

Many workers covered by the UI system are also among the 1.1 million

personnel currently participating in the National Reserve forces (Army

National Guard, Army Reserve, Naval Reserve, Marine Corps Reserve, Air

National Guard, Air Force Reserve, and the Coast Guard Reserve).

Most UI claimants are required to report the income they receive while in

the Reserves so that state UI programs can reduce their benefits

accordingly. Our analysis of benefit and Reserve data from seven states

shows that some Reserve personnel are receiving improper benefit

payments from state UI programs. In the seven states in our analysis, we

estimate that UI claimants who were active participants in the Reserves

failed to report over $7 milllion in Reserve income in fiscal year 1994. This

led to UI benefit overpayments of approximately $3.6 million, of which

federal trust fund losses were about $1.2 million. We expect that the

federal and state trust fund losses from all UI programs are much greater

because the seven states we reviewed account for only 27 percent of all

reservists.

State officials cited various reasons why claimants may not be reporting

their Reserve income while receiving UI benefits. According to state

officials, the claimants may not understand their reporting responsibilities,

are often not specifically informed of these responsibilities, and may have

incentives not to report all Reserve income—incentives that are amplified

by the states’ limited ability to detect nonreporting.

To detect unreported Reserve income, the most frequently suggested

alternative by federal and state officials would be to require the

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Department of Defense (DOD) to report Reserve payroll and personnel data

to states on a quarterly basis, as private-sector employers are required to

do, to permit verification of claimant income on a regular basis. The

following CBO estimate assumes that such reporting would result in a

reduction of overpayments of $44 million over 5 years. It is noted that the

nonreporting of claimant income appears to be a broader problem

involving all UI claimants who were former federal civilian and military

employees, rather than just those participating in the Reserves. Officials

from many of the state programs we analyzed reported general difficulties

in monitoring reported income from claimants who were former federal

employees.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from 1997 funding level adjusted for inflation

Budget authority 11 12 12 12 12

Outlays 11 12 12 12 12

Reduction in receipts 0 –1 –3 –5 –7

Net effect on deficit 11 11 9 7 5

Note: UI trust fund receipts are dependent on prior year benefit outlays. CBO estimates that, in

addition to the savings, this option would have the effect of reducing trust fund receipts in the out

years.

Source: Congressional Budget Office.

Related GAO Product Unemployment Insurance: Millions in Benefits Overpaid to Military

Reservists (GAO/HEHS-96-101, August 5, 1996).

GAO Contact Carlotta C. Joyner, (202) 512-7014

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650 Social Security • The PASS Work Incentive Program

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Option:

The PASS Work

Incentive Program

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Social Security Administration

Account Federal Disability Insurance Trust Fund

(20-8007)

Spending type Direct

Budget subfunction Social Security

Framework theme Redefine beneficiaries

The Social Security Administration’s (SSA) plan for achieving self-support

(PASS) work incentive program was established in 1972 as part of the

Supplemental Security Income (SSI) program to help disability benefit

recipients return to gainful employment. PASS program applicants submit

plans outlining their employment goals, which are reviewed by staff in 1 of

the more than 1,300 SSA field offices that administer SSI. An approved PASS

plan allows disabled individuals to exclude any non-SSI income or

resources they have, including Disability Insurance (DI) benefits, from the

determination of the amount of their SSI benefits.

While the PASS program is currently small—only about 10,300 individuals

participated in December 1994—the number of PASSes has increased more

than fivefold between 1990 and 1994 as awareness of the provision has

grown. Millions more DI and SSI beneficiaries are eligible to participate.

About 40 percent of PASS program participants, largely DI beneficiaries,

would not be eligible for federal SSI payments if some of their income was

not disregarded under PASS. Additionally, nearly all DI beneficiaries who

had participated in the PASS program received their full benefits in May

1995. We estimate the cost of additional SSI payments to all program

participants to be $2.6 million for January 1995, or about $30 million

annually.

We found that SSA has not translated the Congress’ broad goals for the PASS

work incentive into a coherent program design, provided adequate criteria

or guidance to field offices charged with administering the program, or

adequately addressed internal control weaknesses that have left the

program vulnerable to abuse. The Congress may wish to consider whether

individuals otherwise financially ineligible for SSI because their DI benefits

or other income exceed the eligibility threshold should continue to gain

eligibility for SSI through the PASS program. Also, SSA needs to make major

improvements in the management of the program, including clarifying the

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program’s goals, deciding whether fees paid to third parties should

continue to be disregarded when calculating benefit payment amounts and

whether the amount of disregarded fees should be capped, and

strengthening internal controls.

The following savings estimate is based on the assumption that the

Congress takes legislative action to restrict individuals from gaining

access to SSI through the PASS program when their DI benefits or other

income exceed the eligibility threshold.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 5 10 15 15 15

Outlays 5 10 15 15 15

Source: Congressional Budget Office.

Related GAO Product PASS Program: SSA Work Incentive for Disabled Beneficiaries Poorly

Managed (GAO/HEHS-96-51, February 28, 1996).

GAO Contact Jane L. Ross, (202) 512-7215

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700 Veterans

Benefits and

Services

• Veterans’ Disability Compensation for Nonservice Connected Diseases

• Approving Education and Training Programs for Veterans

• Cost Sharing for Veterans’ Long-Term Care

• Effective VA Hospital Preadmission Certification

• Construction of Veterans’ Medical Facilities

• Underused VA Hospitals

• VA’s Medical Care Account Growth Rate

• Enrollment in VA Health Care System

• Outpatient Pharmacy Costs

• Sunset Date of VA’s Income Verification Program

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Option:

Veterans’ Disability

Compensation for

Nonservice

Connected Diseases

Authorizing committees Veterans’ Affairs (Senate and House)

Primary agency Department of Veterans Affairs

Account Compensation (36-0153)

Spending type Direct

Budget subfunction Income Security for Veterans

Framework theme Redefine beneficiaries

During 1986, the Department of Veterans Affairs (VA) paid approximately

$1.7 billion in disability compensation payments to veterans with diseases

neither caused nor aggravated by military service. In 1996, CBO reported

that about 230,000 veterans were receiving about $1.1 billion annually in VA

compensation for these diseases. GAO’s study of five countries shows that

those countries do not compensate veterans under such circumstances.

The Congress may wish to reconsider whether such diseases should be

compensated as service-connected disabilities. If disability compensation

payments to veterans with nonservice connected, disease-related

disabilities were eliminated in future cases, the following savings would

apply.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 15 48 82 118 156

Outlays 14 44 87 105 151

Source: Congressional Budget Office.

Related GAO Products Disabled Veterans Programs: U.S. Eligibility and Benefit Types Compared

With Five Other Countries (GAO/HRD-94-6, November 24, 1993).

VA Benefits: Law Allows Compensation for Disabilities Unrelated to

Military Service (GAO/HRD-89-60, July 31, 1989).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Approving Education

and Training

Programs for Veterans

Authorizing committees Veterans Affairs (Senate and House)

Appropriation subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency Department of Veterans Affairs

Account Readjustment Benefits (36-0137)

Spending type Discretionary

Budget subfunction Veterans Education, Training and

Rehabilitation

Framework theme Improve efficiency

The Department of Veterans Affairs (VA) contracts with state approving

agencies (SAA) to assess whether schools and training programs offer

education of sufficient quality for veterans to receive VA education

assistance benefits when attending them. SAAs perform this “gatekeeping”

or approval function by evaluating course quality, school financial

stability, and student progress. In fiscal year 1994, VA paid more than 

$1 billion in education assistance benefits to more than 450,000

beneficiaries and spent about $12 million for SAA gatekeeping services.

Other federal agencies—particularly the Department of Education and the

Department of Labor—also perform gatekeeping by determining whether

postsecondary educational and training programs and institutions meet

federal requirements for student loans and grants, apprenticeship

assistance, and other forms of federal support.

An estimated $10.5 million of the $12 million paid to SAAs in 1994 was spent

to conduct assessments that overlapped those of the Department of

Education. These assessments involved reviews of academic and

vocational schools that were already accredited by Education-approved

agencies. SAA efforts costing another $400,000 in 1994 may have

overlapped assessments of apprenticeship programs done by Labor,

though the data were not available to determine if overlap was indeed

occurring. The remaining SAA assessment activity—costing about

$1.1 million—did not overlap activities of other agencies because it

involved on-the-job training programs and unaccredited schools, neither of

which Education or Labor assessed.

The substantial amount of overlap that occurred between SAA and other

gatekeepers’ efforts raises questions about whether SAA efforts should

continue at their current level. An estimated 87 percent of the approval

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effort expended by SAAs related to schools and programs also subject to

accreditation by Education-approved entities. Also, in a review of six

jurisdictions, 93 percent of the accredited schools were also certified by

Education to participate in Title IV student aid programs. School

certification involves applying standards that are similar to those used by

SAAs. On its face, an SAA review of courses of study at an

Education-certified school would appear to add only marginal value. An

opportunity exists for reducing federal expenditures by over $10 million

annually through elimination of overlapping SAA gatekeeping efforts.

The following CBO savings estimate is based on the assumption that the

Congress directs VA to discontinue contracting with SAAs to review and

approve educational programs at schools that have already been reviewed

and certified by Education.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from 1997 funding level

Budget authority 10 10 10 10 10

Outlays 10 10 10 10 10

Savings from 1997 funding level adjusted for inflation

Budget authority 10 11 11 11 12

Outlays 10 11 11 11 12

Source: Congressional Budget Office.

Related GAO Product VA Student Financial Aid: Opportunity to Reduce Overlap in Approving

Education and Training Programs (GAO/HEHS-96-22, October 30, 1995).

GAO Contact Carlotta C. Joyner, (202) 512-7002

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Option:

Cost Sharing for

Veterans’ Long-Term

Care

Authorizing committees Veterans’ Affairs (Senate and House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency Department of Veterans Affairs

Account Medical Care (36-0160)

Spending type Discretionary

Budget subfunction Hospital and Medical Care for Veterans

Framework theme Redefine beneficiaries

State veterans’ homes recover as much as 50 percent of the costs of

operating their facilities through charges to veterans receiving services.

Similarly, Oregon recovers about 14 percent of the costs of nursing home

care provided under its Medicaid program through estate recoveries. In

fiscal year 1990, the Department of Veterans Affairs (VA) offset less than

one-tenth of 1 percent of its costs through beneficiary copayments.

Potential recoveries appear to be greater within the VA system than under

Medicaid. Home ownership is significantly higher among VA hospital users

than among Medicaid nursing home recipients, and veterans living in VA

nursing homes generally contribute less toward the cost of their care than

do Medicaid recipients, allowing veterans to build larger estates.

The Congress may wish to consider increasing cost sharing for VA nursing

home care by (1) adopting cost-sharing requirements similar to those

imposed by most state veterans’ homes and (2) implementing an estate

recovery program similar to those operated by many states under their

Medicaid programs. If VA recovered either 25 percent or 50 percent of its

costs of providing nursing home and domiciliary care through a

combination of cost sharing and estate recoveries, the savings shown in

the following table would apply.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Option: Recovery of 25 percent of costs

Budget authority 678 678 678 678 678

Outlays 678 678 678 678 678

Option: Recovery of 50 percent of costs

Budget authority 1,359 1,359 1,359 1,359 1,359

Outlays 1,359 1,359 1,359 1,359 1,359

Source: Congressional Budget Office.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Option: Recovery of 25 percent of costs

Budget authority 703 727 752 778 805

Outlays 703 727 752 778 805

Option: Recovery of 50 percent of costs

Budget authority 1,408 1,456 1,507 1,559 1,614

Outlays 1,408 1,456 1,507 1,559 1,614

Source: Congressional Budget Office.

Related GAO Products VA Health Care: Potential for Offsetting Long-Term Care Costs Through

Estate Recovery (GAO/HRD-93-68, July 27, 1993).

VA Health Care: Offsetting Long-Term Care Cost By Adopting State

Copayment Practices (GAO/HRD-92-96, August 12, 1992).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Effective VA Hospital

Preadmission

Certification

Authorizing committees Veterans’ Affairs (House and Senate)

Appropriations subcommittees VA, HUD, and Independent Agencies

(House and Senate)

Primary agency Department of Veterans Affairs

Account Medical Care (36-0160)

Spending type Discretionary

Budget subfunction Hospital and Medical Care for Veterans

Framework theme Improve efficiency

Department of Veterans Affairs (VA) hospitals too often serve patients

whose care could be more efficiently provided in alternative settings, such

as outpatient clinics or nursing homes. In 1985, we reported that about

43 percent of the days of care that VA medical and surgical patients spent

in the VA hospitals reviewed could have been avoided. Since then, several

studies by VA researchers and the VA Office of Inspector General have

found that over 40 percent of VA hospitals admissions and days of care

were not medically necessary.

Private health insurers typically require their policyholders (or their

physicians) to obtain authorization from the insurer or its agent prior to

admission to a hospital. Failure to obtain such preadmission certification

can result in denial of insurance coverage or a reduction in payment. For

example, all fee-for-service health plans participating in the Federal

Employees Health Benefits Program are required to operate a

preadmission certification program to help limit nonacute admissions and

days of care.

We have recommended that VA establish an independent preadmission

certification program. Although VA agreed to establish such a program, it

has provided no time frame for completing development and

implementation of the program. In addition, it has not indicated how

compliance with the findings of external reviews will be enforced.

Because VA facilities currently incur no financial risk from providing

inappropriate care, external preadmission certification requirements may

not be effective unless coupled with a financial penalty for noncompliance

with review findings.

CBO estimates that if VA were to establish precertification procedures

similar to those used by private health insurers which result in a

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40-percent reduction in admissions and days of care, VA’s Medical Care

spending could be reduced by $8.4 billion over 5 years.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 1,655 1,670 1,682 1,693 1,703

Outlays 1,490 1,652 1,681 1,692 1,702

Source: Congressional Budget Office.

Related GAO Products VA Health Care: Issues Affecting Eligibility Reform Efforts (GAO/HEHS-96-160,

September 11, 1996).

VA Health Care: Opportunities for Service Delivery Efficiencies Within

Existing Resources (GAO/HEHS-96-121, July 25, 1996).

VA Health Care: Opportunities to Increase Efficiency and Reduce Resource

Needs (GAO/T-HEHS-96-99, March 8, 1996).

VA Health Care: Challenges and Options for the Future (GAO/T-HEHS-95-147,

May 9, 1995).

Better Patient Management Practices Could Reduce Length of Stay in VA

Hospitals (GAO/HRD-85-52, August 8, 1985).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Construction of

Veterans’ Medical

Facilities

Authorizing committees Veterans Affairs (Senate and House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency Department of Veterans Affairs

Account Construction (36-0110)

Spending type Discretionary

Budget subfunction Hospital and Medical Care for Veterans

Framework theme Redefine beneficiaries

The Department of Veterans Affairs’(VA) health care system comprises

one of the nation’s largest networks of direct delivery health care

providers, including 173 hospitals, 376 outpatient clinics, 133 nursing

homes, and 39 domicilaries. These facilities provided care to about

2.2 million veterans at a cost of about $16 billion in fiscal year 1995. For

fiscal year 1996, VA medical centers proposed to headquarters more than

$3 billion in funding requests for major construction projects.26 In the

fiscal year 1996 budget request, the President asked the Congress to

appropriate $514 million for nine projects. The projects range in size from

$9 million to renovate nursing units in one hospital to $211.1 million to

build a new medical center at Travis Air Force Base in California.

Long-term commitments for any major construction or renovation of

predominantly inpatient facilities in today’s rapidly changing health care

environment are accompanied by high levels of financial risk. VA’s recent

commitment to a major realignment of its health care system magnifies

such risk by creating additional uncertainty. In addition, we believe that

analyzing such alternatives in connection with the other major

construction projects in VA’s budget proposal is entirely consistent with

VA’s suggested realignment criteria. Delaying funding for these projects

until the alternatives can be fully analyzed may result in more prudent and

economical use of already scarce federal resources.

The potential savings of delaying funding for VA hospital construction are

uncertain in the absence of an assessment of VA’s needs based on its own

realignment criteria. However, we have recently reported that VA officials

did not rigorously consider available alternatives to construction of two

major new hospital facilities: Brevard Hospital in Brevard County, Florida,

and Travis Hospital at Travis Air Force Base in northern California. The

Congress directed VA to forgo construction of Brevard Hospital for savings

26Major projects are those costing $3 million or more.

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totaling $155 million and develop lower cost alternatives to meet veterans’

needs.

Additionally, we found that construction of additional hospital beds and an

outpatient clinic as large as VA proposes at Travis Air Force Base is

unnecessary. Although significant changes have occurred in the health

care marketplace and in the way VA delivers health care in the 4 years

since the project was planned, VA plans have not been revised accordingly.

These changes alone have resulted in over 3,300 unused hospital beds in

northern California hospitals, including beds in VA, Air Force, and

community hospitals. In addition, the veteran population in the service

area is expected to drop by about 25 percent between 1995 and 2010. We

also found that VA has not considered the likely negative effects the

additional beds could have on other hospitals in northern California,

particularly those community hospitals in the Solano County area

surrounding Travis Air Force Base that have occupancy rates of around

40 percent.

CBO estimates that if the Congress did not approve funding of any major

construction projects until after VA has completed its realignment, savings

totaling more than $1.2 billion could be achieved over 5 years.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from 1997 funding level

Budget authority 219 219 219 219 219

Outlays 21 36 104 168 207

Savings from 1997 funding levels adjusted for inflation

Budget authority 224 231 237 243 250

Outlays 1 37 108 175 220

Source: Congressional Budget Office.

Related GAO Products VA Health Care: Travis Hospital Construction Project Is Not Justified

(GAO/HEHS-96-198, September 3, 1996).

VA Health Care: Effects of Facility Realignment on Construction Needs Are

Unknown (GAO/HEHS-96-19, November 17, 1995).

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VA Health Care: Need for Brevard Hospital Not Justified (GAO/HEHS-95-192,

August 29, 1995).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Underused VA

Hospitals

Authorizing committees Veterans’ Affairs (House and Senate)

Appropriations subcommittees VA, HUD, and Independent Agencies

(House and Senate)

Primary agency Department of Veterans Affairs

Account Medical Care (36-0160)

Spending type Discretionary

Budget subfunction Hospital and Medical Care for Veterans

Framework theme Improve efficiency

Although the Department of Veterans Affairs (VA) took over 50,000 hospital

beds out of service between 1970 and 1995, it did not close any hospitals

based on declining utilization. With the declining veteran population, new

technologies, and VA’s plans to emphasize outpatient care, significant

further declines in demand for VA hospital care are likely. While closing

wards clearly saves some money by reducing staffing costs, the cost per

patient treated rises because the fixed costs of facility operation are

disbursed over fewer patients. At some point, closing a hospital and

providing care either through another VA hospital or through contracts

with community hospitals may become less costly than simply taking beds

out of service.

Potential savings from hospital closures are difficult to estimate because

of uncertainties about which facilities would be closed, the increased

costs that would be incurred in providing care through other VA hospitals

or contracts with community hospitals, and the disposition of the closed

facilities. VA is currently developing strategic plans to assess veterans’

future health care needs that could provide a basis for decisions regarding

which hospitals to close.

Related GAO Products VA Health Care: Opportunities for Service Delivery Efficiencies Within

Existing Resources (GAO/HEHS-96-121, July 25, 1996).

VA Health Care: Opportunities to Increase Efficiency and Reduce Resource

Needs (GAO/T-HEHS-96-99, March 8, 1996).

VA Health Care: Challenges and Options for the Future (GAO/T-HEHS-95-147,

May 9, 1995).

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GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

VA’s Medical Care

Account Growth Rate

Authorizing committees Veterans’ Affairs (House and Senate)

Appropriations subcommittees VA, HUD, and Independent Agencies

(House and Senate)

Primary agency Department of Veterans Affairs

Account Medical Care (36-0160)

Spending type Discretionary

Budget subfunction Hospital and Medical Care for Veterans

Framework theme Reassess objectives

The Department of Veterans Affairs’ (VA) health care system was

established in 1930, primarily to provide for the rehabilitation and

continuing care of veterans injured during wartime service. VA developed

its health care system as a direct delivery system in which the government

owned and operated its own health care facilities. It grew into the nation’s

largest direct delivery system. Veterans’ health care benefits include

medically necessary hospital and nursing home care and some outpatient

care.

We found that VA’s health care system should be able to significantly

contribute to deficit reduction in the next 5 years. First, the system may

not need to expend the level of resources that VA had previously estimated

to meet the health care needs of veterans. These resources are overstated

because (1) VA did not adequately reflect the declining demand for VA

hospital care in estimating its resource needs and (2) eligibility for VA

resources has been reformed, which, according to VA, will allow VA to

divert 20 percent of its hospital admissions to less costly outpatient

settings. Second, VA could reduce operating costs over the next 5 years by

billions of dollars by completing actions on a wide range of efficiency

initiatives. Actions are planned or underway on many of the

improvements.

The success of these efforts, however, depends on the extent to which VA

and its health care facilities are held accountable for how they spend

appropriated funds. We recently recommended that VA provide the

Congress improved information supporting its budget request. Specifically,

we recommended that VA provide the Congress information on the savings

achieved through improved efficiency. Providing the Congress with

information on factors, such as inflation and creation of new programs,

that increase resource needs without providing information on changes

that could reduce or offset those needs leaves the Congress with little

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basis for determining appropriate funding levels. VA, however, has been

unwilling to provide the Congress such information.

In 1995, the Congress adopted a budget resolution providing VA medical

care budget authority of $16.2 billion annually for 7 years, essentially

limiting VA spending at the fiscal year 1995 level. VA estimated that such a

limitation would result in a cumulative shortfall of almost $24 billion in the

funds it would need to maintain current services to the veteran population

through 2002. However, we reported that VA overestimated the potential

budget shortfall because it assumed that (1) the VA facility workload would

increase in fiscal year 1996 and that it would be sustained during the entire

7-year period, (2) limited savings would be achieved through

improvements in the efficiency with which services are provided by VA

facilities, and (3) costs, workload, and staffing would steadily increase due

to opening or expanding facilities.

Because VA facilities are essentially allowed to keep any funds they

generate through efficiency improvements and seek additional funds to

compensate for the effects of inflation, the true rate of increase in VA’s

medical care appropriation is understated. One way for the Congress to

respond to VA’s unwillingness to provide information on savings from

improved efficiency and the overestimation of needs would be to limit the

VA medical care appropriation at the fiscal year 1997 level for the next 5

years. CBO estimates that this would result in almost $9 billion in savings.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 0 0 0 0 0

Outlays 0 0 0 0 0

Savings from 1997 funding level adjusted for inflation

Budget authority 584 1,165 1,767 2,395 3,050

Outlays 525 1,101 1,701 2,326 2,978

Source: Congressional Budget Office.

Related GAO Products VA Health Care: Opportunities for Service Delivery Efficiencies Within

Existing Resources (GAO/HEHS-96-121, July 25, 1996).

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VA Health Care: Opportunities to Increase Efficiency and Reduce Resource

Needs (GAO/T-HEHS-96-99, March 8, 1996).

Medical Care Budget Alternatives (GAO/HEHS-95-247R, September 12, 1995).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Enrollment in VA

Health Care System

Authorizing committees Veterans’ Affairs (House and Senate)

Appropriations subcommittees VA, HUD, and Independent Agencies

(House and Senate)

Primary agency Department of Veterans Affairs

Account Medical Care (36-0160)

Spending type Discretionary

Budget subfunction Hospital and Medical Care for Veterans

Framework theme Redefine beneficiaries

The Department of Veterans Affairs’ (VA) health care system was initially

established to meet the special care needs of veterans injured during

wartime and those wartime veterans permanently incapacitated and

incapable of earning a living. Although all veterans were eligible for

hospital care, most veterans were eligible for only limited outpatient

services.

Recently enacted legislation expands eligibility for health benefits to make

all veterans eligible for comprehensive inpatient and outpatient services,

subject to the availability of resources. The legislation also requires VA to

establish a system of enrollment for VA health care benefits and establishes

enrollment priorities to be applied within appropriated resources. The

lowest priority for enrollment are veterans with no service-connected

disabilities and incomes that place them in the discretionary care category.

However, VA does not currently provide the Congress the type of

information on VA’s workload that would enable it to make informed

judgments about which portion of VA’s workload to fund. For example, it

provides the Congress little data on the extent to which its resources are

used to provide services to service-connected veterans, to veterans with

low incomes, and to veterans with higher incomes. Without information on

the extent to which VA resources are used to provide services to veterans

in the priority categories established under the new law, the Congress

lacks the basic information needed to guide decisions about what portion

of VA’s workload to fund.

We found that about 15 percent of veterans with no service-connected

disabilities who use VA medical centers have sufficiently high incomes that

would place them in the lowest priority category under the new patient

enrollment system. If the Congress funded the VA health care system to

cover only the expected enrollment of veterans in higher priority

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enrollment categories, such as veterans with service-connected disabilities

and veterans without the means to obtain public or private insurance to

meet their basic health care needs, CBO estimates that $1.7 billion in budget

authority adjusted for inflation could be saved over 5 years.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from 1997 funding level

Budget authority 280 280 280 280 280

Outlays 252 277 280 280 280

Savings from 1997 funding level adjusted for inflation

Budget authority 323 335 346 358 371

Outlays 291 331 346 358 371

Source: Congressional Budget Office.

Related GAO Products VA Health Care: Issues Affecting Eligibility Reform Efforts (GAO/HEHS-96-160,

September 11, 1996).

VA Health Care: Opportunities for Service Delivery Efficiencies Within

Existing Resources (GAO/HEHS-96-121, July 25, 1996).

VA Health Care: Approaches for Developing Budget-Neutral Eligibility

Reform (GAO/T-HEHS-96-107, March 20, 1996).

VA Health Care: Opportunities to Increase Efficiency and Reduce Resource

Needs (GAO/T-HEHS-96-99, March 8, 1996).

VA Health Care: Issues Affecting Eligibility Reform (GAO/T-HEHS-95-213,

July 19, 1995).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Outpatient Pharmacy

Costs

Authorizing committees Veterans’ Affairs (Senate and House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency Department of Veterans Affairs

Account Medical Care (36-0160)

Spending type Discretionary

Budget subfunction Hospital and Medical Care for Veterans

Framework theme Redefine beneficiaries

The Department of Veterans Affairs’ (VA) pharmacies dispense over 2,000

types of medications and medical supplies to veterans that are available

over the counter (OTC) through local retail outlets. Such products were

dispensed more than 15 million times in 1995 at an estimated cost of

$165 million. The most frequently dispensed include aspirin, dietary

supplements, and alcohol prep pads. VA physicians and others are

concerned that veterans who need such products may lack the resources

to purchase them and, as a result, not use them. However, only a few VA

pharmacies restrict which veterans may receive OTC products or how many

are provided. While many veterans shared a modest portion of the costs of

the OTC products, in most cases, the veterans paid no copayments and VA

absorbed the total costs of these OTC products.

Unlike VA, other public and private health care plans cover few, if any, OTC

products for their beneficiaries. These plans’ coverage of OTC products is

more restrictive than all but a few of VA’s facilities. In addition, VA facilities

provide other features, such as free prescription mail service, that are

commonly not available from other plans. As a result, VA facilities devote

significant resources to the provision of OTC products that other plans have

elected not to cover.

Our assessment of VA’s operating practices suggests several ways that

budget savings could be achieved. First, VA could more narrowly define

when to provide OTC products, reducing the number of OTC products

available to veterans on an outpatient basis. Second, VA could collect

copayments for all OTC products. CBO has estimated that these steps would

save the following amounts.

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Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Restrict availability of OTC products at VA pharmacies

Savings from the 1997 funding level

Budget authority 60 60 61 61 62

Outlays 54 59 61 61 62

Savings from the 1997 funding level adjusted for inflation

Budget authority 62 64 67 70 74

Outlays 55 64 67 70 73

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Option: Charge copayments on OTC products at VA pharmacies

Savings from the 1997 funding level

Budget authority 5 9 14 14 14

Outlays 5 9 14 14 14

Savings from the 1997 funding level adjusted for inflation

Budget authority 5 9 14 14 14

Outlays 5 9 14 14 14

Source: Congressional Budget Office.

Related GAO Product VA Health Care: Opportunities to Significantly Reduce Outpatient

Pharmacy Costs (GAO/HEHS-97-15, October 11, 1996).

GAO Contact Stephen P. Backhus, (202) 512-7111

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Option:

Sunset Date on VA’s

Income Verification

Program

Authorizing committees Veterans’ Affairs (Senate and House)

Appropriations subcommittees VA, HUD, and Independent Agencies

(Senate and House)

Primary agency Department of Veterans Affairs

Accounts Compensation (36-0153)

Medical Care (36-0160)

Spending type Direct

Budget subfunctions Multiple

Framework theme Improve efficiency

The Department of Veterans Affairs (VA) administers over $35 billion

annually in benefits and health care programs for veterans and their

dependents. Eligibility for benefits and the level of benefits paid are often

income dependent. VA uses self-reported income in establishing eligibility

for certain benefits. In general, the lower the reported income, the higher

the benefits.

In 1988 we recommended that the Congress amend the Internal Revenue

Code to give VA access to tax data to verify income reported by VA pension

recipients. We estimated that VA made potential overpayments of over

$157 million in 1984 because it lacked access to tax data. Legislation was

enacted in 1990 that gave VA access to Internal Revenue Service (IRS) tax

data and Social Security Administration (SSA) earnings records to help VA

verify incomes reported by beneficiaries. Since 1990, millions of dollars in

savings have been achieved as a result of VA’s income verification program.

However, the provision authorizing IRS and SSA assistance to VA in verifying

income will expire on September 30, 1998—its “sunset” date. If the

provision is not extended, VA’s outlays will be unnecessarily higher.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Budget authority 0 22 27 31 36

Outlays 0 22 27 31 36

Source: Congressional Budget Office.

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Related GAO Products VA Health Care: Verifying Veterans’ Reported Income Could Generate

Millions in Copayment Revenues (GAO/HRD-92-159, September 15, 1992).

Veterans’ Benefits: Millions in Savings Possible From VA’s Matching

Program With IRS and SSA (GAO/HRD-92-37, December 23, 1991).

Veterans’ Pensions: Verifying Income With Tax Data Can Identify

Significant Payment Problems (GAO/HRD-88-24, March 16, 1988).

GAO Contact Stephen P. Backhus, (202) 512-7111

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750 Administration

of Justice

• Border Patrol Resources

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Option:

Border Patrol

Resources

Authorizing committees Judiciary (Senate and House)

Appropriations subcommittees Commerce, Justice, State, and the

Judiciary (Senate and House)

Primary agency Department of Justice

Accounts Immigration and Naturalization Service

Salaries and Expenses (15-1217)

Violent Crime Reduction Fund Programs

(15-8598)

Spending type Discretionary

Budget subfunction Federal Law Enforcement Activities

Framework theme Improve efficiency

Drug smuggling and illegal immigration are serious threats along the

Southwest border. Experts estimate that most of the cocaine and most

illegal aliens entering the United States enter from Mexico across the

Southwest border. Unless border control efforts become more effective,

illegal immigration is expected to increase over the next decade.

The Department of Justice’s Immigration and Naturalization Service (INS)

is responsible for enforcing the nation’s immigration laws. The INS has 3

regional offices, 33 district offices, 21 Border Patrol sectors with 145

Border Patrol offices, and 265 staffed ports of entry. The three principal

divisions with enforcement responsibilities include the Border Patrol,

Investigations, and Inspections.

The Violent Crime Control and Law Enforcement Act of 1994 increased

funding for the Border Patrol to help stem the flow of illegal aliens

crossing the Southwest border. The legislation authorized an increase of

4,000 Border Patrol agents and support staff over four years to carry out

the INS’ new border enforcement strategy of “prevention through

deterrence.” Under this strategy, Border Patrol agents are to be deployed

on the border to discourage aliens from entering illegally. Previously,

agents were deployed in border areas, but their strategy was to apprehend

aliens after they had entered the United States.

Nationwide, in fiscal year 1994, the Border Patrol reportedly spent

63 percent of its enforcement time preventing illegal alien entry. The

remaining 37 percent was spent apprehending aliens who illegally entered

or violated the conditions upon which they entered. The activities of

Border Patrol agents generally vary according to their distance from the

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border. Agents at most stations within 25 miles of the border were

principally engaged in patrolling the border to prevent illegal entry of

aliens. In contrast, agents at stations over 25 miles from the border were

principally engaged in apprehending illegal aliens after their entry.

INS district offices and Border Patrol sectors geographically overlap

throughout the country. In addition, some Border Patrol enforcement

activities parallel the enforcement activities of other INS enforcement

divisions. Border Patrol and Investigations are both responsible for

identifying criminal and illegal aliens after they enter the country and

reviewing employers’ records to determine whether only authorized

workers are employed. The work in these parallel areas is usually a lower

priority for the Border Patrol.

INS data indicates that it costs half as much to redirect existing Border

Patrol agents to the border than to hire and train new agents. Also,

redirecting the time spent by agents at the 32 southwest border stations

from apprehending aliens after entry to patrolling the border would

decrease the number of new agents needed. Furthermore, relocating

interior Border Patrol agents to the borders could result in INS closing

some Border Patrol stations and reducing some of its lease costs. In a

recent example of how this type of redirection and redeployment might be

implemented, the Congress directed the Border Patrol to redeploy 200

agent positions from interior stations to the Southwest border. Following

this directive, INS set aside only 100 investigator positions to perform the

activities that had previously been performed by the 200 redeployed

agents.

The Congress could direct the INS to fully implement its new enforcement

strategy by redeploying additional Border Patrol agents and closing Border

Patrol stations that are not carrying out operations designed to prevent the

entry of illegal aliens. Given the emphasis that the President and the

Congress have placed on controlling the nation’s borders, one possible

approach would be to redeploy resources to those border areas where

there is an immediate threat of illegal entry. Although CBO could not

provide an estimate of savings at this time, under this approach Border

Patrol stations where agents spend less than, for example, 50 percent of

their time patrolling the border or less than 75 percent of their time

conducting traffic checks, might be closed and have its agents redeployed.

Also, stations in close proximity to the Southwest or Canadian borders

where agents do not spend a minimum of, for example, 50 percent of their

time patrolling the border or 75 percent of their time conducting traffic

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checks, might have the activities of its agents redirected to prevent entry

of illegal aliens. Further, the redirection of agents’ activities should reduce

the number of new agents the Border Patrol would need to hire to increase

the amount of time spent patrolling the border.

Related GAO Products Border Patrol: Staffing and Enforcement Activities (GAO/GGD-96-65,

March 11, 1996).

Border Control: Revised Strategy is Showing Some Positive Results

(GAO/T-GGD-95-92, March 10, 1995).

GAO Contact Norman J. Rabkin, (202) 512-8777

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800 General

Government, 

900 Net Interest,

and 999 Multiple

• General Services Administration Supply Depot System

• Judiciary’s Long-Range Space Planning System

• The 1-Dollar Coin

• Commemorative Coins

• Federal Reserve Operations

• Premium Payments to Employees While on Leave

• Davis-Bacon Act Reform

• Formula-Based Grant Programs

• Federal Grants

• Federal Travel Processing

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Option:

General Services

Administration Supply

Depot System

Authorizing committees Governmental Affairs (Senate) 

Government Reform and Oversight (House)

Primary agency General Services Administration

Account General Supply Fund (47-4530)

Spending type Direct

Budget subfunction General Property and Records

Management

Framework theme Improve efficiency

The General Services Administration (GSA) has a multimillion dollar supply

system to help support federal agencies’ mission needs. As part of this

system, GSA buys and warehouses about 16,000 common-use supply

products and resells and ships them to federal agencies through five

depots. An alternative method GSA uses is to have supplies delivered

directly from suppliers to federal agencies. Agencies pay less when

supplies are delivered directly. At the time of GAO’s most recent work, GSA

marked up directly delivered products, on average, 10 percent of product

cost, while products stored and shipped from GSA depots were marked up

an average of 29 percent. For fiscal year 1996, GSA’s markups had

increased to 22 percent and 35 percent, respectively. Although the cost

difference between the two delivery options has lessened in the

intervening years for a variety of reasons, including a changed

methodology for calculating mark-ups developed in fiscal year 1995, the

difference is still significant and reflects the higher costs associated with

maintaining and operating a large depot distribution system.

In fiscal year 1992, GAO’s review showed that GSA directly delivered only an

estimated $68 million of the estimated $800 million in sales that had

potential for direct delivery during the 12-month period ending on

February 14, 1991. This means that over 80 percent of depot sales had

potential to be supplied in this way. The remaining depot sales were

mostly low-value, small-quantity orders which may have been

uneconomical for GSA to handle—more specifically, it cost them more to

provide the materials than the customer paid. Most of these orders could

have been purchased locally without going through GSA. If GSA increased

direct delivery and encouraged agencies to purchase low-value,

small-quantity orders locally, it could significantly reduce needed depot

operations.

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Maintaining a large and costly depot distribution system may no longer be

a viable or necessary activity for the federal government. Consistent with

this position, the Vice President’s National Performance Review

recommended that supply inventories be reduced and agencies be allowed

to choose sources of supply. In response, GSA is studying its own and

private-sector depot distribution costs to identify where greater efficiency

could be achieved. In addition, GSA (1) permits agencies to use supply

sources other than depots for purchases under $5,000, which GSA

estimated includes 99 percent of all potential purchases, (2) has actions to

identify logistic models that may provide other sources of supply capable

of providing items at reasonable costs, and (3) has increased the use of

commercial rather than government-specific item descriptions, which

should provide a clearer link between the items agencies need and those

available commercially. To the extent that GSA’s efforts result in more

economical and efficient ways for agencies to obtain needed supplies

outside the depot system, GAO believes that there will be increased

opportunities to reduce or possibly even eliminate GSA’s depot system.

The Congress could consider requiring increased use of direct delivery for

high-dollar value supplies and only stocking items that are profitable. After

these changes are implemented, GSA or the Congress could phase out GSA

depots that are no longer economically justifiable or needed. If all the

depots were phased out, the following savings would result.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level adjusted for inflation

Budget authority 16 34 52 54 56

Outlays 12 30 48 54 55

Source: Congressional Budget Office.

Related GAO Products General Services Administration: Increased Direct Delivery of Supplies

Could Save Millions (GAO/GGD-93-32, December 28, 1992).

Transition Series: General Services Issues (GAO/OCG-93-28TR,

December 1992).

GAO Contact J. William Gadsby, (202) 512-8387

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Option:

Judiciary’s

Long-Range Space

Planning System

Authorizing committees Environment and Public Works (Senate)

Transportation and Infrastructure (House)

Primary agency Administrative Office of the United States

Courts

Account Federal Buildings Fund (47-4542)

Spending type Direct

Budget subfunction General Property and Records

Management

Framework theme Improve efficiency

In 1988, the Administrative Office of the U.S. Courts (AOC) developed a

long-range plan for space needs. Based on 1992 space projections by the

AOC, GAO estimated that the total space requirements for courts and related

agencies would increase to about 36.9 million square feet over a 10-year

period—a 97-percent increase. GAO found that AOC’s planning process

resulted in higher estimates for court space than is warranted. Using the

judiciary’s $31 per square foot average cost for all court space, GAO showed

that the judiciary could save approximately $112 million annually, or

$1.1 billion in constant dollars over a 10-year period, if the errors in its

planning process were corrected.

The Congress should direct the judiciary to revise its planning process for

identifying long-range space needs. Specifically, the process should

(1) treat all judicial districts consistently in terms of assumptions between

caseloads, staff, and space, (2) establish a baseline of space needs for each

district that reflects current caseloads, and (3) increase the reliability of its

estimates by using an appropriate statistical methodology to project

caseloads and by reducing the level of subjectivity in the process. Because

of uncertainty about the nature and extent of changes that might be made

to the planning process, a 5-year estimate of savings cannot be developed

for this option.

Related GAO Products Federal Courthouse Construction: More Disciplined Approach Would

Reduce Costs and Provide for Better Decisionmaking (GAO/T-GGD-96-19,

November 8, 1995).

Federal Judiciary Space: Progress Is Being Made To Improve The

Long-Range Planning Process (GAO/T-GGD-94-146, May 4, 1994).

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Federal Judicial Space Follow-up (GAO/GGD-94-135R, April 22, 1994).

Federal Judiciary Space: Long-Range Planning Process Needs Revision

(GAO/T-GGD-94-1B, October 7, 1993).

Federal Judiciary Space: Long-Range Planning Process Needs Revision

(GAO/GGD-93-132, September 28, 1993).

GAO Contact J. William Gadsby, (202) 512-8387

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Option:

The 1-Dollar Coin Authorizing committees Banking, Housing, and Urban Affairs

(Senate)

Banking and Financial Services (House)

Appropriations subcommittees Treasury, Postal Service, and General

Government (Senate and House)

Primary agency Department of the Treasury

Account United States Mint Public Enterprise Fund

(20-4159)

Spending Type Direct

Budget subfunction Central Fiscal Operations

Framework theme Improve efficiency

In 1993 and 1995, GAO reported on cost savings associated with the 1-dollar

coin. We said that because a dollar coin would have a longer life and be

more easily processed than a note, and because the seigniorage27

recognized reduces the amount of borrowing needed to finance the deficit,

substituting a dollar coin for a dollar note would yield significant savings

to the government. Other countries have demonstrated that public

resistance to such a change can be managed and overcome.

The direct budgetary savings from this option, as scored by CBO, are

relatively small during the 5-year estimating period. Additional revenues,

shown in the first table that follows, result from increases in payments of

earnings by the Federal Reserve Bank into miscellaneous receipts of the

Treasury due to the lower costs of purchasing and processing these coins

relative to dollar bills. Although not reflected in the table, there are other

substantial longer term savings due to the effects of seigniorage.

Seigniorage is not considered part of the budget, but it does substitute for

borrowing from the public and, thus, lowers interest costs to the

government. The second table shows that, initially, the U.S. Mint’s costs

would increase to cover the costs of research and development, metals

acquisition, storage for coins stockpiled before their introduction into

circulation,28 and a public education campaign. CBO’s estimate assumes

that the Mint would pay for these costs by borrowing from seignorage

generated by coins already in circulation. These costs would be repaid

when new dollar coins are deposited at the Federal Reserve and begin

27Seigniorage is the difference between the face value of the coin and its cost of production, which

includes the value of the metals contained in the coin and the U.S. Mint’s manufacturing and

distribution costs.

28CBO’s estimate assumes 30 months of lead time for the U.S. Mint to produce and stockpile new dollar

coins before their introduction into circulation.

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generating their own seigniorage. Over time, the net effect on direct

spending would be zero.

Five-Year Revenues

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Revenue gains 0 0 0 80 110

Source: Congressional Budget Office.

Five-Year Direct Spending Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Budget authority –88 –278 212 142 2

Outlays –88 –278 212 142 2

Source: Congressional Budget Office.

Related GAO Products A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13, 1995).

1-Dollar Coin: Reintroduction Could Save Millions If It Replaced the

1-Dollar Note (GAO/T-GGD-95-146, May 3, 1995).

1-Dollar Coin: Reintroduction Could Save Millions if Properly Managed

(GAO/GGD-93-56, March 11, 1993).

National Coinage Proposals: Limited Public Demand for New Dollar Coin

or Elimination of Pennies (GAO/GGD-90-88, May 23, 1990).

GAO Contact J. William Gadsby, (202) 512-8387

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Option:

Commemorative

Coins

Authorizing committees Banking, Housing and Urban Affairs

(Senate) 

Banking and Financial Services (House)

Primary agency Department of the Treasury

Spending type Direct

Budget subfunction Net Interest

Framework theme Improve efficiency

In 1996, GAO reported that if the Congress authorized the United States

Mint to produce circulating commemorative coins, which are coins with

distinctive designs that are issued at face value, the government could

generate about $225 million in additional seigniorage annually. Seigniorage

is the difference between the face value of the coin and its cost of

production and distribution. Seigniorage is not considered part of the

budget, but it does substitute for borrowing from the public and, thus,

lowers interest costs to the government. Generating $225 million in

additional seigniorage annually would result in about $16 million in

interest savings on the national debt each year.

GAO concluded that because the quarter is the highest denomination and

the largest in size of the widely circulating coins, it would be likely to

generate the most seigniorage. GAO reported that in 1976, when the Mint

produced a circulating quarter commemorating the Bicentennial, the Mint

produced 83 percent more quarters commemorating the Bicentennial than

its average annual production from 1971 to 1981. GAO based its 1996

estimate on the assumption that the demand for quarters would increase

50 percent over the 1995 production levels for the quarter. CBO did not

provide an estimate of the savings from producing a circulating

commemorative quarter since it involves interest savings only.

Related GAO Product U.S. Mint: Commemorative Coins Could Be More Profitable (GAO/GGD-96-113,

August 7, 1996).

GAO Contact J. William Gadsby, (202) 512-8387

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Option:

Federal Reserve

Operations

Authorizing committees Banking, Housing and Urban Affairs

(Senate) 

Banking and Financial Services (House)

Primary agency Federal Reserve Board

Spending type Direct

Framework theme Improve efficiency

The Federal Reserve is responsible for conducting monetary policy,

maintaining the stability of financial markets, providing services to

financial institutions and government agencies, and supervising and

regulating banks and bank-holding companies. The Federal Reserve is

unique among governmental entities in its mission, structure, and finances.

Unlike federal agencies funded through congressional appropriations, the

Federal Reserve is a self-financing entity that deducts its expenses from its

revenue and transfers the remaining amount to the U.S. Department of the

Treasury. Although the Federal Reserve’s primary mission is to support a

stable economy, rather than to maximize the amount transferred to

Treasury, its revenues contribute to total U.S. revenues and, thus, can help

reduce the federal deficit.

From 1988 to 1994, the Federal Reserve’s annual revenue averaged

$22 billion and greatly exceeded its average annual expenses and other

deductions of $2.5 billion. Consequently, the annual amount returned to

the Treasury during this period ranged from about $16 billion to

$24 billion. The cost of Federal Reserve operations over this period

increased steadily and substantially. Specifically, operating expenses for

the Board and Reserve banks increased by about 50 percent, with the

greatest increases occurring in the areas of bank supervision, personnel

costs, and data-processing modernization. The costs of providing services

for which banks are charged have been rising faster than the

corresponding revenues received.

With the current budgetary climate, the Federal Reserve could do more to

increase its cost consciousness and ensure that it is operating as

efficiently as possible. GAO has identified several inefficiencies in the

Federal Reserve’s policies and practices that have increased the cost of

providing its current services, including its costs for travel, personnel

benefits, building acquisition, and contracting and procurement. For

example, personnel benefit packages varied among Reserve banks and

certain benefits—such as leave policies and savings plans—were generous

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compared to those of federal financial regulatory agencies with similar

personnel requirements. We have also identified opportunities for the

Federal Reserve to strengthen internal controls over financial reporting

and safeguarding of assets.

The Federal Reserve could better control costs and increase efficiencies

through management with a more systemwide focus. Such management

would include reducing or eliminating benefits that are not necessary to

attract and retain a quality workforce and managing other benefits on a

systemwide basis, using the combined bargaining power of the 12 Reserve

banks. The internal controls of all Reserve banks should be independently

assessed annually to ensure reliable financial reporting, safeguarding of

assets, and compliance with laws and regulations.

In addition, the Federal Reserve’s revenue, and hence its return to

taxpayers, would be enhanced by charging fees for bank examinations.

The Federal Reserve Act authorizes the Federal Reserve to charge fees for

bank examinations, but the Federal Reserve has not done so, either for the

state-member banks it examines or the bank-holding company

examinations it conducts. Thus, taxpayers in effect bear the cost of these

examinations, which totaled $368 million in 1994. If fees were assessed

similar to those charged national banks with a credit allowed for fees paid

to state regulators, the following savings could be achieved.29

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Added receipts 72 75 78 82 86

Source: Congressional Budget Office.

Related GAO Products Federal Reserve System: Current and Future Challenges Require

Systemwide Attention (GAO/T-GGD-96-159, July 26, 1996).

Federal Reserve System: Current and Future Challenges Require

Systemwide Attention (GAO/GGD-96-128, June 17, 1996).

Federal Reserve Banks: Inaccurate Reporting of Currency at the Los

Angeles Branch (GAO/AIMD-96-146, September 30, 1996).

29CBO also assumes that the Federal Deposit Insurance Corporation (FDIC) begins to charge for bank

examinations at the same rate; however, the effect on FDIC’s budget is not included in its estimate.

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Federal Reserve Banks: Internal Control, Accounting, and Auditing Issues

(GAO/AIMD-96-5, February 9, 1996).

GAO Contact Thomas M. McCool, (202) 512-8678

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Option:

Premium Payments to

Employees While on

Leave

Authorizing committees Multiple

Appropriations subcommittees Multiple

Primary agency Multiple

Accounts Multiple

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Improve efficiency

The Office of Personnel Management has directed all federal agencies to

pay employees who are scheduled to work on Sundays at the Sunday

premium pay rate even if the employees take leave on Sunday. The

directive became effective on May 27, 1993, and was based on a U.S.

Claims Court interpretation of federal leave statutes that prohibit an

employee’s pay from being diminished due to taking leave. Prior to this

time, employees who took leave on Sunday were paid at their basic pay

rate for the leave rather than the Sunday premium rate of the base rate

plus 25 percent. GAO reviewed five agencies—the Federal Aviation

Administration, the Customs Service, and the Departments of Defense,

Justice, and Veterans Affairs—which are among the most frequent payers

of Sunday premium pay in the federal government. Using leave

information provided by these five agencies for fiscal year 1994, we

estimated that $17.9 million of the $146.1 million in Sunday premium pay

was paid to employees on leave.

The Departments of Commerce, Justice, State, the Judiciary, and Related

Agencies Appropriations Act of 1997 included a provision that precluded

all the relevant agencies from paying premium pay for Sundays not

actually worked. GAO addressed this issue governmentwide in a 1995

report. We suggested that to preclude federal employees from receiving

Sunday premium pay while on leave and to reduce governmentwide

employment costs, the Congress may wish to consider requiring that all

agencies’ employees actually must work on Sunday to receive Sunday

premium pay.

Related GAO Product Sunday Premium Pay: Millions of Dollars in Sunday Premium Pay Are Paid

to Employees on Leave (GAO/GGD-95-144, May 19, 1995).

GAO Contact L. Nye Stevens, (202) 512-8676

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Option:

Davis-Bacon Act

Reform

Authorizing committees Labor and Human Resources (Senate)

Economic and Educational Opportunities

(House)

Appropriations subcommittees Labor, Health and Human Services, and

Education (Senate and House)

Primary agency Department of Labor

Accounts Multiple

Spending type Discretionary/Direct

Budget subfunctions Multiple

Framework theme Reassess objectives

The Davis-Bacon Act requires that workers on federally funded or

federally assisted construction projects be paid wages at or above levels

determined by the Department of Labor to be prevailing in an area. The

current dollar threshold for projects covered by Davis-Bacon is $2,000, an

amount that has not changed since 1935. Critics of the act believe that it

inflates federal construction costs because the wage rates set are actually

higher than those prevailing in an area. Supporters say it sets a basic

responsibility for federal construction contractors to pay wages typical in

an area, not lower wage rates in order to receive a contract. They also

argue that savings from lower wage rates would be offset by the higher

total project costs and also from government revenue losses as a result of

reduced tax collections.

In 1979, GAO expressed major concern about the accuracy of the wage

determinations and the impact of the inaccurately high wage rates on

federal construction costs. Since that time, Labor has made changes that

have improved the administration of the Davis-Bacon Act and made it less

likely that the wage rates would be artificially high. For example, Labor

has revised its criteria to require that 50 percent, rather than 30 percent, of

the workers included on survey projects must receive the same wage for

that rate to be considered the prevailing wage. This made it less likely that

the collectively bargained wage rate in an area would be used to set the

prevailing wage and, as of 1995, less than 30 percent of all of Labor’s wage

determinations were set in that way. In 1996, Labor also implemented

recommendations to reduce the potential for its wage determinations to be

based on erroneous wage data. There is still an absence of current data,

however, on the accuracy of wage rates set.

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In the past, CBO has noted that repealing the Davis-Bacon Act or raising the

threshold for projects it covers would allow appropriators to reduce funds

spent on federal construction. In addition, either action would increase the

opportunities for employment of less skilled workers. However, such

changes would lower the earnings of some construction workers. In 1997,

CBO estimates that repeal of Davis-Bacon would allow appropriators to

reduce funds for construction with a resulting discretionary outlay savings

of about $2.8 billion between fiscal years 1998 and 2002. CBO assumes that

the currently suspended helper regulations will be reinstated beginning

after the first quarter of fiscal year 1998.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Direct spending

Savings from the 1997 funding level adjusted for inflation

Budget authority 32 26 24 24 23

Outlays 28 27 25 24 24

Note: CBO has identified some direct spending savings from the repeal of the Davis-Bacon Act,

including a reclassification of about $1.6 billion in federal aid to highways in fiscal year 1996.

Source: Congressional Budget Office.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Discretionary spending

Savings from the 1997 funding level

Budget authority 799 777 777 777 777

Outlays 196 458 602 683 734

Savings from the 1997 funding level adjusted for inflation

Budget authority 826 854 877 901 926

Outlays 196 463 625 739 816

Source: Congressional Budget Office.

Related GAO Products Information Regarding the Davis-Bacon Act, Correspondence to

Representative Pete Hoekstra, (GAO/HEHS-97-30R, October 30, 1996).

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Information Regarding Davis-Bacon Wage Determinations,

Correspondence to Representative Pete Hoekstra (GAO/HEHS-96-177R, July 17,

1996).

Davis-Bacon Act: Process Changes Could Address Vulnerability to Use

Inaccurate Data in Setting of Prevailing Wage Rates (GAO/T-HEHS-96-166,

June 20, 1996).

Davis-Bacon Act Job Targeting Programs, Correspondence to

Representative William M. Thomas (GAO/HEHS-96-15R, June 3, 1996).

Davis-Bacon Act: Process Changes Could Raise Confidence That Wage

Rates Are Based on Accurate Data (GAO/HEHS-96-130, May 31, 1996).

Davis-Bacon Act, Correspondence to Senator Larry Craig and

Representatives Charles Stenholm, William Goodling, Tim Valentine, and

Thomas Petri (GAO/HEHS-94-95, April 27, 1996).

Changes to the Davis-Bacon Act Regulations and Administration

(GAO/HEHS-94-95R, February 7, 1994).

The Davis-Bacon Act Should Be Repealed (GAO/HRD-79-18, April 27, 1979).

GAO Contact Carlotta C. Joyner, (202) 512-7002

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Option:

Formula-Based Grant

Programs

Authorizing committees Multiple

Appropriations subcommittees Multiple

Primary agencies Multiple

Accounts Multiple

Spending type Discretionary/Direct

Budget subfunctions Multiple

Framework theme Redefine beneficiaries

GAO has issued many reports over the past decade showing that the

distribution of federal grants to state and local governments is not

well-targeted to those jurisdictions with greatest programmatic needs or

lowest fiscal capacity to meet those needs. As a result, program recipients

in areas with relatively lower needs and greater wealth may enjoy a higher

level of services than is available in harder pressed areas, or the wealthier

areas can provide the same level of services at lower tax rates than harder

pressed areas.

At a time when federal domestic discretionary resources are constrained,

better targeting of grant formulas offers a strategy to bring down federal

outlays by concentrating reductions on wealthier localities with

comparatively fewer needs and greater capacity to absorb the cuts. At the

same time, redesigned formulas could hold harmless the hardest pressed

areas, which are most vulnerable.

Cuts in federal grants to states could be targeted by disproportionately

reducing federal funds to states with stronger tax bases and fewer needs.

Cuts in federal grants to local governments could be targeted by either

concentrating cuts on areas with the strongest tax bases or by changing

program eligibility to restrict grant funding only to those places with lower

fiscal capacity or greatest programmatic needs. As an example, during the

debate in 1986 over the termination of General Revenue Sharing, GAO

reported that a better targeted formula and restricted eligibility could

achieve a 50-percent cut in total outlays, while maintaining or increasing

federal funds to harder pressed jurisdictions. An example that illustrates

the potential savings from this option is a 10-percent reduction in the

aggregate total of all closed-ended or capped formula grant programs

exceeding $1 billion.30 The dollar value for programs exceeding this

threshold would include over 60 percent of the dollars for such programs.

30In the transportation budget function, several very small closed-ended grants could not be easily

isolated in the baseline and these are included in the estimate.

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The savings achieved through this option could serve as a benchmark for

overall savings from this approach but should not be interpreted as a

suggestion for across-the-board cuts. Rather, the Congress may wish to

determine specific reductions on a program-by-program basis, after

examining the relative priority and performance of each grant program.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Discretionary spending

Savings from the 1997 funding level

Budget authority 2,903 2,903 2,903 2,903 2,903

Outlays 1,055 3,256 4,110 4,483 4,659

Savings from the 1997 funding level adjusted for inflation

Budget authority 3,079 3,281 3,486 3,705 3,937

Outlays 1,086 3,413 4,446 5,085 5,532

Five-Year Savings

FY98 FY99 FY00 FY01 FY02

Direct Spending

Savings from the 1997 funding level adjusted for inflation

Budget authority 4,228 4,238 4,308 4,369 4,433

Outlays 1,612 1,811 1,809 1,816 1,825

Source: Congressional Budget Office.

Related GAO Products Federal Grants: Design Improvements Could Help Federal Funds Go

Further (GAO/AIMD-97-7, December 18, 1996).

Public Health: A Health Status Indicator for Targeting Federal Aid to

States (GAO/HEHS-97-13, November 13, 1996).

Highway Funding: Alternatives for Distributing Federal Funds

(GAO/RCED-96-6, November 28, 1995).

Ryan White Care Act of 1990: Opportunities to Enhance Funding Equity

(GAO/HEHS-96-26, November 13, 1995).

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Department of Labor: Senior Community Service Employment Program

Delivery Could Be Improved Through Legislative and Administrative

Action (GAO/HEHS-96-4, November 2, 1995).

Rural Development: USDA’s Approach to Funding Water and Sewer

Projects (GAO/RCED-95-258, September 22, 1995).

Medicaid: Matching Formula’s Performance and Potential Modifications

(GAO/T-HEHS-95-226, July 27, 1995).

Older Americans Act: Funding Formula Could Better Reflect State Needs

(GAO/HEHS-94-41, May 12, 1994).

Medicaid: Alternatives for Improving the Distribution of Funds to States

(GAO/HRD-93-112FS, August 20, 1993).

Mental Health Grants: Funding Not Distributed According to State Needs

(GAO/T-HRD-91-32, May 16, 1992).

Maternal And Child Health: Block Grants Funds Should Be Distributed

More Equitably (GAO/HRD-92-5, April 2, 1992).

Remedial Education: Modifying Chapter 1 Formula Would Target More

Funds to Those Most in Need (GAO/HRD-92-16, March 28, 1992).

Drug Treatment: Targeting Aid to States Using Urban Population as

Indicator of Drug Use (GAO/HRD-91-17, November 27, 1990).

Block Grants: Proposed Formulas for Substance Abuse, Mental Health

Provide More Equity (GAO/HRD-87-109BR, July 16, 1987).

Local Governments: Targeting General Fiscal Assistance Reduces Fiscal

Disparities (GAO/HRD-86-113, July 24, 1986).

Highway Funding: Federal Distribution Formulas Should Be Changed

(GAO/RCED-86-114, March 31, 1986).

Changing Medicaid Formula Can Improve Distribution of Funds to States

(GAO/GGD-83-27, March 9, 1983).

GAO Contact Paul L. Posner, (202) 512-9573

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Option:

Federal Grants Authorizing committees Multiple

Appropriations subcommittees Multiple

Primary agency Multiple

Accounts Multiple

Spending type Discretionary

Budget subfunctions Multiple

Framework theme Improve efficiency

Intergovernmental grants are a significant part of both federal and state

budgets. From the first annual cash grant under the Hatch Act of 1887, the

number of grant programs rose to more than 600 in 1995 with outlays of

$225 billion, about 15 percent of total federal spending. Grants serve many

purposes beyond returning resources to taxpayers in the form of state

services. For example, grants can serve as a tool to supplement state

spending for nationally important activities. However, if states use federal

grant dollars to reduce (i.e., substitute for) their own spending for the

aided program either initially or over time, the fiscal impact of federal

grant dollars is reduced.

Public finance experts suggest that grants are unlikely to supplement

completely a state’s own spending, and thus some substitution is to be

expected in any grant. Our review of economists’ most recent estimates of

substitution suggests that every additional federal grant dollar results in

less than a dollar of total additional spending on the aided activity. The

estimates of substitution showed that about 60 cents of every federal grant

dollar substitutes for state funds that states otherwise would have spent.

Our analysis linked substitution to the way in which most grants are

designed. For example, many of the 87 largest grant programs did not

include features, such as state matching and maintenance-of-effort

requirements, that can encourage states to use federal funds as a

supplement rather than a replacement for their own spending. While not

every grant is intended to supplement state spending, proponents of grant

redesign argue that if some grants incorporated more rigorous

maintenance-of-effort requirements and lower federal matching rates, then

fewer federal funds could still encourage states to contribute to

approximately the same level of overall spending on nationally important

programs. Critics of this approach argue that such redesign would put a

higher burden on states because they would have to finance a greater

share of federally aided programs.

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The savings that could be achieved from redesigning grants to increase

their fiscal impact would depend on the nature of the design changes and

state responses to those changes. For example, faced with more rigorous

financing requirements, states might reduce or eliminate their own

financial support for the aided activity. The outcome will be influenced by

the tradeoff decisions that the Congress makes to balance the importance

of achieving each program’s goals and objectives against the goal of

encouraging greater state spending and lowering the federal deficit.

We were unable to precisely measure the budgetary impact of

inflation-adjusted maintenance-of-effort requirements because current

state spending levels are not reported consistently. However, it was

possible to estimate the impact of changes in the matching rates on many

close-ended federal grants. For example, many such grants do not require

any state or local matching funds. The federal share of these programs

could be reduced modestly, from 100 percent to 90 percent—a reduction

unlikely to discourage states from participating in the program. CBO

estimates that the introduction of a 10 percent matching requirement on

some of the largest federal discretionary grant programs that are currently

100 percent federally funded and a corresponding ten percent reduction

from the authorized grant levels, would reduce outlays by $20 billion over

5 years. If such a change in match rates were combined with

inflation-adjusted maintenance-of-effort requirements, states that choose

to participate in the program would have to maintain the same or increase

levels of program spending in order to receive federal funding.

Five-Year Savings

Dollars in millions

FY98 FY99 FY00 FY01 FY02

Savings from the 1997 funding level

Budget authority 3,740 3,740 3,740 3,740 3,740

Outlays 1,120 2,810 3,550 3,670 3,740

Savings from the 1997 funding level adjusted for inflation

Budget authority 3,830 3,940 4,040 4,150 4,260

Outlays 1,150 2,910 3,750 3,970 4,150

Source: Congressional Budget Office.

Related GAO Products Federal Grants: Design Improvements Could Help Federal Funds Go

Further (GAO/AIMD-97-7, December 18, 1996).

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Block Grants: Issues in Designing Accountability Provisions

(GAO/AIMD-95-226, September 1, 1995).

GAO Contact Paul L. Posner, (202) 512-9573

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Option:

Federal Travel

Processing

Authorizing committees Governmental Affairs (Senate) 

Government Reform and Oversight (House)

Appropriations subcommittees Multiple

Primary agency Multiple

Account Multiple

Spending type Discretionary

Budget subfunction Multiple

Framework theme Improve efficiency

In fiscal year 1994, the federal government reported travel obligations for

individuals of about $7.6 billion—about $5 billion for the Department of

Defense (DOD) and about $2.6 billion for the civilian agencies. This amount

was for direct costs (i.e., costs directly related to travel, such as

transportation, lodging, and rental cars) related primarily to two types of

travel—temporary duty (TDY) and permanent relocation. The General

Services Administration (GSA) currently negotiates some of these direct

rates with travel vendors, at significant savings to federal agencies. The

indirect costs for arranging and processing travel can be significant as

well.

GAO recently reviewed a number of private-sector companies that have set

themselves apart from other organizations, both public and private, by

streamlining and automating their travel processes and adopting a

common set of best practices. These organizations achieved

improvements by consolidating travel management and processing

centers, eliminating unnecessary review layers, simplifying the travel

process, streamlining and automating the expense reporting process, and

integrating travel processing with their financial management systems. In

doing so, these organizations have saved millions of dollars in

administrative costs.

DOD has recognized the need to improve travel management and has

efforts underway to adopt industry best practices and reengineer its travel

processing to reduce costs. In anticipation of savings related to DOD’s

travel reengineering efforts and based on GAO recommendations, the

Appropriations Conference Committee reduced DOD’s operations and

maintenance (O&M) funds for fiscal year 1996 by $128.5 million.

A handful of federal agencies, such as the Departments of State, Energy,

and Transportation, have also begun to implement best practices and

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reduce costs. In addition, the Joint Financial Management Improvement

Program (JFMIP) travel improvement task force, made up of

representatives from several agencies across government, has assessed

both TDY and permanent relocation travel and estimated that hundreds of

millions of dollars could be saved by implementing a number of key

recommendations. JFMIP’s recommendations mirror many of the best

practices we found at leading organizations, including requiring the use of

a corporate charge card and consolidating and automating travel data.

CBO does not disagree that savings could be achieved if agencies were able

to streamline their travel processing operations. However, the amount of

savings would depend on each agency’s current costs and future

streamlining actions.

Related GAO Products Governmentwide Travel Management: Federal Agencies Have

Opportunities for Streamlining and Improving Their Travel Practices

(GAO/T-AIMD-96-60, March 8, 1996).

Business Process Reengineering: DOD Has a Significant Opportunity to

Reduce Travel Costs by Using Industry Practices (GAO/T-AIMD-95-101,

March 28, 1995).

GAO Contact Jack L. Brock, Jr., (202) 512-6240

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Receipts • Tax Treatment of Health Insurance Premiums

• Information Reporting on Forgiven Debts

• Administration of the Tax Deduction for Real Estate Taxes

• Corporate Tax Document Matching

• Tax Treatment of Interest Earned on Life Insurance Policies and Deferred

Annuities

• Federal Agency Reporting to the Internal Revenue Service

• Independent Contractor Tax Compliance

• Deductibility of Home Equity Loan Interest

• Internal Revenue Staff Utilization

• Collecting Gasoline Excise Taxes

• Computing Excise Tax Bases

• Industrial Development Bonds Targeting

• Highway User Fees on Heavy Trucks

• Taxation of Additives to Diesel Fuel

• Electronic Filing of Tax Returns

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Option:

Tax Treatment of

Health Insurance

Premiums

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Redefine beneficiaries

The current tax treatment of health insurance gives few incentives to

workers to economize on purchasing health insurance. Employer

contributions for employee health protection are considered deductible,

ordinary, business expenses, and employer contributions are not included

in an employee’s taxable income. Some analysts believe that the

tax-preferred status of these benefits has contributed to the overuse of

health care services and large increases in our nation’s health care costs.

In addition, the primary tax benefits accrue to those in high tax brackets

who also have above average incomes.

Placing a cap on the amount of health insurance premiums that could be

excluded—that is including in a worker’s income the amount over the

cap—could improve incentives and, to a lesser extent, tax equity.

Alternatively, including health insurance premiums in income but allowing

a tax credit for some percentage of the premium would improve equity

since tax savings per dollar of premium would be the same for all

taxpayers. Incentives could be improved for purchasing low-cost

insurance if the amounts given credits were capped.

One specific option the Congress may wish to consider would be to tax all

employer-paid health insurance, while providing a refundable tax credit of

20 percent of all premiums, with eligible premiums capped at $350 and

$170 per month for family coverage and individuals, respectively. This

option recognizes the gain from changing the treatment of insurance only

for the individual income tax, not the payroll tax. The option is effective

for payments of health insurance premiums paid after December 31, 1997.

Five-Year Revenues

Dollars in billions

FY98 FY99 FY00 FY01 FY02

Revenue gain 10.2 15.7 17.6 19.7 22.0

Note: JCT provided its revenue estimates in billions of dollars.

Source: Joint Committee on Taxation.

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Related GAO Product Tax Policy: Effects of Changing Tax Treatment of Fringe Benefits

(GAO/GGD-92-43, April 7, 1992).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Information Reporting

on Forgiven Debts

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

The Internal Revenue Code requires taxpayers to report forgiven debts as

income except under certain circumstances. GAO reviewed taxpayer

compliance in reporting the Federal Deposit Insurance Corporation’s

(FDIC) and Resolution Trust Corporation’s (RTC) forgiven debt with and

without information reporting by these corporations to IRS.

Information reporting increased taxpayer compliance. For example,

without information reporting, 1 percent of taxpayers voluntarily reported

FDIC forgiven debts. With reporting, 48 percent voluntarily reported their

forgiven debts. With the information reports, IRS was able to detect that

another 20 percent had failed to report their forgiven debts, yielding

68 percent of taxpayers eventually complying.

In 1993, the Congress required information reporting on forgiven debts by

FDIC, RTC, the National Credit Union Administration, credit unions, certain

banks, and federal agencies. In 1996, IRS began receiving these required

information returns for tax year 1995 and has been matching them to tax

returns. The Congress could consider extending the requirement to other

lending institutions. Revenues for this option are difficult to estimate due

to uncertainties about its effect on lending institution reporting practices.

However, to illustrate potential savings from this option, if the requirement

were extended to finance companies, JCT estimates revenue gains of under

$50 million, assuming an effective date of January 1, 1998.

Five-Year Revenues

Dollars in billions

FY98 FY99 FY00 FY01 FY02

Revenue gain a a a a a

Note: JCT provided its revenue estimates in billions of dollars.

aA gain of less than $50 million.

Source: Joint Committee on Taxation.

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Related GAO Product Tax Administration: Information Returns Can Improve Reporting of

Forgiven Debts (GAO/GGD-93-42, February 17, 1993).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Administration of the

Tax Deduction for

Real Estate Taxes

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

IRS audits show that individuals overstated their real estate tax deductions

by about $1.5 billion nationwide in 1988. GAO estimates that this resulted in

a nearly $300 million federal tax loss, which would increase to about

$400 million for 1992. However, this may understate lost revenues because

GAO’s review also found that IRS auditors detected only about 29 percent of

$127 million in overstated deductions in three locations GAO reviewed.

Revenues could be lost not only for the federal government, but also for

the 31 states which in 1991 tied their itemized deductions to those used for

federal tax purposes.

Two changes to the reporting of real estate cash rebates and real estate

taxes could reduce noncompliance and increase federal tax collections.

First, the Congress could require that states report to IRS, and to taxpayers

on Form 1099s, cash rebates of real estate taxes. Second, the Congress

could require that state and local governments conform real estate tax

statements to specifications issued by IRS that would separate real estate

taxes from nondeductible fees, which are often combined on these

statements. For estimation purposes, the proposals would be effective for

rebates issued after December 31, 1998, and for amounts reported on tax

bills after December 31, 1999. Together, the proposals would increase

federal fiscal year revenues as shown in the table below.

Five-Year Revenues

Dollars in billions

FY98 FY99 FY00 FY01 FY02

Revenue gain 0 a 0.1 0.2 0.2

Note: JCT provided its revenue estimates in billions of dollars.

aA gain of less than $50 million.

Source: Joint Committee on Taxation.

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Related GAO Product Tax Administration: Overstated Real Estate Tax Deductions Need To Be

Reduced (GAO/GGD-93-43, January 19, 1993).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Corporate Tax

Document Matching

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

Internal Revenue Service (IRS) data show that corporate compliance with

tax laws has declined to an alarming degree. IRS’ document matching

program for payments to individuals has proven to be a highly

cost-effective way of bringing in billions of dollars in tax revenues to the

Treasury while at the same time boosting voluntary compliance. However,

unlike payments to individuals, the law does not require that information

returns be submitted on most payments to corporations.

Generally using IRS’ assumptions, GAO estimated the benefits and costs for

a corporate document matching program that would cover interest,

dividends, rents, royalties, and capital gains. Assuming that a corporate

document matching program began in 1993, GAO estimated that for years

1995 through 1999, IRS’ annual costs would be about $70 million and annual

increased revenues about $1 billion. This estimate did not factor in

compliance costs and changes in taxpayer behavior. Given continuing

deficits, increased corporate noncompliance, and declining audit

coverage, the Congress may wish to require a corporate document

matching program.

JCT has not developed an estimate of revenue gains from this proposal. JCT

agrees that this option will result in increased revenues, but those

revenues will depend heavily on the scope of coverage under an expanded

information reporting system.

Related GAO Product Tax Administration: Benefits of a Corporate Document Matching Program

Exceed the Costs (GAO/GGD-91-118, September 27, 1991).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Tax Treatment of

Interest Earned on

Life Insurance

Policies and Deferred

Annuities

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Reassess objectives

Interest earned on life insurance policies and deferred annuities, known as

“inside buildup,” is not taxed as long as it accumulates within the contract.

Although the deferred taxation of inside buildup is similar to the tax

treatment of income from some other investments, such as capital gains, it

differs from the policy of taxing interest as it accrues on certain other

investments like certificates of deposit and original issue discount bonds.

Not taxing inside buildup may have merit if it increases the amount of

insurance coverage purchased and the amount of income available to

retirees and beneficiaries. However, the tax preference given life

insurance and annuities mainly benefits middle- and upper-income people.

Coverage for low-income people is largely provided through the Social

Security System, which provides both insurance and annuity protection.

The Congress may want to reconsider granting preferential tax treatment

to inside buildup, weighing the social benefits against the foregone

revenue. The Congress may wish to consider taxing the interest earned on

life insurance policies and deferred annuities. The table below reflects the

estimated savings from this option, effective for life insurance policies and

annuities purchased after December 31, 1997.

Five-Year Revenues

Dollars in billions

FY98 FY99 FY00 FY01 FY02

Revenue gain 7.8 19.1 21.5 23.7 25.9

Note: JCT provided its revenue estimates in billions of dollars.

Source: Joint Committee on Taxation.

Related GAO Product Tax Policy: Tax Treatment of Life Insurance and Annuity Accrued Interest

(GAO/GGD-90-31, January 29, 1990).

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GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Federal Agency

Reporting to the

Internal Revenue

Service

Authorizing committees Governmental Affairs (Senate) 

Finance (Senate) 

Government Reform and Oversight

(House) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

According to Internal Revenue Service (IRS) data, corporate tax

compliance decreased by 20 percentage points between 1980 and 1987.

Information returns—reports provided to IRS by payers of interest,

dividends, or other tax-related information—have proven to be highly

cost-effective in generating billions of tax dollars from individual

taxpayers. However, no such program exists for payments to corporations.

IRS matches information return data to individuals’ tax returns, which

induces individuals to voluntarily report income and helps to identify

those who do not. Similar results might be obtained from corporations.

Federal agencies could help increase corporate tax compliance by

reporting their payments made to corporations for services. Federal

agencies paid corporations about $61 billion for service contracts of more

than $25,000 in 1990.

JCT has not developed an estimate of the revenue gains for this proposal.

JCT does not disagree that improved reporting could increase compliance.

Related GAO Product Tax Administration: Federal Agencies Should Report Service Payments

Made to Corporations (GAO/GGD-92-130, September 22, 1992).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Independent

Contractor Tax

Compliance

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

Common law rules for classifying workers as employees or independent

contractors are unclear and subject to conflicting interpretations. While

recognizing this ambiguity, the Internal Revenue Service (IRS) enforces tax

laws and rules through employment tax examinations. Since 1989,

90 percent of these examinations had found misclassified workers. From

October 1987 through December 1991, the average IRS tax assessment

relating to misclassified workers was $68,000.

Establishing clear rules is difficult. Nevertheless, taxpayers need—and

government is obligated to provide—clear rules for classifying workers if

businesses are to voluntarily comply. In addition, improved tax

compliance could be gained by requiring businesses to (1) withhold taxes

from payments to independent contractors and/or (2) file information

returns with IRS on payments made to independent contractors constituted

as corporations. Both approaches have proven to be effective in promoting

individual tax compliance.

During 1993, the Congress considered but rejected extending current

information reporting requirements for unincorporated independent

contractors to incorporated ones. Thus, independent contractors

organized as either sole proprietors or corporations would have been on

equal footing, and IRS would have had a less intrusive means of ensuring

their tax compliance.

In recent years, various proposals on clarifying the definition of

independent contractors and improving related information reporting

emerged. Congressional hearings dealt with some of these bills. As of

January 1997, the Congress had not acted on any of them.

JCT did not provide an estimate for this option. Estimating the revenue

gains from this option is difficult. A previous estimate by the JCT showed

that the proposal increased revenues by about $400 million over 5 years. In

contrast, the Department of Treasury’s Office of Tax Analysis estimated a

5-year gain of about $5 billion. Estimates can vary widely depending on the

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definition of independent contractor, the scope of coverage under an

expanded information reporting or withholding system, and assumptions

about how much more unreported income could be captured.

Related GAO Product Tax Administration:for Improving Independent Contractor Compliance

(GAO/GGD-92-108, July 23, 1992).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Deductibility of Home

Equity Loan Interest

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of the Treasury

Spending type Direct

Framework theme Reassess objectives

The term home equity borrowing or financing is usually applied to

mortgages other than the original loan used to acquire a home or to any

subsequent refinancing of that loan. Interest is deductible on up to

$100,000 of home equity indebtedness and $1 million of indebtedness used

to acquire a home. Home equity financing grew at an average annual rate

of about 20 percent between 1981 and 1991. Home equity financing is not

limited to home-related uses and can be used to finance additional

consumption by borrowers.

Use of mortgage-related debt to finance nonhousing assets and

consumption purchases through home equity loans could expose

borrowers to increased risk of losing their homes should they default.

Equity concerns may exist because middle- and upper-income taxpayers

who itemize primarily take advantage of this tax preference, and such an

option is not available to people who rent their housing.

One way to address the issues concerning the amounts or uses of home

equity financing would be to limit mortgage interest deductibility to the

first $300,000 of indebtedness for the taxpayer’s principal and second

residence. Assuming an effective date of January 1, 1999, this option would

generate the following revenues.

Five-Year Revenues

Dollars in billions

FY98 FY99 FY00 FY01 FY02

Revenue gain 0 1.9 2.7 2.9 3.1

Note: JCT provided its revenue estimates in billions of dollars.

Source: Joint Committee on Taxation.

Related GAO Product Tax Policy: Many Factors Contributed to the Growth in Home Equity

Financing in the 1980s (GAO/GGD-93-63, March 25, 1993).

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GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Internal Revenue

Service Staff

Utilization

Authorizing committees Appropriations (Senate and House) 

Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

The allocation of IRS’ collection staff has not been based on the relative

productivity of its collection programs. Some of the more productive

programs, such as IRS automatic call sites, have not reached their full

potential because staff are assigned to less productive field collection

activities. The productivity of collection staff also varies greatly among

collection locations.

More emphasis on contacting delinquent taxpayers early using telephone

collection techniques and allocating staff based on productivity should

increase collections. A rough GAO estimate indicated that the reassignment

of about 1,000 staff from field collections—the least productive use of

staff—to telephone collections could increase collections by about

$1.2 billion per year.

IRS’ fiscal year 1997 budget included a decrease of 1,341 full-time

equivalent positions in tax enforcement job categories, such as field

revenue officers and revenue agents, that engage in face-to-face audit and

collection activities. IRS’ budget stated that although “these positions still

comprise the lion’s share of IRS enforcement efforts, they also represent,

on the margin, the least efficient use of IRS resources.”

On the other hand, because of other budget decisions, IRS targeted its

telephone collection activity for a significant staff reduction in fiscal year

1997. IRS officials subsequently decided that the impact of this staff

reduction would be too severe. As a result, they negotiated with the

National Treasury Employees Union to allow for the temporary transfer of

about 300 revenue officers and other compliance staff to telephone

collections for at least 1 year.

Although CBO does not disagree that better utilization of IRS staff can

increase revenues, it does not make budget estimates of such increases.

This is because it is difficult to establish a clear connection between

changes in staff allocations and revenue gains. In addition, even if such a

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connection can be established, the magnitude of such gains attributable to

reallocation is not certain enough for budget scorekeeping purposes.

Related GAO Products Tax Administration: New Delinquent Tax Collection Methods of IRS

(GAO/GGD-93-67, May 11, 1993).

Tax Administration: Improved Staffing of IRS’ Collection Function Would

Increase Productivity (GAO/GGD-93-97, May 5, 1993).

Internal Revenue Service Receivables (GAO/HR-93-13, December 1992).

Tax Administration: IRS’ System Used in Prioritizing Taxpayer

Delinquencies Can Be Improved (GAO/GGD-92-6, March 26, 1992).

Tax Administration: Efforts To Prevent, Identify, and Collect Employment

Tax Delinquencies (GAO/GGD-91-94, August 28, 1991).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Collecting Gasoline

Excise Taxes

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

Although reliable statistical data do not exist to estimate gasoline excise

tax evasion, the Department of Transportation estimated in a report to the

Congress that such evasion amounted to about $500 million annually.

From a tax administration perspective, moving the collection point for

gasoline excise taxes from the terminal to the refinery level may reduce

tax evasion because (1) gasoline would change hands fewer times before

taxation, (2) refiners are presumed to be more financially sound and have

better records than other parties in the distribution system, and (3) fewer

taxpayers would be involved. However, industry representatives raise

competitiveness and cost-efficiency questions associated with moving the

collection point.

In a May 1992 report, GAO suggested that the Congress explore the level of

gasoline excise tax evasion and, if it was found to be sufficiently high,

move tax collection to the point at which gasoline leaves the refinery. The

amount of revenue that would be generated from moving the collection

point for gasoline excise taxes would depend on the accuracy of the

$500 million estimate of evasion and how well the move curbed such

evasion.

JCT agrees that this option has the potential for increased revenue but has

not developed estimates of revenue gains.

Related GAO Product Tax Administration:of Efforts to Curb Motor Fuel Tax Evasion

(GAO/GGD-92-67, May 12, 1992).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Computing Excise

Tax Bases

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

Federal excise taxes are sometimes set at a fixed dollar amount per unit of

taxed good. For example, alcoholic beverages are taxed at a set rate per

gallon or barrel, with the rate varying for different types of beverages and

differing concentrations of alcohol. When set in this manner, the real

dollar value of the tax falls with inflation.

The real dollar value of these taxes can be maintained over time if the tax

is indexed for inflation or set as a percentage of the price of the taxed

product or service. Tax policy issues would need to be considered, and

administrative difficulties may be encountered, but they are not

insurmountable. Of the five excise taxes GAO studied in 1989, alcohol and

tobacco taxes yielded over 99 percent of the increased revenue that

indexing would have generated. The Congress may wish to consider

indexing excise tax rates for alcohol and tobacco. The table below reflects

the estimated savings from this option with an effective date of January 1,

1998.

Five-Year Revenues

Dollars in billions

FY98 FY99 FY00 FY01 FY02

Revenue gain 0.2 0.5 0.7 1.1 1.3

Note: JCT provided its revenue estimates in billions of dollars.

Source: Joint Committee on Taxation.

Related GAO Products Alcohol Excise Taxes: Simplifying Rates Can Enhance Economic and

Administrative Efficiency (GAO/GGD-90-123, September 27, 1990).

Tax Policy: Revenue Potential of Restoring Excise Taxes to Past Levels

(GAO/GGD-89-52, May 9, 1989).

GAO Contact Lynda D. Willis, (202) 512-9110

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Option:

Industrial

Development Bonds

Targeting

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Department of the Treasury

Spending type Direct

Framework theme Reassess objectives

The interest earned on certain bonds used by private entities is tax-exempt

because the activities financed are considered to produce public benefits.

The “private activity bonds” are issued by state and local governmental

authorities who provide the proceeds to private entities to finance, among

other things, the creation or expansion of manufacturing facilities. Such

private activity bonds are commonly referred to as Industrial Development

Bonds (IDBs).

Critics of IDBs argue that the benefits from private activity caps are

ill-defined. While IDBs clearly provide benefits to the private companies

and to investors, there is no clear consensus on whether the bonds achieve

public benefits. Proponents of the bonds argue that IDBs can indeed

achieve public benefits, such as creating jobs, assisting economically

distressed areas, fostering start-up companies, and keeping manufacturing

firms in the country. However, IDBs do not appear to be targeted to states

with large concentrations of communities in fiscal distress and possibly

greatest need for bond market intervention. The Tax Reform Act of 1986

imposed a limit (volume cap) that restricts the amount of bonds a state

may issue to the greater of $50 per state resident or $150 million.

This option illustrates three ways in which the Congress could choose to

reduce the tax losses associated with IDBs. If reductions in the cap were

targeted, states with highest concentrations of fiscal stress could be

spared the cuts while the deepest cuts were applied to states with the

lowest concentration of communities in fiscal stress. For example, this

approach would cut 25 percent from the cap in a state with a majority of

communities in fiscal stress and 75 percent from the cap in states with low

concentrations of communities in fiscal stress. This approach would

reduce the caps by 23 percent for net revenue gains of $800 million over 5

years.

Another approach would simply be to reduce the cap proportionally

across all states. The 1995 cap was allocated to all states in such a way as

to ensure a minimum of $150 million. Many states received more than

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$150 million, however no states received less than this amount. If the

minimum allocation were reduced by $50 million and proportionally

reduced in all states that received more than $150 million, the total cap

would be reduced by 48 percent.

Still another approach would be to both reduce the cap proportionally

across all states and to target additional cuts to states with low

concentrations of communities in fiscal stress. Such an approach would

yield a 56 percent reduction in the caps.

JCT estimates that the first option, targeting reductions in the cap for bonds

issued after December 31, 1997, would result in the following revenue

gain.

Five-Year Revenues

FY98 FY99 FY00 FY01 FY02

Revenue gain a 0.1 0.2 0.2 0.3

Note: JCT provided its revenue estimates in billions of dollars.

aA gain of less than $50 million.

Source: Joint Committee on Taxation.

Related GAO Product Industrial Development Bonds: Achievement of Public Benefits Is Unclear

(GAO/RCED-93-106, April 22, 1993).

GAO Contacts Paul L. Posner, (202) 512-9573

Judy A. England-Joseph, (202) 512-7631

Page 353 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

Option:

Highway User Fees on

Heavy Trucks

Authorizing committees Commerce, Science, and Transportation

(Senate) 

Transportation and Infrastructure (House)

Primary agency Department of Transportation

Spending type Direct

Framework theme Redefine beneficiaries

To develop and maintain highways, the Federal Highway Administration

(FHWA) collects user fees. In fiscal year 1993, FHWA collected over

$18.5 billion from four user fees: fuel taxes, a heavy vehicle use tax, a new

vehicle excise tax, and an excise tax on heavy tires. In 1982, FHWA reported

that heavy trucks underpaid by about 50 percent their fair share relative to

the pavement damage that they caused. FHWA also reported that lighter

trucks were overpaying by between 30 and 70 percent (depending on

weight), and automobiles were overpaying by 10 percent.

To increase highway revenues and to respond to the FHWA study, the

Congress in 1982 passed the first major increase in federal highway use

taxes since 1956. To increase revenues, the Congress raised gasoline and

diesel taxes from 4 cents to 9 cents per gallon. To improve equity, the

Congress mandated that the ceiling for the heavy vehicle use tax be

increased from $240 a year to $1,900 a year by 1989. In response to the

concerns of the trucking industry about the new tax structure, the

Congress again revised the system in the Deficit Reduction Act of 1984.

Under the act, the ceiling for the heavy vehicle use tax was lowered from

$1,900 to $550 a year. To ensure that this action was revenue neutral, the

Congress raised the tax on diesel fuel from 9 cents to 15 cents per gallon.

As we recommended in June 1994, FHWA is conducting a formal cost

allocation study to determine whether all highway users are paying their

fair share of federal highway costs. FHWA plans to complete this study by

early 1997. If this study finds that heavy trucks underpay their share, one

solution could be to base the truck’s fees on vehicle weight and distance

traveled—a method currently employed by six states. The precise revenue

gain from this action would depend on the type and amount of user fee

increases. Increasing fuel taxes, the heavy vehicle use tax, the new vehicle

excise tax, and the excise tax on heavy tires would generate additional

revenues. For example, in fiscal year 1994, heavy truck operators paid

about $620 million in heavy vehicle use taxes. Raising the ceiling on this

Page 354 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

fee from $550 to $1,900 per user could raise between $800 million and

$1 billion.

JCT does not disagree that this option could yield revenue. However, an

estimate of revenue gains is not available at this time.

Related GAO Product Highway User Fees: Updated Data Needed To Determine Whether All

Users Pay Their Fair Share (GAO/RCED-94-181, June 7, 1994).

GAO Contact John H. Anderson, Jr., (202) 512-2834

Page 355 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

Option:

Taxation of Additives

to Diesel Fuel

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

The federal government generally imposes an excise tax of 24.4 cents per

gallon on diesel fuel that is used on highways. Diesel fuel for off-highway

use, such as home heating, is not taxed. In addition, certain entities, such

as state and local governments, are exempt from paying tax on diesel fuel

they use on highways. This excise tax is collected at the fuel terminal and

any diesel fuel removed from a terminal for tax-free use must be dyed.

Diesel fuel additives, primarily kerosene, may be added to tax-paid diesel

fuel after it leaves the terminal where taxes are collected. Fuel excise

taxes are intended to be collected on each gallon of fuel used on the

highway, including any additives, so that the tax revenues can be used to

maintain and improve the highway system. Under current federal excise

tax regulations, kerosene is not treated as a diesel fuel and is generally

neither taxed nor dyed when removed from the terminal. However,

undyed tax-free kerosene can be used in blending schemes that could

result in excise tax evasion. For example, a dishonest retailer could take

two gallons of tax-paid diesel fuel and mix it with one gallon of undyed

kerosene on which no tax has been paid. The retailer now has three

gallons of “cocktailed” diesel fuel, but has only paid tax on two gallons of

the product.

In January 1996, GAO reported that under current IRS regulations, kerosene

is not treated as a diesel fuel and is generally neither taxed nor dyed when

removed from the terminal, although it may ultimately be used as a

highway fuel. Other uses of kerosene, such as for home heating,

complicate its taxation. Nevertheless, in July 1995, the Treasury

Department expressed support for subjecting kerosene to the same dyeing

requirements as those applied to diesel fuel. The Congress may wish to

consider dyeing nontaxed kerosene in order to improve and increase

collection of fuel excise taxes. The table below reflects the estimated

revenues from this option with an effective date of July 1, 1998.

Page 356 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

Five-Year Revenues

Dollars in billions

FY98 FY99 FY00 FY01 FY02

Revenue gain a a a a a

Note: JCT provided its revenue estimates in billions of dollars.

aA gain of less than $50 million.

Source: Joint Committee on Taxation.

Related GAO Products Tax Administration:Fuel Excise Tax Change (GAO/GGD-96-53, January 16, 1996).

Tax Administration: Status of Efforts to Curb Motor Fuel Tax Evasion

(GAO/GGD-92-67, May 12, 1992).

GAO Contact Lynda D. Willis, (202) 512-9110

Page 357 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

Option:

Electronic Filing of

Tax Returns

Authorizing committees Finance (Senate) 

Ways and Means (House)

Primary agency Internal Revenue Service

Spending type Direct

Framework theme Improve efficiency

Electronic filing sends data directly on-line to Internal Revenue Service

(IRS) computers, thereby eliminating manual handling of paper, disks,

computer tapes, and cartridges, which significantly reduces processing

time and cost. For example, electronically filed information returns can be

fully processed and entered into IRS’ computers within 2 days compared

with an average of 58 days for magnetic media shipments. Math errors on

electronic returns are identified by the system and corrected by the

taxpayer before IRS accepts the return. Electronic returns also avoid the

error-prone manual data entry system IRS uses to process paper returns.

Fewer errors mean fewer notices to taxpayers and less time spent with the

resulting telephone calls and correspondence.

Electronic filing can enhance IRS’ compliance efforts. However, of the

777 million nonwage information returns IRS processed in 1994, only

12.6 million (1.6 percent) were filed electronically. Of the 118 million

individual income tax returns filed in 1996, only 15 million (12.7 percent)

were filed electronically. Electronic filing of information returns would

enable IRS to match more of these documents sooner to tax returns. For

example, matching information returns on partnership income (Schedule

K-1) to individual tax returns has been a cost-effective means of detecting

and assessing taxes on unreported partnership income. But few Schedule

K-1s have been matched. For tax year 1991, GAO estimated that had IRS

been able to match all Schedule K-1s, it could have assessed about

$220 million in additional taxes. Similarly, with electronic returns, IRS can

more effectively and efficiently validate social security numbers—a key

control against refund fraud—because up-front filters prevent the

submission of electronic returns with invalid social security numbers. IRS

cannot identify invalid social security numbers on paper returns until after

the returns are filed, and the number of problem cases it can work is

limited by the amount of available staff.

Not only is the number of electronic returns relatively low, but the returns

being filed electronically are generally those that contribute least to

paper-processing workload and operating costs. For example, on the basis

Page 358 GAO/OCG-97-2 Addressing the Deficit
Appendix III 

Options for Deficit Reduction

of IRS’ 1993 service center processing cost estimates, it cost IRS $4.53 to

process a paper Form 1040, $3.95 to process a paper Form 1040A, and

$3.36 to process a paper Form 1040EZ. The most costly of the three (Form

1040) accounted for about 59 percent of all individual returns (paper and

electronic) processed in 1994, yet Form 1040 accounted for only about

20 percent of the individual returns filed electronically.

To reduce processing costs and increase compliance revenues, IRS needs

to develop and implement a strategy for significantly increasing the

number of returns filed electronically. We have recommended that IRS

identify those groups of taxpayers who offer the greatest opportunity to

reduce IRS’ paper-processing workload and operating costs if they were to

file electronically and develop strategies that focus IRS’ resources on

eliminating or alleviating impediments that inhibit those groups from

participating in the program, including the impediment posed by the

program’s cost. No cost savings or revenue enhancement estimates can be

made until IRS develops these strategies.

Related GAO Products Tax Administration:Filing Falling Short of Expectations (GAO/GGD-96-12, 

Oct. 31, 1995).

Tax Administration: IRS’ Partnership Compliance Activities Could Be

Improved (GAO/GGD-95-151, June 16, 1995).

GAO Contact Lynda D. Willis, (202) 512-9110

Page 359 GAO/OCG-97-2 Addressing the Deficit
Appendix IV 

Options Not Updated for This Report

The following table provides information on options from last year’s

report31 that were not updated due to congressional or agency action or

other factors.

Option Comments

Improved Material Management Can Reduce Shipyard Costs See new option on Navy financial management of operating

materials and supplies.

Reduce Army’s Unfilled War Reserve Requirements by Using Other

Inventory Items

See new option on defense inventories reform locations.

MK-48 Advanced Capability Torpedo Propulsion System Since the time this option was included in last year’s report, the

Navy has purchased the MK-48 propulsion improvements.

Reassess Defense Conversion Spending The Congress terminated funding for the centerpiece of the

defense conversion initiative—the Technology Reinvestment

Project.

Improve Controls Over Payments to Defense Contractors In our 1997 high-risk series,a we pointed out that DOD has

recognized problem disbursements as a major area of concern

and is working hard to reduce them. However, we also noted that

our preliminary work on DOD’s reporting on problem

disbursement data indicates that reported amounts are

substantially understated and raises concerns over whether DOD

has sufficient, reliable information to determine the extent to which

disbursement problems have been reduced. We have several

ongoing reviews directed at identifying opportunities for additional

corrective actions.

Negotiate More Realistic Environmental Agreements The Department of Energy’s Environmental Management Program

is in the process of developing a new 10-year plan that will

represent a more national approach to the cleanup and should

result in more realistic cleanup agreements.

U.S. Contribution to the International Fund for Agricultural

Development

The United States has committed to pay $30 million to the Fund in

six installments, beginning in 1997, and may make additional

contributions on a voluntary basis. However, the United States has

decided that it will not participate in any future Fund

replenishments.

Shortwave Radio Modernization Program The Voice of America (part of the U.S. Information Agency) has

either completed or scaled back all projects in the modernization

plan. The only new construction currently planned is for a facility

on Tinian Island to support Radio Free Asia.

Privatize Uranium Enrichment Program As a result of recent amendments to the Energy Policy Act of

1992, CBO assumes that the United States Enrichment

Corporation will be privatized in fiscal year 1998. We continue to

recommend that the Secretary of the Treasury consider ways to

ensure that the government is protected from an undervalued sale

when the Corporation is sold.

(continued)

31Addressing the Deficit: Budgetary Implications of Selected GAO Work for Fiscal Year 1996

(GAO/OCG-96-5, June 28, 1996).

Page 360 GAO/OCG-97-2 Addressing the Deficit
Appendix IV 

Options Not Updated for This Report

Option Comments

Privatize the Naval Petroleum Reserve-1 The Defense Authorization Act (Public Law 104-106) established a

schedule for selling the reserve by February 1998, unless DOE

and OMB determine that selling the reserve is not in the interest of

the United States or the proceeds are unlikely to reflect the

reserve’s fair market value. CBO’s baseline assumes the reserve

will be sold in fiscal year 1998.

Consolidate Strategic Petroleum Reserve In fiscal year 1996, the Congress required DOE to sell enough oil

from the strategic petroleum reserve to pay for the cost of

operating the reserve. CBO assumes that this funding mechanism

will continue to be used. As a result, mothballing a storage site

would reduce the reserve’s operating costs but would also

alleviate the need to sell a requisite amount of oil. Therefore,

mothballing would conserve the reserve’s oil but would not

contribute to deficit reduction.

National Oceanic and Atmospheric Research Fleet Modernization Based on a series of reports on the National Oceanic and

Atmospheric Administration’s (NOAA) fleet modernization,

including prior GAO reports, the Inspector General of the

Commerce Department issued a March 1996 report

recommending that the entire NOAA fleet be eliminated.

Consolidation of U.S. Department of Agriculture Food Assistance

Programs

The Personal Responsibility and Work Opportunity Reconciliation

Act of 1996 consolidates two food assistance programs—the

Emergency Food Assistance Program and Soup Kitchens/Food

Banks. Consolidating these programs should give states greater

flexibility to more effectively target resources to alleviate hunger

and help streamline federal, state, and local administration of

USDA’s distribution of these commodities.

Social Security Continuing Disability Reviews (CDRs) The Contract with America Advancement Act of 1996 increased

authorized funding for CDRs to almost $3 billion by 2002. With this

and other funding earmarked from its administrative budget, SSA

plans to eliminate the backlog of CDRs for disabled workers

under age 59. While we believe that the program could be

administered more cost effectively and that SSA’s plan excludes

some beneficiaries in the backlog, this option was not included

because the potential for additional budget deficit reduction is not

significant.

Justice’s Use of Private Counsel to Collect Civil Debt The Omnibus Consolidated Rescissions and Appropriations Act of

1996 gives the Attorney General permanent authority to hire

private debt contractors to collect a nontax debt or claim owed to

the United States. The Department of Justice currently has

contracts in 13 judicial districts.

Global Positioning System (GPS) Technology In our report on global positioning systems (GPS), we

recommended that the Office of Management and Budget

develop a stronger coordination mechanism for managing future

federal GPS activities. Consistent with our recommendation, in

March 1996, a Presidential Decision Directive established DOT as

the lead agency for all federal civil GPS matters.

(continued)

Page 361 GAO/OCG-97-2 Addressing the Deficit
Appendix IV 

Options Not Updated for This Report

Option Comments

Federal Agency Credit Management Programs The Debt Collection Improvement Act of 1996 provided agencies

with several new debt collection tools. Treasury is developing

plans for, and beginning to implement, the requirements of the act.

Improving Compliance of Sole Proprietors The Internal Revenue Service has created a tracking system to

manage its sole proprietor compliance projects and has been

using its Taxpayer Compliance Management Program data to

help identify projects that would address the most noncompliant

sole proprietors. The agency has also reached an agreement with

the trucking industry that should improve the industry’s tax

recordkeeping.

aSee the high-risk series reports Defense Financial Management (GAO/HR-97-3,

February 1997) and Defense Contract Management (GAO/HR-97-4, February 1997).

Page 362 GAO/OCG-97-2 Addressing the Deficit
Appendix V 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

Thomas M. James, Assistant Director

Claudia J. Dickey, Senior Evaluator

Laura E. Hamilton, Senior Evaluator

Bill J. Keller, Senior Evaluator

(935213) Page 363 GAO/OCG-97-2 Addressing the Deficit
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