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Congress established FHA in 1934 under the National Housing Act (P.L. 73- 479) to broaden homeownership, protect and sustain lending institutions, and stimulate employment in the building industry. FHA’s single-family programs insure private lenders against losses from borrower defaults on mortgages that meet FHA’s criteria for properties with one to four housing units. FHA historically has played a particularly large role among minority, lower-income, and first-time homebuyers. In 2006, 79 percent of FHA- insured home purchase loans went to first-time homebuyers, 31 percent of whom were minorities. In recent years, FHA’s volume of business has fallen sharply. More specifically, the number of single-family loans that FHA insured fell from about 1.3 million in 2002 to 426,000 in 2006. To help FHA adapt to recent trends in the mortgage market, in 2006 HUD submitted a legislative proposal to Congress that included changes that would adjust loan limits for the single-family mortgage insurance program, eliminate the requirement for a minimum down payment, and provide greater flexibility to FHA to set insurance premiums based on risk factors. According to HUD, a zero-down-payment mortgage product would provide FHA with a better way to serve families in need of down-payment assistance. As previously noted, some nonprofits that provide down-payment assistance receive contributions from property sellers. When a homebuyer receives down-payment assistance from one of these organizations, the organization requires the property seller to make a financial payment to their organization. These nonprofits are commonly called “seller-funded” down-payment assistance providers. A 1998 memorandum from HUD’s Office of the General Counsel found that funds from a seller-funded nonprofit were not in conflict with FHA’s guidelines prohibiting down- payment assistance from sellers. FHA does not approve down-payment assistance programs administered by nonprofits. Instead, lenders are responsible for assuring that down-payment assistance from a nonprofit meets FHA requirements. Loans with down-payment assistance have come to constitute a substantial portion of FHA’s portfolio in recent years, particularly as the number of loans without such assistance has fallen sharply. For example, from 2000 to 2004, the total proportion of FHA-insured single-family purchase loans that had a loan-to-value (LTV) ratio greater than 95 percent and that also involved down-payment assistance from any source grew from 35 to nearly 50 percent. Assistance from nonprofit organizations, about 93 percent of which were funded by sellers, accounted for an increasing proportion of this assistance. Approximately 6 percent of FHA- insured loans received down-payment assistance from nonprofit organizations in 2000, but, by 2004 this figure had grown to about 30 percent. FHA data for 2005 and 2006 indicate that the percentages of loans with down-payment assistance from any source and from seller-funded nonprofits remained at roughly 2004 levels. Growth in the number of seller-funded nonprofit providers and the greater acceptance of this type of assistance have contributed to the increase in the use of down-payment assistance. According to industry professionals, relatives have traditionally provided such assistance, but in the past decade or so other sources have emerged, including not only seller-funded nonprofit organizations but also government agencies and employers. The mortgage industry has responded by developing practices to administer this type of assistance, for instance, FHA policies require gift letters and documentation of the transfer of funds. Lenders also reported that seller- funded down-payment assistance providers have developed practices accepted by FHA and lenders. For example, seller-funded programs have standardized gift letter and contract addendum forms for documenting both the transfer of down-payment assistance funds to the homebuyer and the financial contribution from the property seller to the nonprofit organization. As a result, for FHA-insured loans, lenders are increasingly aware of and willing to accept down-payment assistance, including from seller-funded nonprofits. We found that states that have higher-than-average percentages of FHA- insured loans with nonprofit down-payment assistance, primarily from seller-funded programs, tended to be states with lower-than-average house price appreciation rates. From May 2004 to April 2005, 35 percent of all FHA-insured purchase loans nationwide involved down-payment assistance from a nonprofit organization, and 15 states had percentages that were higher than this nationwide average. Fourteen of these 15 states also had house price appreciation rates that were below the median rate for all states. In addition, the eight states with the lowest house price appreciation rates in the nation all had higher-than-average percentages of nonprofit down-payment assistance. Generally, states with high proportions of FHA-insured loans with nonprofit down-payment assistance were concentrated in the Southwest, Southeast, and Midwest. The presence of down-payment assistance from seller-funded nonprofits can alter the structure of purchase transactions. When buyers receive assistance from sources other than seller-funded nonprofits, the home purchase takes place like any other purchase transaction—buyers use the funds to pay part of the house price, the closing costs, or both, reducing the mortgage by the amount they pay and creating “instant equity.” However, seller-funded down-payment assistance programs typically require property sellers to make a financial contribution and pay a service fee after the closing, creating an indirect funding stream from property sellers to homebuyers that does not exist in a typical transaction (see fig. 1). Our analysis indicated, and mortgage industry participants we spoke with reported, that property sellers often raised the sales price of their properties in order to recover the contribution to the seller-funded nonprofit that provided the down-payment assistance. Marketing materials from seller-funded nonprofits often emphasize that property sellers using these down-payment assistance programs earn a higher net profit than property sellers who do not. These materials show sellers receiving a higher sales price that more than compensates for the fee typically paid to the down-payment assistance provider. Several mortgage industry participants we interviewed noted that when homebuyers obtained down- payment assistance from seller-funded nonprofits, property sellers increased their sales prices to recover their payments to the nonprofits providing the assistance. An earlier study by a HUD contractor corroborates the existence of this practice. Some mortgage industry participants we met with told us that they viewed down-payment assistance from seller-funded nonprofits as a seller inducement. However, FHA has not viewed such assistance as a seller inducement and therefore does not subject this assistance to the limits that it otherwise places on contributions from sellers. Some mortgage industry participants told us that homes purchased with down-payment assistance from seller-funded nonprofits might be appraised for higher values than they would be without this assistance. Appraisers we spoke with said that lenders, realtors, and sellers sometimes pressured them to “bring in the value” in order to complete the sale. The HUD contractor study corroborates the existence of these pressures. Our analysis of a national sample of FHA-insured loans endorsed in 2000, 2001, and 2002 suggested that homes with seller-funded assistance were appraised and sold for about 3 percent more than comparable homes without such assistance. Additionally, our analysis of more recent loans—a sample of FHA-insured loans settled in March 2005—indicated that homes sold with nonprofit assistance were appraised and sold for about 2 percentage points more than comparable homes without nonprofit assistance. We found that FHA-insured loans with down-payment assistance do not perform as well as loans without it. As part of our evaluation, we analyzed loan performance by source of down-payment assistance, controlling for the maximum age of the loan, as of June 30, 2005. We used two samples of FHA-insured purchase loans from 2000, 2001, and 2002—a national sample and a sample from three MSAs with high rates of down-payment assistance. We grouped the loans into the following three categories: loans with assistance from seller-funded nonprofit organizations, loans with assistance from nonseller-funded sources, and loans without assistance. As shown in figure 2, in both samples and in each year, loans with down- payment assistance from seller-funded nonprofit organizations had the highest rates of delinquency and insurance claims, and loans without assistance the lowest. Specifically, between 22 and 28 percent of loans with seller-funded assistance had experienced a 90-day delinquency, compared with 11 to 16 percent of loans with assistance from other sources and 8 to 12 percent of loans without assistance. The claim rates for loans with seller-funded assistance ranged from 6 to 18 percent, for loans with other sources of assistance from 5 to 10 percent, and for loans without assistance from 3 to 6 percent. In addition, we analyzed loan performance by source of down-payment assistance holding other variables constant. Here we found that FHA- insured loans with down-payment assistance had higher delinquency and claim rates than similar loans without such assistance (see fig. 3). The results from the national sample indicated that assistance from a seller- funded nonprofit raised the probability that the loan had gone to claim by 76 percent relative to similar loans with no assistance. Differences in the MSA sample were even larger; the probability that loans with seller-funded nonprofit assistance would go to claim was 166 percent higher than it was for comparable loans without assistance. Similarly, results from the national sample showed that down-payment assistance from a seller- funded nonprofit raised the probability of delinquency by 93 percent compared with the probability of delinquency in comparable loans without assistance. For the MSA sample, this figure was 110 percent. The weaker performance of loans with seller-funded down-payment assistance may be explained, in part, by the higher sales prices of homes bought with this assistance and the homebuyer having less equity in the transaction. The higher sales price that often results from a transaction involving seller-funded down-payment assistance can have the perverse effect of denying buyers any equity in their properties and creating higher effective LTV ratios. FHA has requirements which have the effect of ensuring that FHA homebuyers obtain a certain amount of “instant equity” at closing, but seller-funded down-payment assistance effectively undercuts these requirements. That is, when the sales price represents the fair market value of the house, and the homebuyer contributes 3 percent of the sales price at the closing, the LTV ratio is less than 100 percent. But when a seller raises the sales price of a property to accommodate a contribution to a nonprofit that provides down-payment assistance to the buyer, the buyer’s mortgage may represent 100 percent or more of the property’s true market value. Our prior analysis has found that, controlling for other factors, high LTV ratios lead to increased claims. The adverse performance of loans with seller-funded down-payment assistance has had negative consequences for FHA. FHA has estimated that its single-family mortgage insurance program would require a subsidy—that is, appropriations—in 2008 in the absence of program changes. According to FHA, the growing share of FHA-insured purchase loans with seller-funded assistance has contributed to FHA’s worsening financial performance. Our 2005 report made recommendations designed to better manage the risks of loans with down-payment assistance generally and from seller- funded nonprofits specifically. We recommended that FHA consider risk mitigation techniques such as including down-payment assistance as a factor when underwriting loans. We also recommended that FHA take additional steps to mitigate the risk associated with loans with seller- funded down-payment assistance, such as treating such assistance as a seller inducement and therefore subject to the prohibition against using seller contributions to meet the 3 percent borrower contribution requirement. Consistent with our recommendations, FHA is testing additional predictive variables, including source of the down payment, for inclusion in its mortgage scorecard (an automated tool that evaluates the default risk of borrowers). Additionally, in May 2007 HUD issued a proposed rule that would prohibit the use of seller-funded down-payment assistance in conjunction with FHA-insured loans. FHA also has been anticipating a reduction in the number of loans with down-payment assistance from seller-funded nonprofit organizations as a result of actions taken by the Internal Revenue Service (IRS). Citing concerns about seller-funded nonprofits raised by our report and the 2005 HUD contractor study, IRS issued a ruling in May 2006 stating that these organizations do not qualify as tax-exempt charities, thereby making loans with such assistance ineligible for FHA insurance. In a press announcement of the ruling, IRS stated that funneling down-payment assistance from sellers to buyers through “self-serving, circular-financing arrangements” is inconsistent with operation as a charitable organization. According to FHA, as of June 2007, IRS had rescinded the charitable status of three of the 185 organizations that IRS is examining. Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact William B. Shear at (202) 512-8678 or shearw@gao.gov. Individuals making key contributions to this testimony included Steve Westley (Assistant Director), Emily Chalmers, Chris Krzeminski, and Andy Pauline. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Federal Housing Administration (FHA) differs from other key mortgage industry participants in that it allows borrowers to obtain down-payment assistance from nonprofit organizations (nonprofits) that operate programs supported partly by property sellers. Research has raised concerns about how this type of assistance affects home purchase transactions. To assist Congress in considering issues related to down-payment assistance, this testimony provides information from GAO's November 2005 report, Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance (GAO-06-24). Specifically, this testimony discusses (1) trends in the use of down-payment assistance with FHA-insured loans, (2) the impact that the presence of such assistance has on purchase transactions and house prices, and (3) the influence of such assistance on loan performance. The proportion of FHA-insured purchase loans that were financed in part by down-payment assistance increased from 35 percent to nearly 50 percent from 2000 through 2004. Assistance from nonprofit organizations that received at least part of their funding from property sellers accounted for much of this increase, growing from about 6 percent of FHA-insured purchase loans in 2000 to approximately 30 percent in 2004. More recent data indicate that in 2005 and 2006, the percentages of FHA-insured loans with down-payment assistance from all sources and from seller-funded nonprofits were roughly equivalent to 2004 levels. Assistance from seller-funded nonprofits alters the structure of the purchase transaction in important ways. First, because many seller-funded nonprofits require property sellers to make a payment to their organization, assistance from these nonprofits creates an indirect funding stream from property sellers to homebuyers. Second, GAO analysis indicated that FHA-insured homes bought with seller-funded nonprofit assistance were appraised at and sold for about 2 to 3 percent more than comparable homes bought without such assistance. Regardless of the source of assistance and holding other variables constant, GAO analysis indicated that FHA-insured loans with down-payment assistance have higher delinquency and insurance claim rates than do similar loans without such assistance. Furthermore, loans with assistance from seller-funded nonprofits do not perform as well as loans with assistance from other sources. This difference may be explained, in part, by the higher sales prices of comparable homes bought with seller-funded assistance and the homebuyers having less equity in the transaction.

DOE’s Office of Fossil Energy oversees research on key coal technologies, but DOE does not systematically assess the maturity of those technologies. Using TRLs we developed for these technologies, we found consensus among stakeholders that CCS is less mature than efficiency technologies. Although federal standards for internal control require agency managers to compare actual program performance to planned or expected results and analyze significant differences, we found that DOE’s Office of Fossil Energy does not systematically assess the maturity of key coal technologies as they progress toward commercialization. While DOE officials reported that individual programs are aware of the maturity of technologies and DOE publishes reports that assess the technical and economic feasibility of advanced coal technologies, we found that the Office of Fossil Energy does not use a standard set of benchmarks or terms to describe or report on the maturity of technologies. In addition, DOE’s goals for advancing these technologies sometimes use terms that are not well defined. The lack of such benchmarks or an assessment of the maturity of key coal technologies and whether they are achieving planned or desired results limits: DOE’s ability to provide a clear picture of the maturity of these technologies to policymakers, utilities officials, and others; congressional and other oversight of the hundreds of millions of dollars DOE is spending on these technologies; and policymakers’ ability to assess the maturity of CCS and the resources that might be needed to achieve commercial deployment. Other agencies similarly charged with developing technologies, such as NASA and the Department of Defense (DOD), use TRLs to characterize the maturity of technologies. Table 1 shows a description of TRLs used by NASA. DOE has acknowledged that TRLs can play a key role in assessing the maturity of technologies during the contracting process. The agency recently issued a Technology Readiness Assessment Guide, which lays out three key steps to conducting technology readiness assessments during the contracting process. Identify critical technology elements that are essential to the successful operation of the facility. Assess maturity of these critical technologies using TRLs. Develop a technology maturity plan which identifies activities required to bring technology to desired TRL level. Although use of the Guide is not mandatory, DOE’s Office of Environmental Management uses the Guide as part of managing its procurement activities––a result of a GAO recommendation––and its Office of Nuclear Energy has begun using TRLs to measure and communicate risks associated with using critical technologies in a novel way. Furthermore, the National Nuclear Security Administration has used TRLs recently as well. In the absence of an assessment from DOE, we asked stakeholders to gauge the maturity of coal technologies using a scale we developed based on TRLs. Table 2 shows the TRLs we developed for coal technologies by adapting the NASA TRLs. for EOR use. However, this plant does not produce electricity. plants have already been demonstrated commercially. For example, a number of ultrasupercritical plants ranging from 600 to more than 1,000 MW have been built or are under construction in Europe and Asia, and there are five IGCC plants in operation around the world, including two in the United States. Commercial deployment of CCS within 10 to 15 years is possible according to DOE and other stakeholders, but is contingent on overcoming a variety of economic, technical, and legal challenges. Many technologies to improve plant efficiency have been used and are available for commercial use now, but still face challenges. injection wells can be permitted as Class I (injections of hazardous wastes, industrial nonhazardous wastes, municipal wastewater) or Class V wells (injections not included in other classes, including wells used in experimental technologies such as pilot CO for geologic sequestration. endangerment of underground sources of drinking water until the operator meets all the closure and post-closure requirements and EPA approves site closure of the well. According to EPA, once site closure is approved, well operators will only be liable under the SDWA if they violate or fail to comply with EPA orders in situations where an imminent and substantial endangerment to health is posed by a contaminant that is in or likely to enter an underground source of drinking water. EPA plans to finalize the geologic sequestration rule in fall 2010. Neither the proposed rule nor the final rule will address liability for unintended releases of stored CO emissions in lieu of more efficient coal plants. In addition, some higher efficiency plant designs also face technical challenges in that they require more advanced materials than are currently available. For example, “advanced” ultrasupercritical plants require development of metal alloys to withstand steam temperatures that could be 300 to 500 degrees Fahrenheit higher than today’s ultrasupercritical plants according to DOE. From a legal perspective, most stakeholders reported that making efficiency upgrades to the existing fleet of coal power plants was limited by the prospect of triggering the Clean Air Act’s New Source Review (NSR) requirements––additional requirements that may apply when a plant makes a major modification, a physical or operational change that would result in a significant net increase in emissions. emissions than efficiency improvements alone but could raise electricity costs, increase demand for water, and could affect the ability of individual plants to operate reliably. Technologies to improve plant efficiency offer potential near-term reductions, but also raise some concerns. According to key reports and stakeholders, the successful deployment of CCS technologies is critical to helping the United States meet potential limits in greenhouse gas emissions. In addition, CCS could allow coal to remain part of the nation’s diverse fuel mix. IEA estimated that CCS technologies could meet 20 percent of reductions needed to reduce global CO This report also noted that the cost of meeting this goal would increase if CCS was not deployed. Massachusetts Institute of Technology (MIT) researchers called CCS the “critical enabling technology” to reduce CO emissions while allowing continued use of coal in the future. In 2009, NAS reported that if CCS technologies are not demonstrated commercially in the next decade, the electricity sector could move more towards using natural gas to meet emissions targets. Our past work has also found that switching from coal to natural gas can lead to higher fuel costs and increased exposure to the greater price volatility of natural gas. On the other hand, most stakeholders told us that CCS would increase electricity prices, and key reports raise similar concerns. MIT estimated that plants with post-combustion capture have 61 percent higher cost of electricity, and IGCC plants with pre-combustion capture have a 27 percent higher cost compared to plants without these technologies. Similarly, DOE estimated that plants with post-combustion capture have 83 percent higher cost of electricity, while IGCC plants with pre- combustion capture having a 36 percent higher cost. DOE has also raised concerns about CCS and water consumption. Specifically, DOE estimated that post-combustion capture technology could almost double water consumption at a coal plant, while pre-combustion capture would increase water use by 73 percent. Some utility officials also said CCS could lead to a decline in the ability of individual plants to operate reliably because a power plant might need to shut down if any of the three components (capture, transport, and storage) of CCS became unavailable. In addition, more electricity sources would need to make up for the higher parasitic load associated with CCS. The National Coal Council has also reported temporary declines in reliability during past deployments of new coal technologies. Emission Goals with 21st Century Technologies (Washington, D.C., December 2009). We provided a draft of our report to the Secretary of Energy and the Administrator of EPA for review and comment. In addition, we provided selected slides on reliability of electricity supply to NERC for comment. We received written comments from DOE’s Assistant Secretary of the Office of Fossil Energy, which are reproduced in appendix III. The Assistant Secretary concurred with our recommendation, stating that DOE could improve its process for providing a clearer picture of technology maturity and that it planned to conduct a formal TRL assessment of coal technologies in the near future. The Assistant Secretary also provided technical comments, which we have incorporated as appropriate. In addition, EPA and NERC provided technical comments, which we have incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, Secretary of Energy, Administrator of EPA, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-3841 or gaffiganm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. all U.S. emissions of COCO2 is the most prevalent greenhouse gas (GHG) program and interviewed senior DOE staff on these Visited coal power plants and research facilities in three selected states—AL, MD, and WV4 We conducted this performance audit from July 2009 through May 2010, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We selected this nonprobability sample of states because they contained projects involving advanced coal technologies. To conduct this work, we reviewed key reports including those from the Department of Energy’s (DOE) national laboratories, the National Academy of Sciences, International Energy Agency (IEA), Intergovernmental Panel on Climate Change, Global CCS Institute, the National Coal Council, and academic reports. To identify stakeholders’ views on these technologies, we conducted initial scoping interviews with power plant operators, technology vendors, and federal officials from the Environmental Protection Agency (EPA) and DOE. Following this initial round of interviews, we selected a group of 19 stakeholders with expertise in carbon capture and storage (CCS) or technologies to improve coal plant efficiency and asked them a set of standard questions. This group of stakeholders included representatives from major utilities that are planning or implementing projects that use these technologies, technology vendors that are developing these technologies, federal officials that are providing research, development, and demonstration funding for these technologies, and researchers from academia or industry that are actively researching these technologies. During these interviews, we asked stakeholders to describe the maturity of technologies in terms of a scale we developed, based on Technology Readiness Levels (TRL). TRLs are a tool developed by the National Aeronautics and Space Administration and used by various federal agencies to rate the extent to which technologies have been demonstrated to work as intended using a scale of 1 to 9. In developing TRLs for coal technologies, we consulted with the Electric Power Research Institute (EPRI), which had recently used a similar approach to examine the maturity of coal technologies. Specifically, EPRI developed specific benchmarks to describe TRLs in the context of a commercial scale coal power plant. For example, they defined TRL 8 as demonstration at more than 25 percent the size of a commercial scale plant. We applied these benchmarks to a commercial scale power plant, which we defined as 500 megawatts (MW) and emitting about 3 millions tons of carbon dioxide (CO) annually. We based this definition on some of the key reports we reviewed, which used 500 MW as a standard power plant, and stated that such a plant would emit about 3 million tons of CO emissions from a power plant can vary based on a variety of factors, including the amount of time that a power plant is operated. We also reviewed available data on the use of key coal technologies compiled by IEA and the Global CCS Institute. The following are GAO’s comments on the Department of Energy’s letter dated June 4, 2010. In addition to the contact names above, key contributors to this report included Jon Ludwigson (Assistant Director), Chloe Brown, Scott Heacock, Alison O’Neill, Kiki Theodoropoulos, and Jarrod West. Important assistance was also provided by Chuck Bausell, Nirmal Chaudhary, Cindy Gilbert, Madhav Panwar, and Jeanette Soares.

Coal power plants generate about half of the United States' electricity and are expected to remain a key energy source. Coal power plants also account for about one-third of the nation's emissions of carbon dioxide (CO2 ), the primary greenhouse gas that experts believe contributes to climate change. Current regulatory efforts and proposed legislation that seek to reduce CO2 emissions could affect coal power plants. Two key technologies show potential for reducing CO2 emissions: (1) carbon capture and storage (CCS), which involves capturing and storing CO2 in geologic formations, and (2) plant efficiency improvements that allow plants to use less coal. The Department of Energy (DOE) plays a key role in accelerating the commercial availability of these technologies and devoted more than $600 million to them in fiscal year 2009. Congress asked GAO to examine (1) the maturity of these technologies; (2) their potential for commercial use, and any challenges to their use; and (3) possible implications of deploying these technologies. To conduct this work, GAO reviewed reports and interviewed stakeholders with expertise in coal technologies. DOE does not systematically assess the maturity of key coal technologies, but GAO found consensus among stakeholders that CCS is less mature than efficiency technologies. Specifically, DOE does not use a standard set of benchmarks or terms to describe the maturity of technologies, limiting its ability to provide key information to Congress, utilities, and other stakeholders. This lack of information limits congressional oversight of DOE's expenditures on these efforts, and it hampers policymakers' efforts to gauge the maturity of these technologies as they consider climate change policies. In the absence of this information from DOE, GAO interviewed stakeholders with expertise in CCS or efficiency technologies to identify their views on the maturity of these technologies. Stakeholders told GAO that while components of CCS have been used commercially in other industries, their application remains at a small scale in coal power plants, with only one fully integrated CCS project operating at a coal plant. Efficiency technologies, on the other hand, are in wider commercial use. Commercial deployment of CCS is possible within 10 to 15 years while many efficiency technologies have been used and are available for use now. Use of both technologies is, however, contingent on overcoming a variety of economic, technical, and legal challenges. In particular, with respect to CCS, stakeholders highlighted the large costs to install and operate current CCS technologies, the fact that large scale demonstration of CCS is needed in coal plants, and the lack of a national carbon policy to reduce CO2 emissions or a legal framework to govern liability for the permanent storage of large amounts of CO2. With respect to efficiency improvements, stakeholders highlighted the high cost to build or upgrade such coal plants, the fact that some upgrades require highly technical materials, and plant operators' concerns that changes to the existing fleet of coal power plants could trigger additional regulatory requirements. CCS technologies offer more potential to reduce CO2 emissions than efficiency improvements alone, and both could raise electricity costs and have other effects. According to reports and stakeholders, the successful deployment of CCS technologies is critical to meeting the ambitious emissions reductions that are currently being considered in the United States while retaining coal as a fuel source. Most stakeholders told GAO that CCS would increase electricity costs, and some reports estimate that current CCS technologies would increase electricity costs by about 30 to 80 percent at plants using these technologies. DOE has also reported that CCS could increase water consumption at power plants. Efficiency improvements offer more potential for near term reductions in CO2 emissions, but they cannot reduce CO2 emissions from a coal plant to the same extent as CCS. GAO recommends that DOE develop a standard set of benchmarks to gauge and report to Congress on the maturity of key technologies. In commenting on a draft of this report, DOE concurred with our recommendation.

The GPD program is one of six housing programs for homeless veterans administered by the Veterans Health Administration, which also undertakes outreach efforts and provides medical treatment for homeless veterans. VA officials told us in fiscal year 2007 they spent about $95 million on the GPD program to support two basic types of grants—capital grants to pay for the buildings that house homeless veterans and per diem grants for the day-to-day operational expenses. Capital grants cover up to 65 percent of housing acquisition, construction, or renovation costs. The per diem grants pay a fixed dollar amount for each day an authorized bed is occupied by an eligible veteran up to the maximum number of beds allowed by the grant—in 2007 the amount cannot exceed $31.30 per person per day. VA pays providers after they have housed the veteran, on a cost reimbursement basis. Reimbursement may be lower for providers whose costs are lower or are offset by funds for the same purpose from other sources. Through a network of over 300 local providers, consisting of nonprofit or public agencies, the GPD program offers beds to homeless veterans in settings free of drugs and alcohol that are supervised 24 hours a day, 7 days a week. Most GPD providers have 50 or fewer beds available, with the majority of providers having 25 or fewer. Program rules generally allow veterans to stay with a single GPD provider for 2 years, but extensions may be granted when permanent housing has not been located or the veteran requires additional time to prepare for independent living. Providers, however, have the flexibility to set shorter time frames. In addition, veterans are generally limited to a total of three stays in the program over their lifetime, but local VA liaisons may waive this limitation under certain circumstances. The program’s goals are to help homeless veterans achieve residential stability, increase their income or skill levels, and attain greater self-determination. To meet VA’s minimum eligibility requirements for the program, individuals must be veterans and must be homeless. A veteran is an individual discharged or released from active military service. The GPD program excludes individuals with a dishonorable discharge, but it may accept veterans with shorter military service than required of veterans who seek VA health care. A homeless individual is a person who lacks a fixed, regular, adequate nighttime residence and instead stays at night in a shelter, institution, or public or private place not designed for regular sleeping accommodations. GPD providers determine if potential participants are homeless, but local VA liaisons determine if potential participants meet the program’s definition of veteran. VA liaisons are also responsible for determining whether veterans have exceeded their lifetime limit of three stays in the GPD program and for issuing a waiver to that rule when appropriate. Prospective GPD providers may identify additional eligibility requirements in their grant documents. While program policies are developed at the national level by VA program staff, the local VA liaisons designated by VA medical centers have primary responsibility for communicating with GPD providers in their area. VA reported that in fiscal year 2007, there were funds to support 122 full-time liaisons. Since fiscal year 2000, VA has quadrupled the number of available beds and significantly increased the number of admissions of homeless veterans to the GPD program in order to address some of the needs identified through the its annual survey of homeless veterans. In fiscal year 2006, VA estimated that on a given night, about 196,000 veterans were homeless and an additional 11,100 transitional beds were needed to meet homeless veterans’ needs. However, this need was to be met through the combined efforts of the GPD program and other federal, state, or community programs that serve the homeless. VA had the capacity to house about 8,200 veterans on any given night in the GPD program. Over the course of the year, because some veterans completed the program in a matter of months and others left before completion, VA was able to admit about 15,400 veterans into the program, as shown in figure 1. Despite VA rules allowing stays of up to 2 years, veterans remained in the GPD program an average of 3 to 5 months in fiscal year 2006. The need for transitional housing beds continues to exceed capacity, according to VA’s annual survey of local areas served by VA medical centers. The number of transitional beds available nationwide from all sources increased to 40,600 in fiscal year 2006, but the need for beds increased as well. As a result, VA estimates that about 11,100 more beds are needed to serve the homeless, as shown in table 1. VA officials told us that they expect to increase the bed capacity of the GPD program to provide some of the needed beds. Most homeless veterans in the program had struggled with alcohol, drug, medical or mental health problems before they entered the program. Over 40 percent of homeless veterans seen by VA had served during the Vietnam era, and most of the remaining homeless veterans served after that war, including at least 4,000 who served in military or peacekeeping operations in the Persian Gulf, Afghanistan, Iraq, and other areas since 1990. About 50 percent of homeless veterans were between 45 and 54 years old, with 30 percent older and 20 percent younger. African-Americans were disproportionately represented at 46 percent, the same percentage as non- Hispanic whites. Almost all homeless veterans were men, and about 76 percent of veterans were either divorced or never married. An increasing number of homeless women veterans and veterans with dependents are in need of transitional housing according to VA officials and GPD providers we visited. The GPD providers told us in 2006 that women veterans had sought transitional housing; some recent admissions had dependents; and a few of their beds were occupied by the children of veterans, for whom VA could not provide reimbursement. VA officials said that they may have to reconsider the type of housing and services that they are providing with GPD funds in the future, but currently they provide additional funding in the form of special needs grants to a few GPD programs to serve homeless women veterans. VA’s grant process encourages collaboration between GPD providers and other service organizations. Addressing homelessness—particularly when it is compounded by substance abuse and mental illness—is a challenge involving a broad array of services that must be coordinated. To encourage collaboration, VA’s grants process awards points to prospective GPD providers who demonstrate in their grant documents that they have relationships with groups such as local homeless networks, community mental health or substance abuse agencies, VA medical centers, and ancillary programs. The grant documents must also specify how providers will deliver services to meet the program’s three goals—residential stability, increased skill level or income, and greater self-determination. The GPD providers we visited often collaborated with VA, local service organizations, and other state and federal programs to offer the broad array of services needed to help veterans achieve the three goals of the GPD program. Several providers worked with the local homeless networks to identify permanent housing resources, and others sought federal housing funds to build single-room occupancy units for temporary use until more permanent long-term housing could be developed. All providers we visited tried to help veterans obtain financial benefits or employment. Some had staff who assessed a veteran’s potential eligibility for public benefits such as food stamps, Supplemental Security Income, or Social Security Disability Insurance. Other providers relied on relationships with local or state officials to provide this assessment, such as county veterans’ service officers who reviewed veterans’ eligibility for state and federal benefits or employment representatives who assisted with job searches, training, and other employment issues. GPD providers also worked collaboratively to provide health care-related services—such as mental health and substance abuse treatment, and family and nutritional counseling. While several programs used their own staff or their partners’ staff to provide mental health or substance abuse services and counseling directly, some GPD providers referred veterans off site— typically, to a VA local medical center. Despite GPD providers’ efforts to collaborate and leverage resources, GPD providers and VA staff noted gaps in key services and resources, particularly affordable permanent housing for veterans ready to leave the GPD program. Providers also identified lack of transportation, legal assistance, affordable dental care, and immediate access to substance abuse treatment facilities as obstacles for transitioning veterans out of homelessness. VA staff in some of the GPD locations we visited told us that transportation issues made it difficult for veterans to get to medical appointments or employment-related activities. While one GPD provider we visited was able to overcome transportation challenges by partnering with the local transit company to obtain subsidies for homeless veterans, transportation remained an issue for GPD providers that could not easily access VA medical centers by public transit. Providers said difficulty in obtaining legal assistance to resolve issues related to criminal records or credit problems presented challenges in helping veterans obtain jobs or permanent housing. In addition, some providers expressed concerns about obtaining affordable dental care and about wait lists for veterans referred to VA for substance abuse treatment. We found that some providers and staff did not fully understand certain GPD program policies—which in some cases may have affected veterans’ ability to get care. For instance, providers did not always have an accurate understanding of the eligibility requirements and program stay rules, despite VA’s efforts to communicate its program rules to GPD providers and VA liaisons who implement the program. Some providers were told incorrectly that veterans could not participate in the GPD program unless they were eligible for VA health care. Several providers understood the lifetime limit of three GPD stays but may not have known or believed that VA had the authority to waive this rule. As a consequence, we recommended that VA take steps to ensure that its policies are understood by the staff and providers with responsibility for implementing them. In response to our recommendation that VA take steps to ensure that its policies are understood by the staff and providers with responsibility for implementing them, VA took several steps in 2007 to improve communications with VA liaisons and GPD providers, such as calling new providers to explain policies and summarizing their regular quarterly conference calls on a new Web site, along with new or updated manuals. Language on the number and length of allowable stays in the providers’ guide has not changed, however. VA assesses performance in two ways—the outcomes for veterans at the time they leave the program and the performance of individual GPD providers. VA’s data show that since 2000, a generally steady or increasing percentage of veterans met each of the program’s three goals at the time they left the GPD program. Since 2000, proportionately more veterans are leaving the program with housing or with a better handle on their substance abuse or health issues. During 2006, over half of veterans obtained independent housing when they left the GPD program, and another quarter were in transitional housing programs, halfway houses, hospitals, nursing homes, or similar forms of secured housing. Nearly one-third of veterans had jobs, mostly on a full-time basis, when they left the GPD program. One-quarter were receiving VA benefits when they left the GPD program, and one-fifth were receiving other public benefits such as Supplemental Security Income. Significant percentages also demonstrated progress in handling alcohol, drug, mental health, or medical problems and overcoming deficits in social or vocational skills. For example, 67 percent of veterans admitted with substance problems showed progress in handling these problems by the time they left. Table 2 indicates the numbers or percentages involved. VA’s Office of Inspector General (OIG) found when it visited GPD providers in 2005-2006 that VA officials had not been consistently monitoring the GPD providers’ annual performance as required. The GPD program office has since moved to enforce the requirement that VA liaisons review GPD providers’ performance when the VA team comes on- site each year to inspect the GPD facility. To assess the veterans’ success, VA has relied chiefly on measures of veterans’ status at the time they leave the GPD program rather than obtaining routine information on their status months or years later. In part, this has been due to concerns about the costs, benefits, and feasibility of more extensive follow-up. However, VA completed a onetime study in January 2007 that a VA official told us cost about $1.5 million. The study looked at the experience of a sample of 520 veterans who participated in the GPD program in five geographic locations, including 360 who responded to interviews a year after they had left the program. Generally, the findings confirm that veterans’ status at the time they leave the program can be maintained. We recommended that VA explore feasible and cost-effective ways to obtain information on how veterans are faring after they leave the program. We suggested that where possible they could use data from GPD providers and other VA sources, such as VA’s own follow-up health assessments and GPD providers’ follow-up information on the circumstances of veterans 3 to 12 months later. VA concurred and told us in 2007 that VA’s Northeast Program Evaluation Center is piloting a new form to be completed electronically by VA liaisons for every veteran leaving the GPD program. The form asks for the veterans’ employment and housing status, as well as involvement, if any, in substance abuse treatment, 1 month after they have left the program. While following up at 1 month is a step in the right direction, additional information at a later point would yield a better indication of longer-term success. Mr. Chairman, this concludes my remarks. I would be happy to answer any questions that you or other members of the subcommittee may have. For further information, please contact Daniel Bertoni at (202) 512-7215. Also contributing to this statement were Shelia Drake, Pat Elston, Lise Levie, Nyree M. Ryder, and Charles Willson. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Subcommittee on Health of the Committee on Veterans' Affairs asked GAO to discuss its recent work on the Department of Veterans Affairs' (VA) Homeless Providers Grant and Per Diem (GPD) program. GAO reported on this subject in September 2006, focusing on (1) VA's estimates of the number of homeless veterans and transitional housing beds, (2) the extent of collaboration involved in the provision of GPD and related services, and (3) VA's assessment of program performance. VA estimates that about 196,000 veterans nationwide were homeless on a given night in 2006, based on its annual survey, and that the number of transitional beds available through VA and other organizations was not sufficient to meet the needs of eligible veterans. The GPD program has quadrupled its capacity to provide transitional housing for homeless veterans since 2000, and additional growth is planned. As the GPD program continues to grow, VA and its providers are also grappling with how to accommodate the needs of the changing homeless veteran population that will include increasing numbers of women and veterans with dependents. The GPD providers we visited collaborated with VA, local service organizations, and other state and federal programs to offer a broad array of services designed to help veterans achieve the three goals of the GPD program--residential stability, increased skills or income, and greater self-determination. However, most GPD providers noted key service and communication gaps that included difficulties obtaining affordable permanent housing and knowing with certainty which veterans were eligible for the program, how long they could stay, and when exceptions were possible. VA data showed that many veterans leaving the GPD program were better off in several ways--over half had successfully arranged independent housing, nearly one-third had jobs, one-quarter were receiving benefits, and significant percentages showed progress with substance abuse, mental health or medical problems or demonstrated greater self-determination in other ways. Some information on how veterans fare after they leave the program was available from a onetime follow-up study of 520 program participants, but such data are not routinely collected. We recommended that VA take steps to ensure that GPD policies and procedures are consistently understood and to explore feasible means of obtaining information about the circumstances of veterans after they leave the GPD program. VA concurred and, following our review, has taken several steps to improve communications and to develop a process to track veterans' progress shortly after they leave the program. However following up at a later point might yield a better indication of success.

Payments to MA organizations are based on the MA organization’s bid and benchmark and are adjusted for differences in projected and actual enrollment, beneficiary residence, and health status. PPACA changed how the benchmark and rebate are calculated. Payments to MA organizations and the additional benefits that MA organizations offer are based in part on the relationship between the MA organizations’ bids—their projection of the revenue required to provide beneficiaries with services that are covered under Medicare FFS—and a benchmark. If an MA organization’s bid is higher than the benchmark, the organization must charge beneficiaries a premium to collect the amount by which the bid exceeds the benchmark. If an MA organization’s bid is lower than the benchmark, the organization receives the amount of the bid plus additional payments, known as rebates, equal to a percentage of the difference between the benchmark and the bid. MA organizations are required to use rebates to provide additional benefits, such as dental or vision services; reduce cost-sharing; reduce premiums; or some combination of the three. CMS adjusts payments to MA organizations to account for differences in projected and actual enrollment, beneficiary residence, and health status. CMS adjusts for differences in projected and actual enrollment through its method for paying MA organizations. Specifically, MA organizations get paid a PMPM amount and thus only get paid for actual enrollees. CMS also adjusts PMPM payments to MA organizations on the basis of the ratio of the benchmark rate in the beneficiary’s county to the plan benchmark. Thus, if a beneficiary comes from a county that has a benchmark rate that is lower than the plan’s benchmark, the plan will receive a lower PMPM payment for that beneficiary. Finally, to help ensure that health plans have the same financial incentive to enroll and care for beneficiaries regardless of their health status, payments to MA organizations are adjusted for beneficiary health status—a process known as risk adjustment. Final payments are adjusted to account for differences between the projected average risk score—a relative measure of expected health care use for each beneficiary—submitted in plans’ bids and the actual risk scores for enrolled beneficiaries. Bidding rules for employer health plans differ from those for MA plans available to all beneficiaries and SNPs. Specifically, MA organizations are able to negotiate specific benefit packages and cost-sharing amounts with employers after the MA organizations submit their bid for an employer group plan. In contrast, MA organizations’ bids for all other MA plans must reflect their actual benefit package—including additional benefits, reduced cost-sharing, and reduced premiums—and MA organizations cannot change the benefits after the bid is approved by CMS. PPACA changed how the benchmark is calculated beginning in 2011. These changes have resulted in a decrease, on average, in county benchmarks relative to average Medicare FFS expenditures. In 2011, benchmark rates were held constant at 2010 benchmark rates. From 2012 through 2016, the benchmark will be a blend of the traditional benchmark formula and a new quartile-based formula. Counties will be stratified into quartiles based on their Medicare FFS expenditures, with the first quartile of counties (the 25 percent of counties that have the highest Medicare FFS expenditures) having a benchmark equal to 95 percent of FFS expenditures. Counties in the second, third, and fourth quartiles will have benchmarks of 100 percent, 107.5 percent, and 115 percent, respectively, of FFS expenditures. In addition, any MA organization that receives 3 or more stars on CMS’s 5-star quality rating system will receive a bonus to the PPACA portion of their blended benchmark. In 2017 and future years, the quartile-based formula will determine 100 percent of the benchmark value. PPACA also changed how the rebate is calculated. This change resulted in decreased rebate amounts starting in 2012. By 2014, the rebate amounts will be equal to 50, 65, or 70 percent of the difference between the benchmark and the bid, depending on the number of stars a plan receives on CMS’s 5-star quality scale. Prior to 2012, MA organizations received a rebate equal to 75 percent of the difference between the benchmark and the bid. SNPs and employer group plans have specific eligibility requirements. SNPs serve specific populations, including beneficiaries who are dually eligible for Medicare and Medicaid, are institutionalized, or have certain chronic conditions. Employer group plans are MA plans offered by employers or unions to their Medicare-eligible retirees and Medicare- eligible active employees, as well as to Medicare-eligible spouses and dependants of participants in such a plan. In those cases where an active employee is enrolled in an employer’s non-Medicare health plan, the Medicare employer group plan would serve as a secondary payer, while the employer’s non-MA plan for active employees would serve as the primary payer. Among plans available to all beneficiaries, 2011 expenses and profits represented similar percentages of total revenue compared to projections. Among plans with specific eligibility requirements—that is, SNPs and employer group plans—2011 expenses were lower and profits were higher as a percentage of revenue compared to projections. As a percentage of 2011 total revenue, MA organizations’ actual medical expenses, nonmedical expenses, and profits were, on average, similar to projected values for plans available to all beneficiaries. As a percentage of revenue, medical expenses and profits were slightly lower than projected, while nonmedical expenses were slightly higher. Also, as a percentage of revenue, all three categories were within 0.3 percentage points of what MA organizations had projected (see table 1). MA plans that were available to all beneficiaries received slightly higher total revenue per beneficiary than projected, which could be a result of differences between actual and projected health status and geographic location of beneficiaries who enrolled. For instance, MA plans could have received additional Medicare payments if they enrolled beneficiaries who were expected to need more health care, who were disproportionately from counties with higher benchmarks, or a combination of these two reasons. Because of the higher total revenue, medical expenses as a percentage of revenue were 0.2 percentage points lower than projected, despite MA organizations’ spending more dollars on medical expenses than projected. The percentage of revenue spent on medical expenses and profits varied substantially between MA contracts. For example, while MA organizations spent an average of 86.3 percent of revenue on medical expenses, approximately 39 percent of beneficiaries were covered by contracts where less than 85 percent of revenue was spent on medical expenses, and 13 percent of beneficiaries were covered by contracts where less than 80 percent of revenue was spent on medical expenses (see table 2). Further, while the average profit margin was 4.5 percent among plans available to all beneficiaries, 26 percent of beneficiaries in our analysis were covered by contracts where profit margins were negative. In contrast, 15 percent of beneficiaries in our analysis were covered by contracts where profit margins were 10 percent or higher. For MA organizations with either high or low benchmarks, profit margins and the percentage of total revenue devoted to expenses were, on average, similar to projections. As a percentage of revenue, MA organizations with high benchmarks had slightly lower-than-projected medical expenses but slightly higher-than-projected nonmedical expenses and profits (see table 3). As a percentage of revenue, MA organizations with low benchmarks had slightly higher-than-projected medical expenses and nonmedical expenses but slightly lower profits. In addition, MA organizations with high benchmarks had higher profit margins compared to those with low benchmarks. Specifically, organizations with high benchmarks had an average profit margin of 5.9 percent and made $668 per beneficiary compared to 3.5 percent and $313 per beneficiary for organizations with low benchmarks. The accuracy of MA organizations’ projections varied on the basis of the type of plan they offered under each contract. Among the three plan types studied (HMO, PPO, and PFFS), PFFS contracts had the largest differences, in percentage point terms, between their actual and projected expenses and profits. For example, as a result of spending, on average, a higher-than-projected percentage of total revenue on medical and nonmedical expenses, PFFS contracts reported an actual profit margin of only 0.3 percent after projecting a 4.3 percent profit margin (see table 4). HMO contracts had the highest profit margins and were the only type of contract, among the three studied, that averaged higher profits than projected. Specifically, HMO contracts had a 5.3 percent profit margin, which was slightly higher than projected—5.0 percent—and substantially higher than the profit margins of PPO and PPFS contracts—2.5 percent and 0.3 percent, respectively. SNPs’ profits were higher than projected both in terms of a percentage of total revenue and in dollars. SNPs received somewhat higher revenue than projected and spent a lower percentage of total revenue on medical and nonmedical expenses than projected (see table 5). As a result of the higher-than-projected revenue and spending a lower percentage of revenue on expenses, SNPs reported an average profit per beneficiary of $1,115, which was 44 percent higher than projected ($777) and 149 percent higher than the profit per beneficiary for plans available to all Medicare beneficiaries ($447). Compared to plans available to all Medicare beneficiaries, SNPs spent more in terms of amount per beneficiary, but less in percentage terms, on medical and nonmedical expenses. CMS officials said SNPs might have higher profit margins because of the potential additional risk of providing a plan that targets a specific population. For instance, the officials noted that it may be more difficult to predict revenue and spending for a SNP’s targeted population. SNPs may face higher medical expenses because beneficiaries enrolled in such plans may have increased health care needs. According to CMS officials, SNPs may also face higher administrative expenses for several reasons, such as potentially higher marketing expenses associated with targeting SNPs’ designated population. Employer group plans had higher revenue, had higher profit margins, and spent a lower percentage of total revenue on expenses than projected. Specifically, total revenue per beneficiary was about 14 percent higher than projected—$11,364 compared to $9,957 (see table 6). In addition, employer group plans spent 86.3 and 6.1 percent of total revenue on medical expenses and nonmedical expenses, respectively, compared to a projected 89.5 and 6.3 percent, and these plans also had an actual profit margin of 7.6 percent compared to a 4.2 percent projected profit margin. The combined effects of higher revenue and a higher profit margin translated into average profits per beneficiary of $861, which was 108 percent higher than projected ($413) and 93 percent higher than the profit per beneficiary for plans available to all Medicare beneficiaries ($447). Unlike other MA plans, projections for employer group plans may vary from their actual profits and expenses because MA organizations that offer such plans are able to negotiate specific benefit packages and cost-sharing amounts with employers after they submit their bids to CMS. We requested comments from CMS, but none were provided. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, interested congressional committees, and others. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix I. In addition to the contact named above, Christine Brudevold, Assistant Director; Sandra George; Gregory Giusto; Brian O’Donnell; and Elizabeth T. Morrison made key contributions to this report.

MA organizations are entities that contract with the Centers for Medicare & Medicaid Services (CMS) to offer one or more private plans as an alternative to the Medicare fee-for-service (FFS) program. These MA plans are generally available to all Medicare beneficiaries, although certain types of plans, such as employer group plans, have specific eligibility requirements. Payments to MA organizations are based, in part, on the projected expenses and profits that MA organizations submit to CMS. These projections also affect (1) the extent to which MA beneficiaries receive additional benefits not provided under FFS and (2) beneficiary cost-sharing and premium amounts. The Patient Protection and Affordable Care Act (PPACA) required that, starting in 2014, MA organizations have a minimum medical loss ratio of 85 percent--that is, they must spend 85 percent of revenue on medical expenses, quality-improving activities, and reduced premiums. This report examines how MA organizations' actual expenses and profits for 2011 as a percentage of revenue and in dollars compared to projections for the same year, both for plans available to all Medicare beneficiaries and for plans with specific eligibility requirements. GAO analyzed data on MA organizations' projected and actual allocation of revenue to expenses and profits. The percentage of revenue spent on medical expenses reported in GAO's study is not directly comparable to the PPACA medical loss ratio calculation, as the final rule defining the calculation was issued after actual 2011 data were submitted. Medicare Advantage (MA) organizations' actual medical expenses, nonmedical expenses (such as marketing, sales, and administration) and profits as a percentage of total revenue were, on average, similar to projected values for plans available to all beneficiaries in 2011, the most recent year for which data were available at the time of the request for this work. MA organizations' actual medical expenses, nonmedical expenses, and profits were 86.3 percent, 9.1 percent, and 4.5 percent of total revenue, respectively. As a percentage of revenue, all three categories were within 0.3 percentage points of what MA organizations had projected. In addition, MA organizations received, on average, $9,893 in total revenue per beneficiary, slightly higher than the projected amount of $9,635. The percentage of revenue spent on medical expenses and profits varied between MA contracts. For example, while MA organizations spent an average of 86.3 percent of revenue on medical expenses, 39 percent of beneficiaries were covered under contracts where less than 85 percent of revenue was spent on medical expenses. In addition, the accuracy of MA organizations' projections varied on the basis of the type of plans offered under the contract. For example, contracts for private fee-for-service plans--a plan type with new provider network requirements in 2011--had average profit margins that were 4 percentage points lower than projected. In 2011, plans offered by MA organizations with specific eligibility requirements had higher-than-projected profits. Special needs plans (SNP), which serve specific populations, such as those with specific chronic conditions, had an 8.6 percent profit margin, but had projected 6.2 percent. This higher percentage, combined with higher-than-projected revenue, resulted in SNPs reporting an average profit per beneficiary of $1,115, or 44 percent higher than projected ($777). Employer group plans, which are offered by employers or unions to their employees or retirees, as well as to Medicare-eligible spouses and dependants of participants in such plans, had a 7.6 percent profit margin, but had projected 4.2 percent. The higher profit margin, combined with higher-than-projected revenue, resulted in employer plans receiving an average profit per beneficiary of $861, or 108 percent higher than projected ($413). GAO requested comments from CMS, but none were provided.

Our updates were limited to reviewing certain publically available information, such as the most recent strategic plan released by the IACC. spectrum of adults with autism. Funding autism research on the same topic may be appropriate and necessary—for example, for purposes of replicating or corroborating results—but in some instances, funding similar autism research may lead to unnecessary duplication and inefficient use of funds. Most agency officials we spoke with said that they consider the research funded by their agencies to be different than autism research funded by other agencies; however, we found that each research area included projects funded by at least four agencies. For example, the diagnosis research area included projects funded by seven different agencies. The most commonly funded projects were in the area of biology (423 projects), followed by treatment and interventions (253 projects), and causes (159 projects). NIH funded a majority of the autism research projects in five of the seven research areas. (See fig. 1.) Five agencies that funded non-research autism-related activities from fiscal years 2008 through 2011—Administration for Community Living (ACL), CDC, Department of Defense (DOD), Department of Education (Education), and the Health Resources and Services Administration (HRSA)—funded activities that were not duplicative. HRSA and Education both funded training activities related to autism. HRSA’s activities included training health care professionals, such as pediatric practitioners, residents, and graduate students, to provide evidence- based services to children with autism and other developmental disabilities and their families. The activities also included training specialists to provide comprehensive diagnostic evaluations to address the shortage of professionals who can confirm or rule out an autism diagnosis. Education’s training activities focused on the education setting; for example, to prepare personnel in special education, related services, early intervention, and regular education to work with children with disabilities, including autism. Additionally, DOD and ACL both funded a publicly available website to provide information on services available to individuals with autism. DOD’s website was developed for military families to provide them with information on the educational services that are close to specific military installations in select states, while the ACL website is broader by focusing on all individuals with autism and other developmental disabilities, their families, and other targeted key stakeholders concerned with autism. Finally, we determined that CDC is the only agency funding an awareness campaign on autism and other developmental disabilities. CDC’s Learn the Signs. Act Early. campaign promotes awareness of healthy developmental milestones in early childhood, the importance of tracking each child’s development, and the importance of acting early if there are concerns. We noted in our November 2013 report that the IACC and federal agencies may have missed opportunities to coordinate federal autism activities and reduce the risk of duplication of effort and resources. Although the CAA requires the IACC to coordinate HHS autism activities and monitor federal autism activities, OARC officials stated that the prevention of duplication among individual projects in agency portfolios is not specified in the CAA as one of the IACC’s statutory responsibilities and therefore is not a focus of the IACC. OARC officials stated that it was up to the individual federal agencies to use the information contained in the IACC’s strategic plan and portfolio analysis to prevent duplication. Officials from three federal agencies—CDC, DOD, and NIH—told us that they use the strategic plan and portfolio analysis, which are key documents used by the IACC to coordinate and monitor federal autism activities, when setting priorities for their autism programs and to learn of autism activities conducted by other agencies. OARC officials acknowledged that the IACC could choose to use data from the portfolio analysis as the basis for specific recommendations regarding areas where interagency coordination could be increased, but to date this has not occurred. OARC officials stated that they do not consider it to be their responsibility to review the data that they collect on behalf of the IACC for duplication or for coordination opportunities. Instead, they said that they fulfill their role in assisting the IACC in its cross-agency coordination activities in other ways, such as by facilitating interagency communication and gathering information. In our November 2013 report, we recommended that the Secretary of Health and Human Services direct the IACC and NIH, in support of the IACC, to identify projects through their monitoring of federal autism activities— including OARC’s annual collection of data for the portfolio analysis, and the IACC’s annual process to update the strategic plan—that may result in unnecessary duplication and thus may be candidates for consolidation or elimination; and identify potential coordination opportunities among agencies. HHS did not concur with our recommendation. The agency stated that such an analysis by the IACC to identify duplication would not likely provide the detail needed to determine actual duplication, and that the role of the IACC should not include identification of autism-related projects for elimination. We agree that further analysis would be needed to identify actual duplication. While the strategic plan objectives, which represent broad and complex areas of research, are useful to identify the potential for unnecessary duplication, we believe that such identification is worthwhile as it can effectively lead to further review by the funding agencies to ensure funds are carefully spent. Agencies can review specific project information to confirm whether research projects associated with an objective are, for example, necessary to replicate prior research results. While funding more than one study per objective may often be worthwhile and appropriate, this type of analysis by agencies would help provide assurance that agencies are not wasting federal resources due to unnecessary duplication of effort. Further, such an analysis could help identify research needs—such as research that is needed to complement or follow-up prior research, or research that requires further corroboration—and move autism research forward in a coordinated manner. We also question the purpose of using federal resources to collect data, if the data are not then carefully examined to ensure federal funds are being used appropriately and efficiently. Further, we found that the IACC’s efforts to coordinate HHS autism research and monitor all federal autism activities were hindered due to limitations with the data it collects. For example, the guidance and methodology for determining what projects constitute research, and therefore should be included in the portfolio analysis, has changed over the years. As a result, the projects included in the portfolio analysis have varied. Such inconsistency makes it difficult to accurately determine how much an increase in the funding of autism research was due to an actual increase in research versus the inclusion of more projects in the analysis. Additionally, the portfolio analysis and strategic plan contain limited information on non-research autism-related activities, and the IACC did not have a mechanism to collect information on such activities. In our November 2013 report, we made recommendations that the Secretary of Health and Human Services direct the IACC and NIH, in support of the IACC, to provide consistent guidance to federal agencies when collecting data for the portfolio analysis so that information can be more easily and accurately compared over multiple years; and create a document or database that provides information on non- research autism-related activities funded by the federal government, and make this document or database publicly available. HHS did not concur with these recommendations. HHS emphasized that, when collecting data for the portfolio analysis, it has balanced the need for consistency with the need to be responsive to feedback from the IACC and from those participating in the portfolio analysis. While we agree with HHS that it is important to be responsive to feedback and make adjustments to guidance as necessary to improve data collection, we believe that annual changes of the type we observed are not productive. Guidance should be developed so that accurate, consistent, and meaningful comparisons of changes in federal funding of autism research can be made over time and used to inform future funding decisions. Additionally, HHS commented that information on non-research autism- related activities was publicly accessible through a report to Congress that the CAA, and its reauthorization in 2011, required of HHS. While this document could be a starting point from which the IACC could begin to regularly catalog non-research autism-related activities, we believe that having a document or database that contains current and regularly- updated information on these activities is an important aspect of fulfilling the IACC's responsibility to monitor all federal autism activities, not just research. We also reported in November 2013 that the data used by the IACC was outdated and not tracked over time, and therefore not useful for measuring progress on the strategic plan objectives or identifying gaps in current research needs. Although the IACC did not examine research projects over time, our analysis found that, when looking across multiple years, some agencies funded more autism research projects than were suggested in the associated strategic plan objective, whereas other objectives were not funded by an agency. Recently, in April 2014, the IACC released an update of its strategic plan. This plan included the number of research projects funded from fiscal years 2008 through 2012 under each objective, and the corresponding funding amounts, which may help identify those objectives that have received more funding than others. Although OARC collected specific information on the more recently funded projects—those funded in fiscal years 2011 and 2012— this information was not included in the plan. Detailed project information is needed to effectively coordinate and monitor autism research across the federal government and avoid duplication. Principal investigators are typically individuals designated by the applicant organization, such as a university, to have the appropriate level of authority and responsibility to direct the project or program to be supported by the award. not provide information indicating that NIH has policies requiring program officials to actually search this database before awarding each research grant. Several agency officials also stated that they rely on their peer reviewers, other experts, and project officers to have knowledge of the current autism research environment. As established in our recent duplication work, it is important for agencies that fund research on topics of common interest, such as autism, to monitor each others’ activities. Such monitoring helps maximize effectiveness and efficiency of federal investments, and minimize the potential for the inefficient use of federal resources due to unnecessary duplication. To promote better coordination among federal agencies that fund autism research and avoid the potential for unnecessary duplication before research projects are funded, we recommended that the Secretary of Health and Human Services, the Secretary of Defense, the Secretary of Education, and the Director of the National Science Foundation (NSF) each determine methods for identifying and monitoring the autism research conducted by other agencies, including by taking full advantage of monitoring data the IACC develops and makes available. DOD concurred with our recommendation to improve coordination among federal agencies, and comments from Education, HHS, and NSF suggested that these agencies support improving the coordination of federal autism research activities. However, Education, HHS, and NSF disputed that any duplication occurs. We agree that more information on the specific projects funded within each objective would need to be assessed in order to determine actual duplication. However, the fact that research is categorized to the same objectives suggests that there may be duplicative projects being funded. During the course of our work, Education, HHS, and NSF did not provide any information to show that they had reviewed research projects to ensure that they were not unnecessarily duplicative. Chairman Mica, Ranking Member Connolly, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For questions about this statement, please contact me at (202) 512-7114 or crossem@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this statement include Geri Redican-Bigott, Assistant Director; Deirdre Brown; Sandra George; Drew Long; and Sarah Resavy. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Autism—a developmental disorder involving communication and social impairment—is an important public health concern. From fiscal years 2008 through 2012, 12 federal agencies awarded at least $1.4 billion to support autism research and other autism-related activities. The Combating Autism Act directed the IACC to coordinate HHS autism activities and monitor all federal autism activities. It also required the IACC to develop and annually update a strategic plan for autism research. This plan is organized into 7 research areas that contain specific objectives. This statement is based on GAO's November 2013 report, GAO-14-16 , with selected updates. It discusses federal autism activities, including (1) the extent to which federal agencies fund potentially duplicative autism research, and (2) the extent to which IACC and agencies coordinate and monitor federal autism activities. GAO analyzed agencies' data and documents, and interviewed federal agency officials. Eighty-four percent of the autism research projects funded by federal agencies had the potential to be duplicative. Of the 1,206 autism research projects funded by federal agencies from fiscal years 2008 through 2012, 1,018 projects were potentially duplicative because the projects were categorized to the same objectives in the Interagency Autism Coordinating Committee's (IACC) strategic plan. Funding similar research on the same topic is sometimes appropriate—for example, for purposes of replicating or corroborating results—but in other instances funding similar research may lead to unnecessary duplication. Each agency funded at least 1 autism research project in the same strategic plan objective as another agency and at least 4 agencies funded autism research in the same research area. The IACC and federal agencies may have missed opportunities to coordinate and reduce the risk of duplicating effort and resources. GAO found that the IACC is not focused on the prevention of duplication, and its efforts to coordinate the Department of Health and Human Services' (HHS) autism research and monitor all federal autism activities were hindered by limitations with the data it collects. Apart from federal agencies' participation on the IACC, there were limited instances of agency coordination, and the agencies did not have robust or routine procedures for monitoring federal autism activities. GAO recommended in November 2013 that HHS improve IACC data to enhance coordination and monitoring. HHS disagreed and stated its efforts were already adequate. GAO also recommended that DOD, Education, HHS, and NSF improve coordination. The agencies supported improved coordination, but most disputed that duplication occurs. GAO continues to believe the recommendations are warranted and actions needed.

IRS has made a concerted effort to implement the Restructuring Act’s taxpayer rights and protections mandates. Not surprisingly, given the magnitude of change required by these provisions, work remains in completing, and in some instances expanding on, current implementation efforts. To manage Restructuring Act implementation, IRS delegated lead responsibility for each of the provisions to the affected organizational unit and required those units to develop detailed implementation plans. For example, IRS assigned to its Collections unit the lead responsibility for implementing the 22 collection-related taxpayer protection provisions in title III of the act. Our review of each of these plans identified numerous action items, such as developing tax regulations, forms, instructions, and procedures, as well as milestones for completing the actions. According to IRS officials, although IRS has met all of the legal requirements of the provisions whose effective dates have passed, it is still in the process of completing several actions or implementation steps. For example, in order to meet the effective dates of some provisions, IRS issued temporary procedures until the final rulemaking could be completed. insufficient controls to establish accountability and control over assets. Accordingly, we made a number of recommendations to IRS regarding these problems and are awaiting a final response concerning its plans to implement the recommendations. In another instance, IRS has made changes to meet the Restructuring Act’s mandate but does not have information necessary to determine whether the implementation steps have been sufficient. The act prohibits IRS from using enforcement statistics to impose or suggest production quotas or goals for any employee, or to evaluate an employee based on such enforcement quotas. IRS has taken a number of actions to implement this mandate, such as issuing a handbook on the appropriate use of performance measures and conducting agencywide training sessions. IRS has also taken action on our recommendations, such as by clarifying the requirements for IRS managers to certify that they have not used enforcement statistics inappropriately. In its spring 1999 survey, IRS found that about 7 percent of Collections employees and 9 percent of Examination employees reported that their supervisors had either discussed enforcement statistics with them or used statistics to evaluate their performance. Until it has more recent comparison data, IRS will not know if its actions were sufficient to fulfill the Restructuring Act’s mandate. IRS has also experienced some difficulty in implementing the Restructuring Act. Two notable examples are the decline in enforcement actions, particularly liens, levies, and seizures and the backlog of “innocent spouse” cases. IRS’ use of enforcement actions to collect delinquent taxes has declined significantly since passage of the act. Comparing pre-Restructuring Act data on IRS’ use of liens, levies and seizures, with fiscal 1999 data shows that lien filings were down about 69 percent, levies down about 86 percent, and seizures down about 98 percent. Moreover, according to IRS, collections from delinquent taxpayers were down about $2 billion from fiscal year 1996 levels. fiscal year 1997, the last full year before passage of the Restructuring Act, about 42 percent of seizures resulted in the tax debt being fully resolved. In most cases, the debt was resolved when the taxpayers produced funds to fully pay their tax liabilities and have their assets returned. Prior to the seizures, the involved taxpayers had been unresponsive to other IRS collection efforts, including letters, phone calls, personal collection visits, and levies of bank accounts and wages. We concluded from these observations that there was little likelihood that the tax debts would have been paid without the seizure actions. At the conclusion of our seizure work in 1999, it was clear to us that neither IRS management officials nor front line employees believed that seizure authority was being used when appropriate. Front line employees expressed concerns about the lack of guidance on when to make seizures in light of Restructuring Act changes. Accordingly, we made recommendations aimed at (1) clarifying when seizures ought to be made, (2) preventing departures from process requirements established to protect taxpayer interests, and (3) delineating senior managers’ responsibilities for ensuring that seizures are made when justified. Effective use of tax collection enforcement authority, such as seizing delinquents’ property to resolve their tax debts, plays an important role in ensuring voluntary compliance---a practice dependent on taxpayers having confidence that their neighbors or competitors are complying with the tax law. A second example of IRS difficulty in implementing the Restructuring Act is related to “innocent spouse” cases. The Restructuring Act expanded innocent spouses’ right to seek relief from tax liabilities assessed on jointly filed returns. IRS published forms and temporary guidance to implement this provision and has just recently issued permanent guidance on equitable relief provisions. However, as Commissioner Rossotti has acknowledged, IRS was administratively unprepared to deal with the volume of requests for relief because its data systems did not allow the separation of single tax liability for spouses into multiple liabilities. Thus, IRS established manual processes and controls to deal with the requests, a measure requiring about 330 additional staff. As of October 1999, of the 41,000 relief requests received, only about 12 percent had been processed to the point where at least a preliminary determination had been reached. IRS considers the remaining relief requests to be a significant backlog that will require an average of about 12 staff hours per case to resolve. Underlying the Commissioner’s modernization strategy is the understanding that fulfilling the Restructuring Act’s mandate to place greater emphasis on taxpayer rights and needs while ensuring compliance depends on two key factors. First, IRS must make material improvements in the processes and procedures through which it interacts with taxpayers and collects taxes due. Second, IRS must make efficiency improvements that will allow reallocation of its limited resources. Historically, however, IRS has not had much success designing and implementing these kinds of process changes. The Commissioner has argued, and we agree, that this difficulty is due in large part to systemic barriers in IRS’ organization, management, and information systems. Accordingly, and in compliance with the Restructuring Act, the Commissioner has begun to implement a multifaceted modernization strategy, the first stages of which are designed to address these systemic barriers. Notwithstanding a reduction in the number of its field offices, IRS’ organizational structure has not changed significantly in almost 50 years. Under this structure, authority for serving taxpayers and administering the tax code is decentralized to 33 districts and 10 service centers, with each of these geographic units organized along functional lines—such as collection, examination, and taxpayer service. This has resulted in convoluted lines of authority. In the collection area, for example, IRS has three separate kinds of organizations spread over all 43 operational units that use four separate computer systems to collect taxes from all types of taxpayers. This decentralized structure has also allowed disparity among districts in their compliance approaches and, as a result, inconsistent treatment of taxpayers. To illustrate, in our review of IRS’ use of its seizure authority, we found that seizures were as much as 17 times more likely for delinquent individual taxpayers in some district offices than in others. Similar variations exist in other IRS programs as well. and tax issues. Through its new taxpayer-focused operating divisions, IRS is centralizing management of key functions and creating narrower scopes of responsibility. For example, IRS estimates that individual taxpayers account for 75 percent of all filers, yet only 17 percent of the tax code is ordinarily relevant to them. By creating a division devoted solely to individual taxpayers, IRS is creating a situation in which managers and employees in that division will be able to focus on compliance and service issues related to individual taxpayers and will need expertise in a much smaller body of tax law. Creating a simpler, more coherent organization and management structure is an important step, but it does not guarantee good management. IRS’ managers, at all levels, need to be skilled in results-oriented management, including planning, performance measurement, and the use of performance data in decisionmaking. Without these skills, IRS cannot be assured that its employees and the agency as a whole are performing as expected with regard to both taxpayer rights and enforcement. Our work has shown that ensuring that IRS has the capacity it needs in this area will be a challenge. For example, in our recent work on IRS seizures, we found that IRS did not generate information sufficient for senior managers to use in monitoring the program. IRS did not have a fully developed capability to monitor the quality of seizure work in terms of the appropriateness of seizure decisionmaking or the conduct of asset management and sales activity. In addition, collection managers were not systematically provided with information on the type of problems experienced by taxpayers involved in a seizure or on the resolution of those problems. We concluded that IRS managers were not collecting the information needed to effectively oversee the program and made recommendations to improve oversight. Our point today, however, is that generating and using basic management information needs to be routine among IRS managers at all levels and across all taxpayer groups and functions. The organizational and management changes I’ve described, while significant, will not be sufficient to achieve IRS’ mission. As an agency still dealing with the repercussions of a performance system that was, for many years, based on enforcement statistics, IRS well knows that performance measures can create powerful incentives to influence both organizational and individual behavior. Consequently, IRS needs to develop an integrated performance management system that aligns employee, program, and strategic performance measures and creates incentives for behavior supporting agency goals, including that of giving due recognition to taxpayers’ rights and interests. Developing and implementing performance measures are difficult tasks for any organization, but especially for an organization like IRS that must ensure both quality taxpayer service and tax law compliance. At the operational level, IRS is measuring its progress toward these goals through customer satisfaction surveys and through the business results measures of quality and quantity. Mindful of concerns that the Service had focused on revenue production as an end in itself, IRS established what it believes are outcome-neutral quantity measures. For example, instead of measuring the revenue generated by compliance employees, IRS is generally monitoring the total number of cases closed, regardless of how those cases were closed. We have reported in the past that IRS employees’ performance focused more on IRS’ objectives of revenue production and efficiency than on taxpayer service. Guided by these concerns and the Restructuring Act’s explicit prohibitions against using enforcement statistics to evaluate employees, IRS now recognizes that employees must have a clearer line of sight between their day-to-day activities, their resulting performance evaluations, and the agency’s broader goals. IRS is still exploring several different approaches for revising its employee evaluation system to make the relationship between employee performance and agency performance more transparent. accessing comprehensive information about individual taxpayer accounts or summary data on groups of taxpayers. Without this type of data, IRS managers will continue to have a difficult time monitoring and managing program outcomes—including identifying taxpayer needs and evaluating the effectiveness of programs to meet those needs. In doing our work on small business compliance issues, for example, we found that IRS could not reliably provide data on the extent to which small businesses filed various required forms, when they made tax deposits, or the extent to which they were involved in a variety of enforcement processes. For years, IRS has struggled to modernize its information systems to support high quality taxpayer service and management information needs. In 1995, we made over a dozen recommendations to correct management and technical weaknesses that jeopardized the modernization process. In February 1998, we made additional recommendations to ensure, among other things, that IRS develops a complete systems architectural blueprint for modernizing its information systems. Subsequently, in fiscal years 1998 and 1999, Congress provided IRS funds for systems modernization and limited their obligation until certain conditions, similar to our recommendations, were met. While IRS has made progress in addressing our recommendations and complying with the legislative conditions, the Service has not yet fully implemented our recommendations. As a result, at the direction of the Senate and House appropriation subcommittees responsible for IRS’ appropriation, we have continued to monitor and report on IRS’ system modernization efforts. gains to allow IRS to better target its resources to promote compliance and taxpayer service. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other Members of the Committee may have. For future contacts regarding this testimony, please contact James R. White at 202-512-9110. Thomas M. Richards, Deborah Parker Junod, Charlie Daniel, and Ralph Block made key contributions to this testimony.

Pursuant to a congressional request, GAO discussed the Internal Revenue Service's (IRS) progress in implementing the taxpayer rights and protection mandates of the IRS Restructuring and Reform Act of 1998 and IRS' ongoing efforts to modernize its organizational structure, performance management system, and information systems. GAO noted that: (1) IRS has embarked on a concerted effort to implement the taxpayer rights and protection provisions; (2) in some instances, implementation is not complete, and in some others, it is too early to tell if implementation is successful; (3) IRS has experienced difficulties in implementing some aspects of the mandates; (4) these difficulties included determining when enforced collection actions, such as the seizure of delinquent taxpayers' assets, are appropriate and dealing with requests for relief under the innocent spouse provisions; (5) to streamline its management structure and create a more taxpayer-focused organization, IRS is in the midst of instituting a major reorganization; (6) IRS' new organization structure is built around four operating units, each with end-to-end responsibility for serving a group of taxpayers with similar needs; (7) through its new taxpayer-focused divisions, IRS is centralizing management of key functions and creating narrower scopes of responsibility; (8) IRS needs to develop an integrated performance management system that aligns employee, program, and strategic performance measures and creates incentives for behavior supporting agency goals; (9) at the operating level, IRS is measuring its progress toward these goals through customer satisfaction surveys and through business results measures of quality and quantity; (10) IRS' system difficulties hinder, and will continue to hinder, efforts to better serve taxpayer segments; (11) IRS has dozens of discrete databases that are function specific and are designed to reflect transactions at different points in the life of a return or information report--from its receipt to disposition; (12) as a consequence, IRS does not have any easy means of accessing comprehensive information about individual taxpayer accounts or summary data on groups of taxpayers; (13) GAO made over a dozen recommendations to correct management and technical weaknesses that jeopardized IRS' information systems modernization process; (14) in fiscal years 1998 to 1999, Congress provided IRS funds for systems modernization and limited their obligation until certain conditions, similar to GAO's recommendations, were met; (15) while IRS made progress in addressing GAO's recommendations and complying with the legislative conditions, IRS has not yet fully implemented GAO's recommendations; and (16) GAO believes that IRS' ongoing efforts to modernize its organizational structure, performance management system, and information systems are heading the agency in the right direction.

Countries can take varying approaches to reducing greenhouse gas emissions. Since energy use is a significant source of greenhouse gas emissions, policies designed to increase energy efficiency or induce a switch to less greenhouse-gas-intensive fuels, such as from coal to natural gas, can reduce emissions in the short term. In the long term, however, major technology changes will be needed to establish a less carbon- intensive energy infrastructure. To that end, a U.S. policy to mitigate climate change may require facilities to achieve specified reductions or employ a market-based mechanism, such as establishing a price on emissions. Several bills to implement emissions pricing in the United States have been introduced in the 110th and 111th Congresses. These bills have included both cap-and-trade and carbon tax proposals. Some of the proposed legislation also include measures intended to limit potentially adverse impacts on the international competitiveness of domestic firms. Estimating the effects of domestic emissions pricing for industries in the United States is complex. For example, if the United States were to regulate greenhouse gas emissions, production costs could rise for many industries and could cause output, profits, or employment to fall. However, the magnitude of these potential effects is likely to depend on the greenhouse gas intensity of industry output and on the domestic emissions price, which is not yet known, among other factors. Additionally, if U.S. climate policy was more stringent than in other countries, some domestic industries could experience a loss in international competitiveness. Within these industries, adverse competitiveness effects could arise through an increase in imports, a decrease in exports, or both. For regulated sources, greenhouse gas emissions pricing would increase the cost of releasing greenhouse gases. As a result, it would encourage some of these sources to reduce their emissions, compared with business- as-usual. Under domestic emissions pricing, production costs for regulated sources could rise as they either take action to reduce their emissions or pay for the greenhouse gases they release. Cost increases are likely to be larger for production that is relatively greenhouse gas-intensive, where greenhouse gas intensity refers to emissions per unit of output. Cost increases may reduce industry profits, or they may be passed on to consumers in the form of higher prices. To the extent that cost increases are passed on to consumers, they could demand fewer goods, and industry output could fall. While emissions pricing would likely cause production costs to rise for certain industries, the extent of this rise and the resulting impact on industry output are less certain due to a number of factors. For example, the U.S. emissions price and the emissions price in other countries are key variables that will help to determine the impact of emissions pricing on domestic industries. However, future emission prices are currently unknown. Additionally, to the extent that emissions pricing encourages technological change that reduces greenhouse gas intensity, potential adverse effects of emissions pricing on profits or output could be mitigated for U.S. industries. Several studies by U.S. agencies and experts have used models of the economy to simulate the effects of emissions pricing policy on output and related economic outcomes. These models generally find that emissions pricing will cause output, profits, or employment to decline in sectors that are described as energy intensive, compared with business-as-usual. In general, these studies conclude that these declines are likely to be greater for these industries, as compared with other sectors in the economy. However, some research suggests that not every industry is likely to suffer adverse effects from emissions pricing. For example, a long-run model estimated by Ho, Morgenstern, and Shih (2008) predicts that some U.S. sectors, such as services, may experience growth in the long run as a result of domestic emissions pricing. This growth would likely be due to changes in consumption patterns in favor of goods and services that are relatively less greenhouse gas-intensive. Potential international competitiveness effects depend in part on the stringency of U.S. climate policy relative to other countries. For example, if domestic greenhouse gas emissions pricing were to make emissions more expensive in the United States than in other countries, production costs for domestic industries would likely increase relative to their international competitors, potentially disadvantaging industries in the United States. As a result, some domestic production could shift abroad, through changes in consumption or investment patterns, to countries where greenhouse gas emissions are less stringently regulated. For example, consumers may substitute some goods made in other countries for some goods made domestically. Similarly, investment patterns could shift more strongly in favor of new capacity in countries where greenhouse gas emissions are regulated less stringently than in the United States. Stakeholders and experts have identified two criteria, among others, that are important in determining potential vulnerability to adverse competitiveness effects: trade intensity and energy intensity. Trade intensity is important because international competitiveness effects arise from changes in trade patterns. For example, if climate policy in the United States were more stringent than in other countries, international competition could limit the ability of domestic firms to pass increases in costs through to consumers. Energy intensity is important because the combustion of fossil fuels for energy is a significant source of greenhouse gas emissions, which may increase production costs under emissions pricing. Legislation passed in June 2009 by the House of Representatives, H.R. 2454, 111th Cong. (2009), uses the criteria of trade intensity and energy intensity or greenhouse gas intensity, among others, to determine eligibility for the Emission Allowance Rebate Program, which is part of the legislation. H.R. 2454 specifies how to calculate the two criteria. Trade intensity is defined as the ratio of the sum of the value of imports and exports within an industry to the sum of the value of shipments and imports within the industry. Energy intensity is defined as the industry’s cost of purchased electricity and fuel costs, or energy expenditures, divided by the value of shipments of the industry. Reducing carbon emissions in the United States could result in carbon leakage through two potential mechanisms. First, if domestic production were to shift abroad to countries where greenhouse gas emissions are not regulated, emissions in these countries could grow faster than expected otherwise. Through this mechanism, some of the expected benefits of reducing emissions domestically could be offset by faster growth in emissions elsewhere, according to Aldy and Pizer (2009). Second, carbon leakage may also arise from changes in world prices that are brought about by domestic emissions pricing. For example, U.S. emissions pricing could cause domestic demand for oil to fall. Because the United States is a relatively large consumer of oil worldwide, the world price of oil could fall when the U.S. demand for oil drops. The quantity of oil consumed by other countries would rise in response, increasing greenhouse gas emissions from the rest of the world. These price effects may be a more important source of carbon leakage than the trade effects previously described. Two key indicators of potential vulnerability to adverse competitiveness effects are an industry’s energy intensity and trade intensity. Proposed U.S. legislation specifies that (1) either an energy intensity or greenhouse gas intensity of 5 percent or greater; and (2) a trade intensity of 15 percent or greater be used as criteria to identify industries for which trade measures or rebates would apply. Since data on greenhouse gas intensity are less complete, we focused our analysis on industry energy intensity. Most of the industries that meet these criteria fall under 4 industry categories: primary metals, nonmetallic minerals, paper, and chemicals. However, there is significant variation in specified vulnerability characteristics among different product groups (“sub-industries”). Although our report examined the four industry categories, figures 1 through 4 or the following pages illustrate the variation among different sub-industries within the primary metals industry, as well as information on the type of energy used and location of import and export markets. The data shown in these figures are for the latest year available. As shown by sub-industry examples in figure 1, energy and trade intensities differ within primary metals. For example, primary aluminum meets the vulnerability criteria with an energy intensity of 24 percent and a trade intensity of 62 percent. Ferrous metal foundries meets the energy intensity criteria, but not the trade intensity criteria. Steel manufacturing—products made from purchased steel—and aluminum products fall short of both vulnerability criteria. Iron and steel mills has an energy intensity of 7 percent and a trade intensity of 35 percent and is by far the largest sub-industry example, with a 2007 value of output of over $93 billion. The energy and trade intensity for all primary metal products is denoted by the “x” in figure 1. Among the primary metals sub-industry examples shown in figure 2, the types of energy used also vary. Iron and steel mills uses the greatest share of coal and coke, and steel manufacturing and ferrous metal foundries uses the greatest proportion of natural gas. Since coal is more carbon- intensive than natural gas, sub-industries that rely more heavily on coal could also be more vulnerable to competitiveness effects. The carbon intensity of electricity, used heavily in the production of aluminum, will also vary on the basis of the source of energy used to generate it and the market conditions where it is sold. Data shown for “aluminum” include primary aluminum and aluminum products, and net electricity is the sum of net transfers plus purchases and generation minus quantities sold. Industry vulnerability may further vary depending on the share of trade with countries that do not have carbon pricing. To illustrate this variability, figure 3 provides data on the share of imports by source, since imports exceed exports in each of the primary metals examples. As shown, while primary aluminum is among the most trade-intensive, the majority of imports are from Canada, an Annex I country with agreed emission reduction targets. For iron and steel mills, over one-third of imports are from the European Union and other Annex I countries, not including Canada (“EU plus”). However, for iron and steel mills, almost 30 percent of imports are also from the non-Annex I countries of China, Mexico, and Brazil. While less trade-intensive, steel manufacturing and aluminum products each has greater than one-third of imports from China alone. As shown in figure 4, adverse competitiveness effects from emissions pricing could increase the already growing share of Chinese imports that exists in some of the sub-industries. Among the examples, iron and steel mills, steel manufacturing, and aluminum products exhibit a growing trade reliance on Chinese imports since 2002. This trend has largely been driven by lower labor and capital costs in China, and, according to representatives from the steel industry, China has recently been producing 50 percent of the world’s steel. Mr. Chairman, this concludes my prepared statement. Thank you for the opportunity to testify before the Committee on some of the issues addressed in our report on the subject of climate change trade measures. I would be happy to answer any questions from you or other members of the Committee. For further information about this statement, please contact Loren Yager at (202) 512-4347 or yagerl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Christine Broderick (Assistant Director), Etana Finkler, Kendall Helm, Jeremy Latimer, Maria Mercado, and Ardith Spence. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Countries can take varying approaches to reducing greenhouse gas emissions. Since energy use is a significant source of greenhouse gas emissions, policies designed to increase energy efficiency or induce a switch to less greenhouse-gas-intensive fuels, such as from coal to natural gas, can reduce emissions in the short term. In the long term, however, major technology changes will be needed to establish a less carbon-intensive energy infrastructure. To that end, a U.S. policy to mitigate climate change may require facilities to achieve specified reductions or employ a market-based mechanism, such as establishing a price on emissions. Several bills to implement emissions pricing in the United States have been introduced in the 110th and 111th Congresses. These bills have included both cap-and-trade and carbon tax proposals. Some of the proposed legislation also include measures intended to limit potentially adverse impacts on the international competitiveness of domestic firms. Estimating the potential effects of domestic emissions pricing for industries in the United States is complex. If the United States were to regulate greenhouse gas emissions, production costs could rise for certain industries and could cause output, profits, or employment to fall. Within these industries, some of these adverse effects could arise through an increase in imports, a decrease in exports, or both. However, the magnitude of these potential effects is likely to depend on the greenhouse gas intensity of industry output and on the domestic emissions price, which is not yet known, among other factors. Estimates of adverse competitiveness effects are generally larger for industries that are both relatively energy- and trade-intensive. In 2007, these industries accounted for about 4.5 percent of domestic output. Estimates of the effects vary because of key assumptions required by economic models. For example, models generally assume a price for U.S. carbon emissions, but do not assume a similar price by other nations. In addition, the models generally do not incorporate all policy provisions, such as legislative proposals related to trade measures and rebates that are based on levels of production. Proposed legislation suggests that industries vulnerable to competitiveness effects should be considered differently. Industries for which competitiveness measures would apply are identified on the basis of their energy and trade intensity. Most of the industries that meet these criteria are in primary metals, nonmetallic minerals, paper, and chemicals, although significant variation exists for product groups (sub-industries) within each industry. Additional variation arises on the basis of the type of energy used and the extent to which foreign competitors' greenhouse gas emissions are regulated. To illustrate variability in characteristics that make industries vulnerable to competitiveness effects, we include illustrations of sub-industries within primary metals that meet both the energy and trade intensity criteria; examples that met only one criterion; and examples that met neither, but had significant imports from countries without greenhouse gas pricing.

Addressing the Year 2000 problem in time will be a formidable challenge for the District of Columbia. The District government is composed of approximately 80 entities, responsible for carrying out a vast array of services for a diverse group of stakeholders. These services include municipal, state, and federal functions, such as street maintenance and repairs, economic development and regulation, trash pick-up, water and sewer services, educational institutions, hospital and health care, public safety, and correctional institutions. Each of these services is susceptible to the Year 2000 problem. The Year 2000 problem is rooted in the way dates are recorded and computed in automated information systems. For the past several decades, systems have typically used two digits to represent the year, such as “97” representing 1997, in order to conserve on electronic data storage and reduce operating costs. With this two-digit format, however, the year 2000 is indistinguishable from 1900, or 2001 from 1901. As a result of this ambiguity, system or application programs that use dates to perform calculations, comparisons, or sorting may generate incorrect results. The District has a widespread and complex data processing environment, including a myriad of organizations and functions. There are four major data centers located throughout the city, each serving divergent groups of users, running multiple applications, and using various types of computer platforms and systems. Most of the District’s computer systems were not designed to recognize dates beyond 1999 and will thus need to be remediated, retired, or replaced before 2000. To complicate matters, each District agency must also consider computer systems belonging to other city agencies, other governments, and private sector contractors that interface with their systems. For example, the Social Security Administration exchanges data files with the District to determine the eligibility of disabled persons for disability benefits. Even more important, the District houses the most critical elements of the federal government. The ability of the District to perform critical government services after the century date change is not only essential to District residents but also important to the continuity of operations of the executive, congressional, and judicial offices housed here. In addition, the Year 2000 could cause problems for the many facilities used by the District of Columbia that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations. For example, water and sewer systems, building security systems, elevators, telecommunications systems, and air conditioning and heating equipment could malfunction or cease to operate. The District cannot afford to neglect any of these issues. If it does, the impact of Year 2000 failures could potentially be disruptive to vital city operations and harmful to the local economy. For example: Critical service agencies, such as the District’s fire and police departments, may be unable to provide adequate and prompt responses to emergencies due to malfunctions or failures of computer reliant equipment and communications systems. The city’s unemployment insurance benefit system may be unable to accurately process benefit checks as early as January 4, 1999. The city’s tax and business systems may not be able to effectively process tax bills, licenses, and building permits. Such problems could hamper local businesses as well as revenue collection. Payroll and retirement systems may be unable to accurately calculate pay and retirement checks. Security systems, including alarm systems, automatic door locking and opening systems and identification systems, could operate erratically or not all, putting people and goods at risk and disabling authorized access to important functions. To address these Year 2000 challenges, we issued our Year 2000 Assessment Guide to help federal agencies plan, manage, and evaluate their efforts. This guide provides a structured approach to planning and managing five delineated phases of an effective Year 2000 program. The phases include (1) raising awareness of the problem, (2) assessing the complexity and impact the problem can have on systems, (3) renovating, or correcting, systems, (4) validating, or testing, corrections, and (5) implementing corrected systems. We have also identified other dimensions to solving the Year 2000 problem, such as identifying interfaces with outside organizations specifying how data will be exchanged in the year 2000 and beyond and developing business continuity and contingency plans to ensure that core business functions can continue to be performed even if systems have not been made Year 2000 compliant. Based on the limited data available on the status of local and state governments, we believe that the District’s Year 2000 status is not atypical. For example, a survey conducted by Public Technology, Inc. and the International City/County Management Association in the fall and winter of 1997, found that of about 1,650 cities that acknowledged an impact from Year 2000, nearly a quarter had not begun to address the problem. In addition, state governments are also reporting areas where they are behind in fixing Year 2000 problems. For example, as we recently testified before the Subcommittee on Government Management, Information and Technology, House Committee on Government Reform and Oversight, a June 1998 survey conducted by the Department of Agriculture’s Food and Nutrition Service, found that only 3 states reported that their Food Stamp Program systems were Year 2000 compliant and only 14 states reported that their Women, Infants, and Children program were compliant. Moreover, four states reported that their Food Stamp Program systems would not be compliant until the last quarter of calendar year 1999, and five states reported a similar compliance time frame for the Women, Infants, and Children program. Until June 1998, the District had made very little progress in addressing the Year 2000 problem. It had not identified all of its mission-critical systems, established reporting mechanisms to evaluate the progress of remediation efforts, or developed detailed plans for remediation and testing. In addition, it lacked the basic tools necessary to move its program forward. For example, it had not assigned a full-time executive to lead its Year 2000 effort, established an executive council or committee to help set priorities and mobilize its agencies, or identified management points-of-contact in business areas. Since this past June, the District has recognized the severity of its situation and taken a number of actions to strengthen program management and to develop a strategy that is designed to help the city compensate for its late start. For example, to improve program management, the District has hired a new chief technology officer, appointed a full-time Year 2000 program manager, established a Year 2000 program office, and continued to use its chief technology officer council to help coordinate and prioritize efforts. The District also contracted with an information technology firm to assist in completing the remediation effort. To accomplish this in the short time remaining, the District and the contractor plan to concurrently (1) remediate and test system applications, (2) assess and fix the information technology (IT) infrastructure, including the data centers, hardware, operating systems, and telecommunications equipment, (3) assess and correct noninformation technology assets, and (4) develop contingency plans. So far, the District has done the following. Developed an inventory of information technology applications. Of the 336 applications identified, the District and its contractor determined that 84 are deemed Year 2000 compliant, 135 have already been remediated but still need to be tested, and 117 need to be remediated and tested. According to the District, over 9 million lines of code still need to be remediated. Initiated pilot remediation and test efforts with the pension and payroll system. The system has been converted and the conversion results are being readied for system users to review. The District expects to complete the pilot by December 31, 1998. Adopted a contingency planning methodology that it is now piloting on the 911 system, the water and sewer system, and the lottery board system. It expects to complete the first two pilots by October 31, 1998, and the remaining one during the first quarter of fiscal year 1999. Developed a strategy for remediating non-IT assets that is now being tested on the water and sewer system. This is also expected to be done by October 31, 1998. After this effort is completed, the District and the contractor will begin to assess and remediate non-IT equipment at agencies providing critical safety, health, and environmental services. The District’s recent actions reflect a commitment on the part of the city to address the Year 2000 problem and to make up for the lack of progress. However, the District is still significantly behind in addressing the problem. As illustrated in the following figure, our Assessment Guide recommends that organizations should now be testing their systems in order to have enough time to implement them. They should also have business continuity and contingency plans in place for mission-critical systems to ensure the continuity of core business operations if critical systems are not corrected in time. By contrast, the District is still in the assessment process—more than 1 year behind our recommended timetable. For example, it has not identified all of its essential business functions that must continue to operate, finished assessing its IT infrastructure and its non-IT assets, provided guidance to its agencies on testing, and identified resources that will be needed to complete remediation and testing. Until the District completes the assessment phase, it will not have reliable estimates of how long it will take to renovate and test mission-critical systems and processes and to develop business continuity and contingency plans. The District will also be unable to provide a reliable estimate of the costs to implement an effective Year 2000 program. Further, the District has had some problems in completing the assessment phase. For example, according to program office officials, three agencies—the Court System, Superior Court, and Housing Authority—have refused to participate in the program office’s assessment activities. Agencies also do not consistently attend program office meetings and do not always follow though on their assessment commitments, such as ensuring that program office and contractor teams have access to agency personnel and data. Program office officials attributed these problems to the office’s limited authority and the lack of mandatory requirements to participate in the Year 2000 program. Failure to fully engage in the Year 2000 program can only increase the risks the District faces in trying to ensure continuity of service in key business process areas. District officials acknowledge that the city is not able to provide assurance that all critical systems will be remediated on time. We agree. Therefore, to minimize disruptions to vital city services, it will be essential for the District to effectively manage risks over the next 15 months. First, because it is likely that there will not be enough time to remediate all systems, the District must identify and prioritize its most critical operations. This decision must collectively reside with the key stakeholders involved in providing District services and must represent a consensus of the key processes and their relative priority. The results of this decision should drive remediation, testing, and business continuity and contingency planning and should provide increased focus to the efforts of the Year 2000 office and its contractor. To this end, we recommend that the District, along with its current Year 2000 efforts, identify and rank the most critical business operations and systems by October 31, 1998. The District should use this ranking to determine by November 30, 1998, the priority in which supporting systems will be renovated and tested. Continuity of operations and contingency plans for these processes and systems should also be initiated at this time if such action is not already underway. Second, for systems that may not complete remediation but that are still important to city operations, managers will need to develop contingency plans for continued operations. It is essential that such plans be developed early to provide stakeholders as much time as possible to provide resources, develop “workarounds,” or secure legislative or administrative approvals as necessary to execute the plans. Third, because of the dependencies between the District and the surrounding local and federal government entities, the District will need to work closely with those bodies to both identify and prepare appropriate remedial steps and contingency plans to accommodate those dependencies. We recommend that the District immediately develop an outreach program to first identify its dependencies and then determine the remediation required to minimize the risk of Year 2000 failure. Finally, efforts to address this problem must have continued top-level commitment from the Chief Management Officer and the department and agency heads, the Mayor’s office, and the control board. Establishing a program office and hiring a contractor with significant expertise is a good first step. However, the key stakeholders need to “own” the process, i.e., participate in critical decision-making on program direction, provide resources and support for the program, and ensure that all District agencies and offices fully participate in the process. To conclude, we believe the District’s Year 2000 program needs an absolute commitment from its leadership to make the most of the short time remaining. By addressing the steps outlined above, the District can better ensure a shared understanding of the key business processes that must be remediated, a shared understanding of the risks being assumed in establishing priorities for remediation, testing, and business continuity and contingency planning, and a shared commitment to provide the resources required to address those priorities. Mrs. Chairwoman and Mr. Chairmen, this concludes my statement. I will be happy to answer any questions you or Members of the Subcommittees may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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GAO discussed the year 2000 risks facing the District of Columbia, focusing on: (1) its progress to date in fixing its systems; and (2) the District's remediation strategy. GAO noted that: (1) until June 1998, the District had made very little progress in addressing the year 2000 problem; (2) to compensate for its late start, the District has hired a new chief technology officer, appointed a full-time year 2000 program manager, established a year 2000 program office, and continued to use its chief technology officer council to help coordinate and prioritize efforts; (3) the District also contracted with an information technology firm to assist in completing the remediation effort; (4) to accomplish this in the short time remaining, the District and the contractor plan to concurrently: (a) remediate and test system applications; (b) assess and fix the information technology (IT) infrastructure, including the data centers, hardware, operating systems, and telecommunications equipment; (c) assess and correct noninformation technology assets; and (d) develop contingency plans; (5) the District has done the following: (a) developed an inventory of information technology applications; (b) initiated pilot remediation and test efforts with the pension and payroll system; (c) adopted a contingency planning methodology which it is now piloting on the 911 system, the water and sewer system, and the lottery board system; and (d) developed a strategy for remediating non-IT assets which is now being tested on the water and sewer system; (6) the District's recent actions reflect a commitment on the part of the city to address the year 2000 problem and to make up for the lack of progress; (7) however, the District is still significantly behind in addressing the problem; (8) the District has not: (a) identified all of its essential business functions that must continue to operate; (b) finished assessing its IT infrastructure and its non-information technology assets; (c) provided guidance to its agencies on testing; and (d) identified resources that will be needed to complete remediation and testing; (9) until the District completes the assessment phase, it will not have reliable estimates on how long it will take to renovate and test mission-critical systems and processes and to develop business continuity and contingency plans; (10) District officials acknowledge that the city is not able to provide assurance that all critical systems will be remediated on time; and (11) therefore, to minimize disruptions to vital city services, it will be essential for the District to effectively manage risks over the next 15 months.

All six projects serve adults who are economically disadvantaged, with a range of reasons why they have been unable to get and keep a job that would allow them to become self-sufficient. Many participants lack a high school diploma or have limited basic skills or English proficiency; have few, if any, marketable job skills; have a history of substance abuse; or have been victims of domestic violence. The projects we visited had impressive results. Three of the sites had placement rates above 90 percent—two placed virtually all those who completed their training. The other three projects placed two-thirds or more of those who completed the program. The sites differ in their funding sources, skills training approaches, and client focus. For example: We visited two sites that are primarily federally funded and target clients eligible under the Job Training Partnership Act (JTPA) and Job Opportunities and Basic Skills (JOBS) program. These sites are Arapahoe County Employment and Training in Aurora, Colorado, which is a suburb of Denver, and The Private Industry Council (TPIC) in Portland, Oregon. Both of these sites assess clients and then follow a case management approach, linking clients with vocational training available through community colleges or vocational-technical schools. The Encore! program in Port Charlotte, Florida, serves single parents, displaced homemakers, and single pregnant women. Encore!’s 6-week workshop and year-round support prepare participants for skill training. It is primarily funded by a federal grant under the Perkins Act and is strongly linked with the Charlotte Vocational Technical Center (Vo-Tech). The Center for Employment Training (CET) in Reno, Nevada, focuses on three specific service-related occupations and serves mainly Hispanic farmworkers. Participants may receive subsidized training from sources such as Pell grants, JTPA state funds, and the JTPA Farmworker Program, as well as grants from the city of Reno. Focus: HOPE, in Detroit, Michigan, also serves inner-city minorities but emphasizes development of manufacturing-related skills. Its primary funding source in 1994 was a state economic development grant. STRIVE (Support and Training Results in Valuable Employment), in New York City’s East Harlem, primarily serves inner-city minorities and focuses on developing in clients a proper work attitude needed for successful employment rather than on providing occupational skills training. STRIVE is privately funded through a grant from the Clark Foundation, which requires a two-for-one dollar match from other sources, such as local employers. Projects also differ in other ways, such as the way project staff interact with clients—customizing their approach to what they believe to be the needs of their participants. For example, STRIVE’s approach is strict, confrontational, and “no-nonsense” with the East Harlem men and women in their program. In contrast, Encore! takes a more nurturing approach, attempting to build the self-esteem of the women, many of them victims of mental or physical abuse, who participate in the program in rural Florida. One important feature of these projects’ common strategy is ensuring that clients are committed to participating in training and getting a job. Each project tries to secure client commitment before enrollment and continues to encourage that commitment throughout training. Project staff at several sites believed that the voluntary nature of their projects is an important factor in fostering strong client commitment. Just walking through the door, however, does not mean that a client is committed to the program. Further measures to encourage, develop, and require this commitment are essential. All the projects use some of these measures. Some of the things that projects do to ensure commitment are (1) making sure clients know what to expect, so they are making an informed choice when they enter; (2) creating opportunities for clients to screen themselves out if they are not fully committed; and (3) requiring clients to actively demonstrate the seriousness of their commitment. To give clients detailed information about project expectations, projects use orientation sessions, assessment workshops, and one-on-one interviews with project staff. Project officials say that they do this to minimize any misunderstandings that could lead to client attrition. Officials at both STRIVE and Arapahoe told us that they do not want to spend scarce dollars on individuals who are not committed to completing their program and moving toward full-time employment; they believe that it is important to target their efforts to those most willing to take full advantage of the project’s help. For example, at STRIVE’s preprogram orientation session, staff members give potential clients a realistic program preview. STRIVE staff explain their strict requirements for staying in the program: attending every day—on time, displaying an attitude open to change and criticism, and completing all homework assignments. At the end of the session, STRIVE staff tell potential clients to take the weekend to think about whether they are serious about obtaining employment and, if so, to return on Monday to begin training. STRIVE staff told us that typically 10 percent of those who attend the orientation do not return on Monday. Both CET and Focus: HOPE provide specific opportunities for clients to screen themselves out. They both allow potential clients to try out their training program at no charge to ensure the program is suitable for them. Focus: HOPE reserves the right not to accept potential clients on the basis of their attitude, but it does not routinely do this. Instead, staff will provisionally accept the client into one of the training programs, but put that client on notice that his or her attitude will be monitored. All six projects require clients to actively demonstrate the seriousness of their commitment to both training and employment. For example, all projects require clients to sign an agreement of commitment outlining the client’s responsibilities while in training and all projects monitor attendance throughout a client’s enrollment. In addition, some project officials believed that requiring clients to contribute to training is important to encouraging commitment. Focus: HOPE requires participants—even those receiving cash subsidies—to pay a small weekly fee for their training, typically $10 a week. A Focus: HOPE administrator explained that project officials believe that students are more committed when they are “paying customers,” and that this small payment discourages potential participants who are not seriously committed to training. All the projects emphasize removing employment barriers as a key to successful outcomes. They define a barrier as anything that precludes a client from participating in and completing training, as well as anything that could potentially limit a client’s ability to obtain and maintain a job. For example, if a client lacks appropriate basic skills, then providing basic skills training can allow him or her to build those skills and enter an occupational training program. Similarly, if a client does not have adequate transportation, she or he will not be able to get to the training program. Because all the projects have attendance requirements, a lack of adequate child care would likely affect the ability of a client who is a parent to successfully complete training. Moreover, if a client is living in a domestic abuse situation, it may be difficult for that client to focus on learning a new skill or search for a job. The projects use a comprehensive assessment process to identify the particular barriers each client faces. This assessment can take many forms, including orientation sessions, workshops, one-on-one interviews, interactions with project staff, or a combination of these. For example, at TPIC’s assessment workshop, clients complete a five-page barrier/needs checklist on a wide variety of issues, including food, housing, clothing, transportation, financial matters, health, and social/support issues. At the end of this workshop, clients must develop a personal statement and a self-sufficiency plan that the client and case manager use as a guide for addressing barriers and for helping the client throughout training. Encore! and Arapahoe have similar processes for identifying and addressing barriers that clients face. Rather than relying on a formal workshop or orientation process, CET identifies clients’ needs through one-on-one interviews with program staff when a client enters the program. Throughout the training period, instructors, the job developer, and other project staff work to provide support services and address the client’s ongoing needs. All the projects arrange for clients to get the services they need to address barriers, but—because of the wide range of individual client needs—none provides all possible services on-site. For example, although all six projects recognize the importance of basic skills training, they arrange for this training in different ways. Arapahoe contracts out for basic skills training for clients, while CET, Encore!, and Focus: HOPE provide this service on-site and TPIC and STRIVE refer clients out to community resources. Only Focus: HOPE provides on-site child care; however, all five other projects help clients obtain financial assistance to pay for child care services or refer clients to other resources. Because some of the projects attract many clients who have similar needs, these projects provide certain services on-site to better tailor their services to that specific population. For example, because it serves Hispanic migrant farmworkers with limited English proficiency, CET provides an on-site English-as-a-second-language program. Likewise, because a major barrier for many of Encore!’s clients is low self-esteem resulting from mental and/or physical abuse, Encore! designed its 6-week workshop to build self-esteem and address the barriers that these women face so that they are then ready to enter occupational training. Each project we visited emphasizes employability skills training. Because so many of their clients have not had successful work experiences, they often do not have the basic knowledge others might take for granted about how to function in the workplace. They need to learn what behaviors are important and how to demonstrate them successfully. These include getting to work regularly and on time; dressing appropriately; working well with others; accepting constructive feedback; resolving conflicts appropriately; and, in general, being a reliable, responsible, self-disciplined employee. Each project coaches students in employability skills through on-site workshops or one-on-one sessions. For example, CET provides a human development program that addresses such issues as life skills, communication strategies, and good work habits. Similarly, Arapahoe helps each client develop employment readiness competencies through a workshop or one-on-one with client case managers. Some of the projects also develop employability skills within the context of occupational skills training, with specific rules about punctuality, attendance, and, in some cases, appropriate clothing consistent with the occupation for which clients are training. STRIVE concentrates almost exclusively on employability skills and, in particular, attitudinal training. This project has a very low tolerance for behaviors such as being even a few minutes late for class, not completing homework assignments, not dressing appropriately for the business world, and not exhibiting the appropriate attitude. We observed staff dismissing clients from the program for a violation of any of these elements, telling them they may enroll in another offering of the program when they are ready to change their behavior. Program staff work hard to rid clients of their attitude problems and “victim mentality”—that is, believing that things are beyond their control—and instill in them a responsibility for themselves, as well as make them understand the consequences of their actions in the workplace. All the projects have strong links with the local labor market. Five of the six projects provide occupational skills training, using information from the local labor market to guide their selection of training options to offer clients. These projects focus on occupations that the local labor market will support. Project staff strive to ensure that the training they provide will lead to self-sufficiency—jobs with good earnings potential as well as benefits. In addition, all but one of the six projects use their links to local employers to assist clients with job placement. While their approaches to occupational training and job placement differ, the common thread among the projects is their ability to interpret the needs of local employers and provide them with workers who fit their requirements. All five projects that provide occupational training are selective in the training options that they offer clients, focusing on occupational areas that are in demand locally. For example, CET and Focus: HOPE have chosen to limit their training to one or a few very specific occupational areas that they know the local labor market can support. Focus: HOPE takes advantage of the strong automotive manufacturing base in the Detroit area by offering training in a single occupation serving the automotive industry—machining. With this single occupational focus, Focus: HOPE concentrates primarily on meeting the needs of the automotive industry and the local firms that supply automotive parts. Students are instructed by skilled craftspeople; many senior instructors at Focus: HOPE are retirees who are passing on the knowledge they acquired during their careers. The machines used in training are carefully chosen to represent those that are available in local machine shops—both state-of-the-art and older, less technically sophisticated equipment. Job developers sometimes visit potential work sites, paying close attention to the equipment in use. This information is then used to ensure a good match between client and employer. While offering a wide range of training options, Vo-Tech, which trains Encore! participants, is linked to the local labor market, in part by its craft advisory committees. These committees involve 160 businesses in determining course offerings and curricula. Vo-Tech recently discontinued its bank teller program shortly after a series of local bank mergers decreased demand for this skill. It began offering an electronics program when that industry started expansion in the Port Charlotte area. Vo-Tech also annually surveys local employers for feedback on its graduates’ skills and abilities, using the feedback to make changes to its programs. When feedback from local employers in one occupation indicated that Vo-Tech graduates were unable to pass state licensing exams, the school terminated the instructors and hired new staff. All the projects assist clients in their job search. Five of the six projects had job developers or placement personnel who work to understand the needs of local employers and provide them with workers who fit their requirements. For example, at Focus: HOPE the job developers sometimes visit local employers to discuss their required skill needs. Virtually all graduates of Focus: HOPE are hired into machinist jobs in local firms. The placement staff that works with Encore! graduates noted that there are more positions to fill than clients to fill them. They believe that because of their close ties with the community and the relevance of their training program they have established a reputation of producing well-trained graduates. This reputation leads employers to trust their referrals. Mr. Chairman, that concludes my prepared statement. At this time I will be happy to answer any questions you or other members of the Subcommittee may have. For information on this testimony, please call Sigurd R. Nilsen, Assistant Director, at (202) 512-7003; Sarah L. Glavin, Senior Economist, at (202) 512-7180; Denise D. Hunter, Senior Evaluator, at (617) 565-7536; or Betty S. Clark, Senior Evaluator, at (617) 565-7524. Other major contributors included Benjamin Jordan and Dianne Murphy Blank. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the merits of 6 highly successful employment training programs for economically disadvantaged adults. GAO found that the programs: (1) serve adults with little high school education, limited basic skills and English language proficiency, few marketable job skills, and past histories of substance abuse and domestic violence; (2) have a fairly successful placement rate, with three of the programs placing 90 percent of their clientele; (3) ensure that the clients are committed to training and getting a good job, and as a result, require them to sign an agreement of commitment outlining their responsibilities; (4) provide child care, transportation, and basic skills training to enable clients to complete program training and acquire employment; (5) improve their clients employability through on-site workshops and one-on-one sessions; (6) have strong links with the local labor market and use information from the local market to guide training options; and (7) aim to provide their clients with training that will lead to higher earnings, good benefits, and overall self-sufficiency.

Based on state responses to our survey, we estimated that nearly 617,000, or about 89 percent of the approximately 693,000 regulated tanks, had been upgraded with the federally required equipment by the end of fiscal year 2000. EPA data showed that about 70 percent of the total number of tanks that its regions regulate on tribal lands had also been upgraded. With regard to the approximately 76,000 tanks that we estimated have not been upgraded, closed, or removed as required, 17 states and the 3 EPA regions we visited reported that they believed that most of these tanks were either empty or inactive. However, another five states reported that at least half of their non-upgraded tanks were still in use. EPA and states assume that the tanks are empty or inactive and therefore pose less risk. As a result, they may give them a lower priority for resources. However, states also reported that they generally did not discover tank leaks or contamination around tanks until the empty or inactive tanks were removed from the ground during replacement or closure. Consequently, unless EPA and the states address these non-compliant tanks in a more timely manner, they may be overlooking a potential source of soil and groundwater contamination. Even though most tanks have been upgraded, we estimated from our survey data that more than 200,000 of them, or about 29 percent, were not being properly operated and maintained, increasing the risk of leaks. The extent of operations and maintenance problems varied across the states, as figure 1 illustrates. The states reported a variety of operational and maintenance problems, such as operators turning off leak detection equipment. The states also reported that the majority of problems occurred at tanks owned by small, independent businesses; non-retail and commercial companies, such as cab companies; and local governments. The states attributed these problems to a lack of training for tank owners, installers, operators, removers, and inspectors. These smaller businesses and local government operations may find it more difficult to afford adequate training, especially given the high turnover rates among tank staff, or may give training a lower priority. Almost all of the states reported a need for additional resources to keep their own inspectors and program staff trained, and 41 states requested additional technical assistance from the federal government to provide such training. To date, EPA has provided states with a number of training sessions and helpful tools, such as operation and maintenance checklists and guidelines. One of EPA’s tank program initiatives is also intended to improve training and tank compliance with federal requirements, such as setting annual compliance targets with the states. The agency is in the process of implementing its compliance improvement initiative, which involves actions such as setting the targets and providing incentives to tank owners, but it is too early to gauge the impact of the agency’s efforts on compliance rates. According to EPA’s program managers, only physical inspections can confirm whether tanks have been upgraded and are being properly operated and maintained. However, only 19 states physically inspect all of their tanks at least once every 3 years—the minimum that EPA considers necessary for effective tank monitoring. Another 10 states inspect all tanks, but less frequently. The remaining 22 states do not inspect all tanks, but instead generally target inspections to potentially problematic tanks, such as those close to drinking water sources. In addition, not all of EPA’s own regions comply with the recommended rate. Two of the three regions that we visited inspected tanks located on tribal land every 3 years. Figure 2 illustrates the states’ reported inspection practices. According to our survey results, some states and EPA regions would need additional staff to conduct more frequent inspections. For example, under staffing levels at the time of our review, the inspectors in 11 states would each have to visit more than 300 facilities a year to cover all tanks at least once every 3 years, but EPA estimates that a qualified inspector can only visit at most 200 facilities a year. Moreover, because most states use their own employees to conduct inspections, state legislatures would need to provide them additional hiring authority and funding to acquire more inspectors. Officials in 40 states said that they would support a federal mandate requiring states to periodically inspect all tanks, in part because they expect that such a mandate would provide them needed leverage to obtain the requisite inspection staff and funding from their state legislatures. In addition to more frequent inspections, a number of states stated that they need additional enforcement tools to correct problem tanks. EPA’s program managers stated that good enforcement requires a variety of tools, including the ability to issue citations or fines. One of the most effective tools is the ability to prohibit suppliers from delivering fuel to stations with problem tanks. However, as figure 3 illustrates, 27 states reported that they did not have the authority to stop deliveries. In addition, EPA believes, and we agree, that the law governing the tank program does not give the Agency clear authority to regulate fuel suppliers and therefore prohibit their deliveries. Almost all of the states said they need additional enforcement resources and 27 need additional authority. Members of both an expert panel and an industry group, which EPA convened to help it assess the tank program, likewise saw the need for states to have more resources and more uniform and consistent enforcement across states, including the authority to prohibit fuel deliveries. They further noted that the fear of being shut down would provide owners and operators a greater incentive to comply with federal requirements. Under its tank initiatives, EPA is working with states to implement third party inspection programs, using either private contractors or other state agencies that may also be inspecting these business sites for other reasons. EPA’s regions have the opportunity, to some extent, to use the grants that they provide to the states for their tank programs as a means to encourage more inspections and better enforcement. However, the Agency does not want to limit state funding to the point where this further jeopardizes program implementation. The Congress may also wish to consider making more funds available to states to improve tank inspections and enforcement. For example, the Congress could increase the amount of funds it provides from the Leaking Underground Storage Tank trust fund, which the Congress established to specifically provide funds for cleaning up contamination from tanks. The Congress could then allow states to spend a portion of these funds on inspections and enforcement. It has considered taking this action in the past, and 40 states said that they would welcome such funding flexibility. In fiscal year 2000, EPA and the states confirmed a total of more than 14,500 leaks or releases from regulated tanks, although the Agency and many of the states could not verify whether the releases had occurred before or after the tanks had been upgraded. According to our survey, 14 states said that they had traced newly discovered leaks or releases that year to upgraded tanks, while another 17 states said they seldom or never detected such leaks. The remaining 20 states could not confirm whether or not their upgraded tanks leaked. EPA recognizes the need to collect better data to determine the extent and cause of leaks from upgraded tanks, the effectiveness of the current equipment, and if there is a need to strengthen existing equipment standards. The Agency has launched studies in several of its regions to obtain such data, but it may have trouble concluding whether leaks occurred after the upgrades. In a study of local tanks, researchers in Santa Clara County, California, concluded that upgraded tanks do not provide complete protection against leaks, and even properly operated and maintained tank monitoring systems cannot guarantee that leaks are detected. EPA, as one of its program initiatives, is working with the states to gather data on leaks from upgraded tanks in order to determine whether equipment requirements need to be strengthened, such as requiring double-walled tanks. The states and the industry and expert groups support EPA’s actions. In closing, the states and EPA cannot ensure that all regulated tanks have the required equipment to prevent health risks from fuel leaks, spills, and overfills or that tanks are safely operated and maintained. Many states are not inspecting all of their tanks to make sure that they do not leak, nor can they prohibit fuel from being delivered to problem tanks. EPA has the opportunity to help its regions and states correct these limitations through its tank initiatives, but it is difficult to determine whether the Agency’s proposed actions will be sufficient because it is just defining its implementation plans. The Congress also has the opportunity to help provide EPA and the states the additional inspection and enforcement authority and resources they need to improve tank compliance and safety.

Hazardous substances that leak from underground storage tanks can contaminate the soil and water and pose continuing health risks. Leaks of methyl tertiary butyl ether--a fuel additive--have forced several communities to close their wells. GAO surveyed all 50 states and the District of Columbia to determine whether tanks are compliant with the Environmental Protection Agency's (EPA) underground storage tank (UST) requirements. About 1.5 million tanks have been closed since the program was created, leaving about 693,000 tanks subject to UST requirements. Eighty-nine percent of these tanks had the required protective equipment installed, but nearly 30 percent of them were not properly operated and maintained. EPA estimates that the rest were inactive and empty. More than half of the states do not meet the minimum rate recommended by EPA for inspections. State officials said that they lacked the money, staff, and authority to conduct more inspections or more strongly enforce tank compliance. States reported that even tanks with the required leak prevention and detection equipment continue to leak, although the full extent of the problem is unknown. EPA is seeking better data on leaks from upgraded tanks and is considering whether it needs to set new tank requirements, such as double-walled tanks, to prevent future leaks.

In July 2012, we reported on changes Interior made to its oversight of offshore oil and gas activities in the Gulf of Mexico in the aftermath of the Deepwater Horizon incident. Specifically, we reported that On October 1, 2011, Interior officially established two new bureaus, separating offshore resource management oversight activities, such as reviewing oil and gas exploration and development plans, from safety and environmental oversight activities, such as reviewing drilling permits and inspecting drilling rigs. Because the responsibilities of these new bureaus are closely interconnected, and carrying them out will depend on effective coordination, Interior developed memoranda and standard operating procedures to define roles and responsibilities and facilitate and formalize coordination. New safety and environmental requirements and policy changes designed to mitigate the risk of a well blowout or spill initially required Interior to devote additional resources and time to reviewing certain oil and gas exploration and development plans and drilling permits for oil and gas activities in the Gulf of Mexico. Specifically, these policy changes affected Interior’s (1) environmental analyses, (2) reviews of oil and gas exploration and development plans, and (3) reviews of oil and gas drilling permits. Our analysis of drilling permit approval time frames found that approval times initially increased after the new requirements went into effect, but as both Interior staff and oil and gas companies became more familiar with these requirements, the review times decreased. Interior’s inspections of offshore Gulf of Mexico oil and gas drilling rigs and production platforms from January 1, 2000, through September 30, 2011, routinely identified violations. However, Interior’s database was missing data on when violations were identified, as well as when they were corrected for about half of the violations issued. As a result, Interior did not know on a real-time basis whether or when all violations were identified and corrected, potentially allowing unsafe conditions to continue for extended periods. During this same period, Interior issued approximately $18 million in civil penalty assessments. At the time of our report, Interior had begun implementing a number of policy changes to improve both its inspection and civil penalty programs—but had not assessed how these changes would affect its ability to conduct monthly drilling rig inspections. Interior continued to face challenges following its reorganization that may affect its ability to oversee oil and gas activities in the Gulf of Mexico. Specifically, Interior’s capacity to identify and evaluate risks associated with drilling remained limited, raising questions about the effectiveness with which it allocated its oversight resources. Interior also experienced difficulties in implementing effective information technology systems, such as those that aid its reviews of oil and gas companies’ exploration and development plans. It also continued to face workforce planning challenges, including hiring, retaining, and training staff. Moreover, Interior did not have current strategic plans to guide its information technology or workforce planning efforts. Our July 2012 report resulted in 11 recommendations for specific improvements to Interior’s oversight of offshore oil and gas activities, including those intended to improve its drilling inspection program and human capital planning. Interior generally agreed with our recommendations and has committed to implementing them. Federal oil and gas resources generate billions of dollars annually in revenues that are shared among federal, state, and tribal governments; however, in several reviews over the past 5 years we found Interior may not be properly assessing and collecting these revenues. In September 2008, we reported that Interior collected lower levels of revenues for oil and gas production in the deepwater of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners in other countries, as well as in some states whose revenue collection systems were evaluated in a comprehensive industry study.significant changes in the oil and gas industry over the past several decades, we found that Interior had not systematically reexamined how the U.S. government is compensated for extraction of oil and gas in over 25 years. We recommended Interior conduct a comprehensive review of In addition, despite the federal oil and gas fiscal system using an independent panel. After Interior initially disagreed with our recommendations, we recommended that Congress consider directing the Secretary of the Interior to convene an independent panel to perform a comprehensive review of the federal oil and gas fiscal system and establish procedures to periodically evaluate the state of the fiscal system. In response to that recommendation, Interior commissioned a study that compared the U.S. government’s fiscal system with that of other resource owners. We are currently conducting work to assess how Interior plans to use the results of this study to inform decisions about its fiscal system. Furthermore, we reported, in July 2009, on numerous problems with Interior’s efforts to collect data on oil and gas produced on federal lands and waters, including missing data, errors in company-reported data on oil and gas production, and sales data that did not reflect prevailing market prices for oil and gas. As a result of its lack of consistent and reliable data on the production and sale of oil and gas from federal lands and waters, Interior could not provide reasonable assurance that it was assessing and collecting the appropriate amount of royalties on this production. We made a number of recommendations to Interior to improve controls on the accuracy and reliability of royalty data. Interior generally agreed with our recommendations and has implemented the majority of them. We also reported, in March 2010, that Interior was not taking the steps needed to ensure that oil and gas produced from federal lands and For example, we found that neither waters was accurately measured. BLM nor MMS had consistently met their agency goals for oil and gas production verification inspections, intended to examine, among other things, whether lessees were taking steps to ensure that the amount of oil and gas produced from federal lands and waters was being accurately measured. Without such verification, Interior cannot provide reasonable assurance that the public is collecting its share of revenue from oil and gas development. We also raised concerns over Interior’s efforts to develop software to allow inspection staff to remotely monitor gas production. Specifically, we found that BLM’s Remote Data Acquisition for Well Production program—a program designed to provide industry and government with common tools to validate production and to view production data in near real-time—had shown few results, despite 10 years of development and costs of over $1.5 million. Our March 2010 report identified 19 recommendations for specific improvements to oversight of production verification activities, including recommendations intended to strengthen BLM’s production inspection program and its ability to obtain near real-time gas production data. Interior generally agreed with our recommendations; it has already implemented many of them and continues to work on the remainder. Additionally, we reported, in October 2010, that Interior’s data likely understated the amount of natural gas produced on federal leases, because the data did not quantify the amount of gas released directly to the atmosphere (vented) or burned (flared) during the production process. This vented and flared gas represents lost royalties to the government and contributes to greenhouse gases. We recommended that Interior improve its data and address limitations in its regulations and guidance to reduce this lost gas. Interior generally agreed with our recommendations and is taking steps to implement them. In February 2011, we added Interior’s management of federal oil and gas resources to our list of federal programs and operations at high risk for waste, fraud, abuse, and mismanagement or needing broad-based transformation. We added Interior to the list because the department: (1) did not have reasonable assurance that it was collecting its share of revenue from oil and gas produced on federal lands; (2) continued to experience problems in hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations on federal lands and waters; and (3) was engaged in a broad reorganization of both its offshore oil and gas management and revenue collection functions, leading to concerns about whether Interior could provide effective program oversight while undergoing such a broad reorganization. In the February 2013 update to our High Risk list,federal oil and gas management high-risk area to focus on revenue collection and human capital challenges because Interior had completed its reorganization. In order for GAO to remove the high-risk designation, Interior must successfully address the challenges we have identified, implement open recommendations, and meet its responsibilities to manage federal oil and gas resources in the public interest. While Interior recently began implementing a number of GAO recommendations, including those intended to improve the reliability of data necessary for determining royalties, the agency has yet to implement a number of other recommendations, including those intended to help the agency (1) provide reasonable assurance that oil and gas produced from federal leases is accurately measured and that the public is getting an appropriate share of oil and gas revenues and (2) address its long- standing human capital issues. We are currently engaged in two reviews examining the remaining two high-risk issues. First, we are conducting a follow up review of Interior’s collection of revenues from the production of oil and gas on federal lands and waters. As part of this review, we will examine Interior’s progress, if any, in (1) ensuring the government is getting a fair return for federal oil and gas resources, (2) meeting agency targets for conducting oil and gas production verification inspections, and (3) providing greater assurance that oil and gas production and royalty data are consistent and reliable. Second, we are reviewing the extent to which Interior continues to face problems hiring, training, and retaining staff, and how any remaining problems affect Interior’s ability to oversee oil and gas activities on federal lands and waters. As part of this effort, we will focus on the causes of Interior’s human capital challenges, actions taken, and Interior’s plans for measuring the effectiveness of corrective actions. In addition, while we have narrowed the focus of the high-risk area to revenue collection and human capital issues, we will, in the course of ongoing work on these issues, continue to consider Interior’s reorganization and its affect on the agency’s ability to oversee federal lands and waters. In conclusion, Interior’s management of federal oil and gas resources is in transition. Our past work has found a wide range of weaknesses in Interior’s oversight of federal oil and gas resources, ultimately resulting in its inclusion on our High Risk List in 2011. Since then, Interior has successfully implemented many recommendations and resolved one of the three concerns that led to its inclusion on the high risk list—the challenges associated with its reorganization. We remain hopeful that Interior will continue to implement the many remaining recommendations we have made, thereby providing greater assurance of effective oversight of federal oil and gas resources. Chairman Lankford, Ranking Member Speier and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. If you have any questions concerning this testimony, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions include Jon Ludwigson, Assistant Director; Christine Kehr, Assistant Director; Janice Ceperich; Glenn Fischer; Cindy Gilbert; Alison O’Neill; and Barbara Timmerman. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Interior issues permits for the development of new oil and gas wells on federal lands and waters; inspects wells to ensure compliance with environmental, safety, and other regulations; and collects royalties from companies that sell the oil and gas produced from those wells. In recent years, onshore and offshore federal leases produced a substantial portion of the oil and gas produced in the United States. In fiscal year 2012, Interior collected almost $12 billion in mineral revenues including those from oil and gas development, making it one of the largest nontax sources of federal government funds. Previous GAO work has raised concerns about Interior's management and oversight of federal oil and gas resources. This testimony focuses on (1) Interior's oversight of offshore oil and gas resources, (2) Interior's collection of oil and gas revenues, and (3) Interior's progress to address concerns that resulted in its inclusion on GAO's High Risk List in 2011. This statement is based on prior GAO reports issued from September 2008 through February 2013. GAO is making no new recommendations. Interior continues to act on the recommendations that GAO has made to improve the management of oil and gas resources. GAO continues to monitor Interior's implementation of these recommendations. Interior's oversight of offshore resources . In July 2012, GAO reported on changes to the Department of the Interior's oversight of offshore oil and gas activities in the Gulf of Mexico following the Deepwater Horizon incident. Specifically, GAO reported that Interior had established two new bureaus, separating resource management oversight activities from safety and environmental oversight activities. GAO also reported that new requirements and policy changes designed to mitigate risk of a well blowout or spill had initially required additional resources and increased permit approval times, but that approval times decreased as Interior staff and oil and gas companies became more familiar with the new requirements. GAO also found that Interior's inspections of offshore Gulf of Mexico drilling rigs and production platforms routinely identified violations, but that Interior's database was missing data on when violations were identified and corrected. GAO made 11 recommendations aimed at improving Interior's oversight activities. Interior generally agreed with the recommendations and plans to implement them. Interior's collection of oil and gas revenues. In September 2008, GAO reported that Interior collected lower levels of revenues for oil and gas production in the deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners in other countries and some states. In July 2009, GAO reported on problems with Interior's efforts to collect data on oil and gas produced on federal lands, including missing and erroneous data. In March 2010, GAO reported that Interior was not taking needed steps to ensure that oil and gas produced from federal lands was accurately measured and was not consistently meeting its goals for oil and gas production verification inspections. GAO made numerous recommendations aimed at improving Interior's revenue collection policies, including oversight of production verification activities and controls on the accuracy and reliability of royalty data. Interior generally agreed with these recommendations and has implemented many of them. Interior's oil and gas management on GAO's high risk list . In February 2011, GAO added Interior's management of federal oil and gas resources to its list of federal programs and operations at high risk for waste, fraud, abuse, and mismanagement or needing broad-based transformation. GAO added this high risk area because Interior (1) did not have reasonable assurance that it was collecting its share of revenues; (2) continued to experience problems hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations; and (3) was engaged in a broad agency reorganization that could adversely impact its ability to effectively manage oil and gas during the crisis following the Deepwater Horizon incident. In February 2013, after Interior completed its reorganization, GAO narrowed the oil and gas high-risk area to focus on revenue collection and human capital challenges and is currently examining these issues. While Interior has begun to implement many of GAO's recommendations, it has yet to fully implement a number of others, including recommendations intended to (1) provide reasonable assurance that oil and gas is accurately measured, and that the public is getting an appropriate share of revenues, and (2) address its long-standing human capital issues.

Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss the progress being made in downsizing the federal workforce and agencies’ use of buyouts. As agreed with your office, our statement includes information on the results to date of federal downsizing efforts, whether agencies’ use of buyouts reflected the administration’s workforce restructuring goals as articulated by the National Performance Review (NPR), the demographic results of the buyouts, the extent to which we estimate that the statutorily mandated workforce reduction goals could be met through attrition, and the cost and savings implications of buyouts versus reductions-in-force (RIF). We obtained information on the results of federal downsizing activities by analyzing workforce data contained in the Office of Personnel Management’s (OPM) Central Personnel Data File (CPDF) for fiscal year 1992 through November of fiscal year 1996, and by reviewing workforce trends presented in the President’s fiscal year 1997 federal budget. Our analysis of whether agencies’ use of buyouts reflected NPR’s workforce restructuring goals was based on our review of applicable Office of Management and Budget (OMB) guidance to agencies and CPDF workforce data. Our examination of the demographic results of the buyouts was based on CPDF data as well. Our estimate of the extent to which mandated workforce reduction goals can be achieved by attrition was based on workforce trends data contained in the President’s fiscal year 1997 federal budget. The costs and savings of buyouts and RIFs were analyzed using past studies by us, the Congressional Budget Office, and other federal agencies; contacts with agency officials; and demographic data from the CPDF. A more detailed analysis of the circumstances under which buyouts or RIFs offer greater potential savings is contained in the report we prepared for this Subcommittee that was released today. The Federal Workforce Restructuring Act of 1994 (P.L. 103-226) placed annual ceilings on executive branch full-time equivalent (FTE) positions from fiscal years 1994 through 1999. If implemented as intended, these ceilings will result in downsizing the federal workforce from 2.08 million FTE positions during fiscal year 1994 to 1.88 million FTE positions during fiscal year 1999. To help accomplish this downsizing, the act allowed non-Department of Defense (DOD) executive branch agencies to pay buyouts to employees who agreed to resign, retire, or take voluntary early retirement by March 31, 1995, unless extended by the head of the agency, but no later than March 31, 1997. DOD, though subject to the act’s governmentwide FTE ceilings, has the authority, under earlier legislation, to offer buyouts through September 30, 1999. For both DOD and non-DOD agencies, the buyout payment was the lesser of $25,000 or an employee’s severance pay entitlement. According to OPM data, as of September 30, 1995, more than 112,500 buyouts had been paid governmentwide. DOD was responsible for about 71 percent of these buyouts. The federal workforce is being reduced at a faster pace than was called for by the Workforce Restructuring Act. As shown in table 1, the act mandated a ceiling of 2,043,300 FTE positions for fiscal year 1995. This would have resulted in a reduction of 95,500 FTE positions (4.5 percent) from the actual fiscal year 1993 level. In reality, the actual fiscal year 1995 FTE level was 1,970,200, a reduction of 168,600 FTE positions (7.9 percent) from the fiscal year 1993 level. By the end of fiscal year 1997, the administration’s budget calls for the federal workforce to be nearly 53,000 FTE positions below the ceiling called for by the act for that period. Although the workforce reductions occurred governmentwide, they were not evenly distributed among agencies. Indeed, most of the downsizing took place at DOD. As shown in table 2, DOD absorbed nearly three-quarters of the FTE reductions in fiscal year 1994 and over half of the governmentwide reductions in fiscal year 1995. In fiscal year 1997, DOD is expected to absorb all of the FTE reductions made that year while the non-DOD workforce is expected to increase by a net total of 0.2 percent, according to the President’s fiscal year 1997 budget. Although federal employment levels have declined steadily in recent years, the workforce has been reduced with comparatively few RIFs, in part because of the buyouts. Had it not been for the buyout authority, it is likely that more agencies would have RIFed a larger number of employees to meet federal downsizing goals. From September 30, 1994, through March 1995, the on-board executive branch civilian workforce dropped from 2,164,727 employees to 2,032,440 employees, a reduction of 6 percent. CPDF data show that of the 132,287 reductions in on-board personnel that took place during this time period, 48 percent involved buyouts and 6 percent came from RIFs. The remaining 46 percent involved separations without buyouts or the basis for separation was not identified in the CPDF. The administration, through NPR, recommended that agencies direct their workforce reductions at specific “management control” positions that the administration said added little value to serving taxpayers. Such positions included those held by (1) managers and supervisors and (2) employees in headquarters, personnel, budget, procurement, and accounting occupations. By fiscal year 1999, the administration called on agencies to increase managers’ and supervisors’ span of control over other employees from a ratio of 1:7 to 1:15, and to cut management control positions by half. In our draft report on agencies’ use of buyouts that we are preparing for this Subcommittee, we present preliminary data showing that, as a proportion of the workforce as a whole, the management control positions designated for reduction by NPR were barely reduced since the end of fiscal year 1992 (the year before buyouts began at DOD); in some agencies they have increased. As shown in table 3, although the percentage of supervisors at DOD agencies dipped from 12.7 percent of the workforce to 11.9 percent, (1 supervisor for every 6.9 employees to 1 supervisor for every 7.4 employees), all but one of the other designated management control positions increased somewhat. Acquisition positions showed no change. Non-DOD agencies came only slightly closer to meeting the NPR goals. The percentage of supervisors in the non-DOD workforce went from 12.5 percent to 11.6 percent (1 supervisor for every 7 employees to 1 supervisor for every 7.6 employees). Personnel and headquarters staff also decreased as a proportion of the non-DOD workforce, while the remaining categories showed no proportional reduction or slight increases. some employees delayed their separations so that they could receive a buyout. Although it was not an explicit goal of the buyout legislation, the buyouts appeared to have helped agencies downsize without adversely affecting workforce diversity. Indeed, of the nearly 83,000 employees who were paid buyouts from fiscal year 1993 through March 31, 1995, 52 percent were white males. Consequently, the percentage of women in the workforce increased from 43.4 percent at the end of fiscal year 1992 to 44.6 percent by March 31, 1995. Likewise, during that same time period, the percentage of minorities went from 27.9 percent to 28.9 percent of the workforce. As noted earlier, total governmentwide FTE levels to date are well below the annual ceilings mandated by the Workforce Restructuring Act. Our estimates indicate that the act’s final fiscal year 1999 target for FTE ceilings could probably be met in total through an attrition rate as low as 1.5 percent and still allow for some limited hiring. As shown in figure 1, the administration’s 1997 budget calls for reducing the federal workforce from 1.97 million FTE positions at the end of fiscal year 1995 to an estimated 1.91 million FTE positions by the end of fiscal year 1997. At that rate of reduction—about 1.5 percent per year—executive branch civilian agencies could meet the fiscal year 1999 FTE ceiling called for by the act while still hiring nearly 28,000 new full-time employees. Although federal attrition varies from year to year because of such factors as the state of the economy, the availability of separation incentives, and employees’ personal considerations, federal attrition has typically run considerably higher than 1.5 percent. For example, in fiscal years 1982 through 1992 (the year before buyouts began at DOD), CPDF data shows that the average annual quit rate was about 8 percent. Federal employment levels (FY 1996 - 1997 are budgetary estimates). GAO estimates. Federal Workforce Restructuring Act ceiling. Experience has shown that some agencies may need to pare down their workforces more than others as budgets are reduced, programs are dropped, and/or missions are changed. In such circumstances, some agencies may not be able to meet workforce reduction goals through attrition, and other downsizing strategies, such as buyouts or RIFs, may be necessary. do so 3 years earlier. If it were to reduce at this pace, NASA has said that it would anticipate that RIFs would be necessary. Although this downsizing proposal may or may not be implemented, it illustrates the potential magnitude of workforce reductions being considered at some individual agencies. If an agency is unable to meet its workforce reduction goals through attrition alone, which downsizing strategy—buyouts or RIFs—generates greater savings? Our study of the costs and savings of buyouts versus RIFs concludes that, over a 5-year period, buyouts would generally result in more savings to taxpayers than RIFs. This is because buyouts usually result in the separation of employees with higher salaries and benefits than those who are separated through RIFs. Because of the rights of higher graded employees to “bump” or “retreat” to lower-graded positions during a RIF, employees separated through RIFs are frequently not those who were in the positions originally targeted for elimination. We found that buyouts could generate up to 50 percent more in net savings than RIFs over the 5-year period following separation. However, these results would change if bumping and retreating did not occur in a RIF and the separated employees were eligible for retirement. In these cases, RIFs could generate up to 12 percent more in savings over the 5-year period than buyouts. Finally, if the employees were separated without bumping and retreating and were not retirement-eligible, the cost of severance pay for the RIFed employees would result in buyouts generating up to 10 percent more in net savings than RIFs over the 5-year period. These net savings projections are based on the assumption that positions vacated by separating employees would not be refilled by government or contractor personnel. Projected savings would be reduced if this occurred. their workforces by reducing management control positions. These positions have not been reduced as a proportion of the workforce as called for by NPR. With regard to future workforce reductions, our analysis showed that in terms of absolute numbers—and given historical quit rates—the remaining annual FTE employment ceilings called for by the Workforce Restructuring Act probably could be achieved governmentwide through attrition. Nevertheless, some agencies may be required to downsize more than others. In such situations, buyouts or RIFs may be necessary. In comparing the costs and savings of buyouts and RIFs, our analysis showed that buyouts offered greater savings than RIFs, except when RIFed employees do not bump and retreat and are eligible to retire. This concludes my prepared statement. I would be pleased to answer any questions you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the government's progress in downsizing its workforce and use of employee buyouts. GAO noted that: (1) executive branch full-time equivalent (FTE) positions could decrease to 1.88 million during fiscal year (FY) 1999 under mandated ceilings; (2) as of September 30, 1995, the Department of Defense (DOD) paid 71 percent of the more than 112,500 governmentwide buyouts; (3) the actual FY 1995 FTE level was 73,100 positions below the FY 1995 ceiling; (4) the FY 1997 budget calls for nearly 53,000 fewer FTE positions; (5) employee buyouts have helped limit reductions-in-force (RIF) to 6 percent of personnel cuts; (6) agencies have used buyouts more to meet required downsizing goals than to meet the administration's restructuring goals; (7) management control positions of DOD agencies have decreased to under 12 percent, but other designated positions have increased; (8) 70 percent of buyouts between FY 1993 and FY 1995 were paid to employees who took regular or early retirement; (9) retirements decreased 20 percent from FY 1991 through FY 1992, but increased 35 percent after buyout authorization; (10) the FY 1999 workforce goal could probably be met through normal attrition, but budget cuts may force some agencies to rely on other strategies to reduce their workforces below their goals; and (11) in general, buyouts generate up to 50 percent more in net savings over 5 years than RIF because higher-graded employees retreat to lower-graded positions during RIF.

Commercial airlines normally carry commercial insurance to cover losses caused by such things as mechanical failure, weather, and pilot error. In addition, they carry war-risk insurance to cover losses resulting from war, terrorism, or other hostile acts. Commercial war-risk insurance, however, can be canceled or restricted in the event of a major war, its geographical coverage can be restricted, and its rates can be raised without limit. Therefore, to provide the insurance necessary to enable air commerce to continue in the event of war, the Aviation Insurance Program was established in 1951. The program authorized FAA to provide war-risk insurance for those commercial aircraft operations deemed essential to the foreign policy of the United States when such insurance is not available commercially or is available only on unreasonable terms. In 1977, the Congress authorized the program to provide aviation insurance due to any risk, not just war risk, under the above conditions. To date FAA has issued only war-risk insurance. The fundamental premise underlying the program, according to FAA, is that the government should not provide insurance on a regular or routine basis; rather, the government should be the insurer of last resort. Consequently, FAA is not statutorily required to issue insurance to air carriers. Rather, FAA may issue aviation insurance only when certain conditions are met: (1) The President must determine that the continuation of specified air services, whether American or foreign flag, is necessary to carry out the foreign policy of the United States and (2) the Administrator of the FAA must find that insurance for the particular operation cannot be obtained on reasonable terms from the commercial insurance market. FAA issues two types of aviation insurance: nonpremium and premium. FAA issues nonpremium insurance for airlines performing contract services for federal agencies that have indemnification agreements with the Department of Transportation (DOT). Under the indemnification agreements, the federal agencies that contract for aircraft reimburse FAA for the insurance claims it pays to the airlines. This insurance is provided at no cost to the airlines, except for a one-time registration fee of $200 per aircraft. At present, only DOD and the State Department have such indemnification agreements with DOT. Nonpremium insurance accounts for about 99 percent of the aviation insurance issued by FAA. Since 1975, about 5,400 flights have been covered. For example, in 1990 and 1991, during Operation Desert Storm/Shield, FAA issued nonpremium insurance for over 5,000 flights of commercial airlines that provided airlift services as part of the Civil Reserve Air Fleet (CRAF).The commercial insurers had canceled war-risk coverage for those airlines that had clauses in their policies excluding CRAF activities. In addition to the CRAF program, the commercial air carriers insured under the program have flown many other important airlift missions for the United States, such as 111 flights to Tuzla, Bosnia, in 1996. For other regularly scheduled commercial or charter service, FAA issues premium insurance. With premium insurance, airlines pay premiums commensurate with the risks involved, and FAA assumes the financial liability for claims. As a condition for obtaining premium insurance, the aircraft must be operating in foreign air commerce, or between two or more points both of which are outside of the United States. In total FAA has provided this insurance for 67 flights since 1975. For example, FAA provided premium insurance in 1991 for flights operated by Tower Air to evacuate U.S. citizens from Tel Aviv. Both forms of FAA’s insurance cover loss of or damage to the aircraft (hull insurance), along with coverage for bodily injury or death, property damage, and baggage and personal effects (liability coverage). The maximum amount of hull and liability coverage that FAA provides under its policies is limited to the amounts insured by an airline’s commercial policy. The program is self-financed through the Aviation Insurance Revolving Fund (the Fund). Moneys deposited into the Fund to pay claims are generated from insurance premiums, the one-time registration fee charged for nonpremium insurance, and interest on investments in U.S. Treasury securities. From fiscal year 1959 through March 1997, the Fund accumulated approximately $65 million in revenues and paid out net claims totaling only about $151,000. Appendix I summarizes the major attributes of the program. In 1994, we reported that the Fund’s balance was insufficient to pay many potential claims and that delays in the payment of claims could cause a financial hardship for affected airlines. Since then, however, the National Defense Authorization Act for Fiscal Year 1997 (P.L. 104-201) has addressed these problems for DOD-sponsored flights. When we reported on this issue in 1994, about 20 percent of the aircraft registered for nonpremium insurance had hull values—the value of the aircraft itself—that exceeded the Fund’s balance of $56 million. According to FAA’s most currently available information, about 15 percent of the aircraft registered for nonpremium insurance have hull values that exceed the Fund’s March 31, 1997, balance of about $65.2 million. In other words, the loss of any one of those aircraft would liquidate the entire balance and leave the liability portion on any claim unpaid. FAA estimates that the average contingent liability per incident for each registered aircraft is about $350 million. Clearly, the Fund’s balance is inadequate to settle claims of this magnitude. We also reported in 1994 on a related problem with the timeliness with which the government could reimburse an airline for a major loss. Because the FAA would have needed to seek supplemental funding to pay any claims that exceeded the Fund’s balance, airline officials had expressed concern that untimely reimbursements could cause severe financial hardships and possible bankruptcy. The National Defense Authorization Act directed that the Secretary of Defense promptly indemnify the Secretary of Transportation for any loss covered by defense-related aviation insurance within 30 days. Second, the act authorized the Secretary of Defense to use any available operations and maintenance funds for that indemnification. The appropriations made to the Defense Department’s operations and maintenance accounts for fiscal year 1997 totaled approximately $91 billion. The unobligated balance remaining at the end of fiscal year 1997 is estimated to be $0.9 billion. Thus, sufficient funds appear to be available to reimburse the airlines for defense-related aviation hull losses, and there is a legislative requirement to do so in a timely manner. According to the FAA, industry, and airline officials with whom we spoke, these provisions generally resolve much of the uncertainty that they had earlier expressed about the Fund’s insufficient balance. We have two remaining concerns about the program. The first is making sure that the program has sufficient funds available to pay potential insurance claims for non-Defense-related flights in a timely manner. The second involves clarifying whether an explicit presidential determination of the foreign policy interests of the United States is needed before FAA can issue insurance. For the relatively rare flights for which FAA may extend nonpremium insurance at the request of the State Department (one flight since the program’s inception) and for the flights for which FAA provides premium insurance (67 flights since 1975), the Fund may still be undercapitalized in the event of a catastrophic loss. The insured State Department flight occurred in January 1991, when U.S. personnel were flown from Oman to Frankfurt because of the increasing unrest in Somalia. FAA also has extended premium insurance relatively infrequently. Most recently, premium insurance was issued for 37 flights to or from the Middle East between August 1990 and March 1991, which included evacuating U.S. citizens from Tel Aviv and ferrying cargo to Dhahran. While FAA has paid no claims for premium insurance flights in the history of the program, if there should be a catastrophe, the Fund may not have sufficient money to pay the claim in a timely manner. Not counting the liability associated with the loss of a flight, a claim for the loss of a single aircraft—which can cost $100 million—could liquidate the Fund’s entire balance and still leave a substantial portion of the claim unpaid for an indeterminate period of time. In 1994, FAA proposed alternative financing sources to make additional funds available for the reimbursement of major claims. Those alternatives included obtaining a permanent indefinite appropriation from the Congress and the authority to borrow funds from the U.S. Treasury to pay claims that exceed the Fund’s balance. FAA proposed using the permanent appropriations to pay claims under premium insurance, and the borrowing authority to pay claims under nonpremium insurance while awaiting a supplemental appropriation from the Congress or reimbursement from the indemnifying agency. However, the Office of Management and Budget did not approve the proposal, and the administration therefore did not forward the proposal to the Congress. Thus, the Fund remains potentially undercapitalized. FAA is proposing to raise the one-time fee that the airlines pay to register each aircraft for nonpremium insurance. FAA published a notice of proposed rulemaking in the Federal Register on April 17, 1997, that would raise the registration fee from $200 to $550; the increase is based on the changes in the consumer price index since the fee was set in 1975. However, such an increase would have a limited impact on the Fund’s balance in comparison with the potential costs resulting from a major loss of a non-DOD flight. In our 1994 report, we recommended that the program’s authorizing legislation be clarified because there were ambiguities in the legislation and in FAA’s implementing regulations about the need for FAA to obtain a presidential determination that a flight is in the foreign policy interests of the United States before issuing nonpremium insurance. No clarification in the legislation nor in the current FAA regulations have been made, and we believe that ambiguities still exist. FAA does not see this situation as a problem. FAA considers presidential approval of the indemnity agreement between DOT and other government agencies to constitute the President’s having determined that the flights covered by these agreements are in the foreign policy interests of the United States. This position is based on FAA’s Acting Chief Counsel’s 1984 review of the legislation and its accompanying legislative history. He concluded that the requirement for a presidential determination applied only to premium insurance and that the President’s signature on an interagency indemnification agreement was all that was required to issue nonpremium insurance. FAA published a proposed rulemaking in the Federal Register on April 17, 1997, that would revise its regulations to point out specifically that the presidential approval required for the issuance of nonpremium insurance is demonstrated by the standing presidential approval of the indemnification agreements with other government agencies. We disagree with FAA’s position. We believe that while FAA’s current practice has the advantage of being easier to administer, it lacks sufficient foundation in the authorizing legislation and current implementing regulations. We believe that the act, as currently written, requires that a presidential determination be made as a condition for issuing both nonpremium and premium insurance. In our 1994 report, we recommended that the Congress consider legislative changes that would address the Fund’s capitalization and the ambiguities about presidential determination. During this reauthorization process, we continue to believe that the Congress should consider providing a mechanism by which DOT can obtain access to financial resources so that it can pay claims that exceed the Fund’s balance within the normal time frames for commercial insurance for those few flights not sponsored by DOD. The source of funds could include (1) a permanent indefinite appropriation to cover the potential losses incurred during premium-insured flights and (2) the authority to borrow sufficient funds from the U.S. Treasury to pay the losses incurred during nonpremium flights made for qualifying government agencies other than DOD. DOT would repay the Treasury after it was reimbursed by the indemnifying agency. According to an analyst in the Congressional Budget Office, such changes would have no perceptible effect on the federal budget. We also continue to believe that the Congress should clarify the issue of whether or not a presidential determination is required before FAA can issue nonpremium insurance. This concludes our prepared statement. I would be happy to respond to any questions that you or members of the Subcommittee might have. Military Airlift: Observations on the Civil Reserve Air Fleet Program (GAO/NSIAD-96-125), March 29, 1996. Aviation Insurance: Federal Insurance Program Needs Improvements to Ensure Success (GAO/RCED-94-151), July 15, 1994. Military Airlift: Changes Underway to Ensure Continued Success of Civil Reserve Air Fleet (GAO/NSIAD-93-12), December 31, 1992. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO discussed the reauthorization of the Federal Aviation Administration's (FAA) Aviation Insurance Program, focusing on changes made to the program since GAO last reported on it in 1994. GAO noted that: (1) in its 1994 report, GAO found that the program did not have sufficient funds available to pay potential insurance claims in the unlikely event of a catastrophic loss; (2) progress has been made in addressing this matter; specifically, the National Defense Authorization Act for Fiscal Year 1997 made funds available to indemnify the program for losses incurred under Department of Defense (DOD)-sponsored flights, which account for the majority of flights insured; (3) while GAO's major concern has been addressed, two other concerns that it raised in the 1994 report remain unresolved; (4) gaps remain in the program's ability to pay claims for non-DOD flights; (5) although these flights account for a relatively small percentage of the flights that have been insured by the program, a single major loss could liquidate the program's available funds and leave a substantial portion of the claim unpaid; (6) FAA would need to seek supplemental funding to pay the claim, but the delay could cause financial hardship for the affected airline; and (7) GAO believes that some uncertainty about the program continues to be caused by ambiguity in the statutory language and FAA's current implementing regulations about whether the President must make a determination that a flight is in the foreign policy interests of the United States before issuing insurance.

A cookie is a short string of text that is sent from a Web server to a Web browser when the browser accesses a Web page. The information stored in a cookie includes, among other things, the name of the cookie, its unique identification number, its expiration date, and its domain. When a browser requests a page from the server that sent it a cookie, the browser sends a copy of that cookie back to the server. In general, most cookies are placed by the visited Web site. However, some Web sites also allow the placement of a third-party cookie—that is, a cookie placed on a visitor’s computer by a domain other than the site being visited. Cookies—whether placed by the visited Web site or a third-party—may be further classified as either session cookies or persistent cookies. Session cookies are short-lived, are used only during the current on-line session, and expire when the user exits the browser. For example, session cookies could be used to support an interactive opinion survey. Persistent cookies remain stored on the user’s computer until a specified expiration date and can be used by a Web site to track a user’s browsing behavior, through potential linkage to other data and whenever the user returns to a site. Although cookies help enable electronic commerce and other Web applications, persistent cookies also pose privacy risks even if they do not themselves gather personally identifiable information because the data contained in persistent cookies may be linked to persons after the fact, even when that was not the original intent of the operating Web site. For example, links may be established when persons accessing the Web site give out personal information, such as their names or e-mail addresses, which can uniquely identify them to the organization operating the Web site. Once a persistent cookie is linked to personally identifiable information, it is relatively easy to learn visitors’ browsing habits and keep track of viewed or downloaded Web pages. This practice raises concerns about the privacy of visitors to federal Web sites. Concerned about the protection of the privacy of visitors to federal Web sites, OMB directed—in Memorandum 99-18, issued in June 1999—every agency to post clear privacy policies on its principal Web site, other major entry points to agency Web sites, and any Web page where the agency collects substantial personal information from the public. Further, the memorandum stated that such polices must inform Web site visitors what information the agency collects about individuals, why it is collected, and how it is used, and that the policies must be clearly labeled and easily accessed when someone visits the site. In addition to these specific requirements, the memorandum was accompanied by an attachment entitled “Guidance and Model Language for Federal Web Site Privacy Policies.” OMB attached the guidance and model language for agencies to use, depending on their needs. For example, the discussion in the attachment states that in the course of operating a Web site, certain information may be collected automatically or by cookies, and that in some instances, sites may have the technical ability to collect information and later take additional steps to identify people. The discussion further states that agency privacy policies should make clear whether or not they are collecting this type of information and whether they will take further steps to collect additional information. In June 2000, OMB issued further guidance specifically concerning the use of cookies on federal Web sites. Memorandum 00-13 had two major objectives. First, it reminded agencies that they are required by law and policy to establish clear privacy policies for their Web activities and to comply with those policies. To this end, the memorandum reiterated the requirement of Memorandum 99-18 for agencies to post privacy policies on their principal Web sites, major entry points, and other Web pages where substantial amounts of personal information are posted. Second, Memorandum 00-13 established a new federal policy regarding cookies by stating that “particular privacy concerns may be raised when uses of Web technology can track the activities of users over time and across Web sites.” This guidance established a presumption that cookies would not be used on federal Web sites. Further, it provided that cookies could be used only when agencies (1) provide clear and conspicuous notice of their use, (2) have a compelling need to gather the data on the Web site, (3) have appropriate and publicly disclosed privacy safeguards for handling information derived from cookies, and (4) have personal approval by the head of the agency. The memorandum also directed agencies to provide a description of their privacy practices and the steps they have taken to ensure compliance with this memorandum as part of their information technology budget submission package. Concerned about the impact of Memorandum 00-13 on federal Web sites, the Chairman of the CIO Council’s Subcommittee on Privacy subsequently sent a letter to the Administrator of OMB’s OIRA recommending that session cookies be exempt from the requirements of the memorandum. The Chairman noted that the term “cookie” covers a number of techniques used to track information about Web site use, and that there is an important distinction between session and persistent cookies. Although supporting the application of the new policy to persistent cookies, the Chairman recommended that session cookies, which are discarded on completion of a session or expire within a short time frame and are not used to track personal information, not be subject to the requirements of the memorandum. He added that the use of these cookies should, however, continue to be disclosed in the Web sites’ privacy statements. In a September 2000 letter responding to the Chairman, the Administrator agreed that persistent cookies are a principal example of a technique for tracking the activities of users over time and across different Web sites, and, thus, agencies should not use persistent cookies unless they have met the four conditions provided in the guidance. Further, the Administrator noted that Web sites could gather information from visitors in ways that do not raise privacy concerns, such as retaining the information only during the session or for the purpose of completing a particular on-line transaction, without the capacity to track the user over time and across different Web sites. The letter concluded that such activities would not fall within the scope of the new policy. As of January 2001, most federal Web sites we reviewed followed OMB’s guidance on the use of cookies. Of the 65 federal Web sites reviewed, 57 did not use persistent cookies. However, of the eight Web sites using persistent cookies, four did so without disclosing this in their privacy policies, as required by OMB. Two of these four were allowing commercial, third-party sites to place these cookies on the computers of individuals visiting the sites. The four remaining sites using persistent cookies disclosed this use but did not meet OMB’s other conditions. In addition, four sites that did not use persistent cookies did not post privacy policies on their home pages. After we brought these findings to their attention, all 12 agencies either took corrective action or stated that they planned to take such action, as follows: The four sites using persistent cookies without disclosing such use have removed those cookies from their Web sites. Two of the four sites using persistent cookies with disclosure have now removed them. Regarding the other two sites, one has recently met all of OMB’s conditions in order to use persistent cookies. Agency officials responsible for the remaining site have revised their privacy policy to disclose the use of persistent cookies and have stated that they are in the process of seeking approval from the head of the agency to use such cookies. All four sites lacking privacy policy notices have now installed such statement hyperlinks on their respective home pages. Although OMB’s guidance has proved useful in ensuring that federal Web sites address privacy issues, the guidance is fragmented, with multiple documents addressing various aspects of Web site privacy and cookie issues. Guidance concerning cookies is currently contained in two official policy memorandums. These documents, taken together, prompted the CIO Council to recommend clarification of OMB’s cookie policy. Although OMB’s response provided useful clarification on the requirements for using persistent cookies, OMB has not yet revised the guidance memorandums themselves. Further, the letter to the CIO Council does not appear on OMB’s Web site with the two guidance memorandums. As a result, federal agencies may not have ready access to the clarifying letter and may be confused as to requirements on the use of cookies. OMB’s guidance documents also do not provide clear direction on the disclosure requirements for session cookies. Memorandum 99-18 stated that agency privacy policies should make clear whether information is collected automatically through cookies or other techniques, but it did not distinguish between session and persistent cookies. Memorandum 00-13 established the four conditions for cookie use but, again, did not clearly distinguish between session and persistent cookies. This prompted the CIO Council’s letter recommending clarification. OIRA’s letter in response clarified that Memorandum 00-13 applied only to persistent cookies but did not directly respond to the Council’s recommendation that session cookies continue to be disclosed in Web site privacy policies. This left unresolved questions as to what extent the notice requirements from Memorandum 99-18 apply to session cookies. When we asked OMB to clarify the disclosure requirements for session cookies, OIRA officials stated that session cookies do not present a privacy issue; therefore, no disclosure is required. This position, however, may confuse and mislead federal Web site visitors. For example, under this policy, a federal Web site may state in its privacy policy that it is not using cookies, while it continues to give session cookies. If a site visitor has enabled a browser to detect the presence of cookies, it may not be apparent to the visitor whether the cookies they see are session or persistent. This could raise questions about the practices of the Web site that would not be resolved by viewing the privacy policy. The Chair of the CIO Council’s Subcommittee on Privacy agreed that the issue is one of clarity rather than privacy. Further, he stated that it is better for agencies to choose full disclosure rather than partial, and that it constitutes good customer service to provide such disclosure. Most federal Web sites we reviewed were following OMB’s guidance on the use of cookies. The sites that were not following the guidance either have taken or plan to take corrective action. The OMB guidance, while helpful, leaves agencies to implement fragmented directives contained in multiple documents. In addition, the guidance itself is not clear on the disclosure requirements for techniques that do not track users over time and across Web sites, such as session cookies. Further, OMB’s stated position on the disclosure requirements for session cookies could lead to confusion on the part of visitors to federal Web sites. To clarify agency requirements on the use of automatic collections of information, including the use of cookies on their Web sites, we recommend that the Director, OMB, in consultation with other parties, such as agency officials and the CIO Council, unify OMB’s guidance on Web site privacy policies and the use of cookies, clarify the resulting guidance to provide comprehensive direction on the use of cookies by federal agencies on their Web sites, and consider directing federal agencies to disclose the use of session cookies in their Web site privacy notices. We provided a draft of this report for review and comment to the Director, OMB, on March 26, 2001. OMB did not provide comments. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time we will provide copies of the report to Senator Joseph Lieberman, Ranking Member, Senate Committee on Governmental Affairs; Representative Dan Burton, Chairman, and Representative Henry A. Waxman, Ranking Minority Member, House Committee on Government Reform; the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. Copies will also be available on GAO’s Web site at www.gao.gov. If you have any questions, please contact me at (202) 512-6240 or Mike Dolak, Assistant Director, at (202) 512-6362. We can also be reached by e- mail at koontzl@gao.gov and dolakm@gao.gov, respectively. Key contributors to this report were Scott A. Binder, Michael P. Fruitman, and David F. Plocher. To determine the use of cookies by federal agencies, we reviewed 65 federal Web sites—the same sites we reviewed in our October 2000 report. These Web sites consisted of (1) the sites operated by the 33 high- impact agencies, which handle the majority of the government’s contact with the public, and (2) 32 sites randomly selected from the General Services Administration’s government domain registry database. We reviewed each Web site between November and December, 2000, to determine which were using cookies and the type of cookies given. We also determined whether the sites using persistent cookies (1) provided clear and conspicuous notice of their use, (2) had a compelling need to gather the data on the site, (3) had appropriate and publicly disclosed privacy safeguards for handling information derived from cookies, and (4) had personal approval by the head of the agency. We updated our findings on January 24, 2001. We performed our review by using Microsoft’s Internet Explorer browser, version 5.5. We changed the security settings in the browser to alert us if we were about to receive a cookie. Before we would visit a Web site, we would clear out our computer’s cache, cookies, and temporary files and clear our history folder. We then typed in the Universal Resource Locator of the site we were visiting and spent about 10 to15 minutes per site searching through its links to determine if it was using cookies. To document our review, we made a printout of the site’s home page and privacy policies. If we found a persistent cookie on the site, we would make a printout of the cookie. After we captured and printed the cookie, we would stop searching and move on to another site. We contacted the agencies operating the Web sites that were using persistent cookies, notified them of our findings, and asked them to provide written responses detailing actions they planned to take in response to our findings and provide documentation to support their compliance with the Office of Management and Budget’s (OMB) guidelines. Specifically, we asked them to support how they (1) provided clear and conspicuous notice that they were using persistent cookies, (2) had a compelling need to gather the data on the site, (3) had appropriate and publicly disclosed privacy safeguards for handling the information derived from cookies, and (4) had obtained the personal approval by the head of the agency. We also contacted the four agencies that did not have privacy policies posted on their home pages, notified them of our findings, and asked them to provide written responses detailing the actions they planned to take to ensure that their Web sites complied with OMB guidance. To determine whether the guidance issued by OMB provided adequate direction to federal agencies operating public Web sites, we analyzed the guidance and discussed its intent with representatives of OMB’s Office of Information and Regulatory Affairs. We also met with the Chairman of the Chief Information Officers Council, Subcommittee on Privacy, to obtain the council’s views on additional privacy issues and concerns that needed to be addressed in OMB guidance. We conducted our review from August 2000 through March 2001, in accordance with generally accepted government auditing standards.

Federal agencies are using Internet "cookies" to enable electronic transactions and track visitors on their websites. Cookies are text files that have unique identifiers and are used to store and retrieve information that allow websites to recognize returning users, track on-line purchases, or maintain and serve customized web pages. This report discusses whether (1) federal websites complied with the Office of Management and Budget's (OMB) guidance on the use of cookies and (2) the guidance provided federal agencies with clear instructions on the use of cookies. GAO reviewed 65 websites randomly selected from the General Services Administration's government domain registry database between November 2000 and January 2001 to determine whether they used persistent cookies and whether such use was disclosed in the website's privacy policy. As of January 2001, most of the websites reviewed were following OMB's guidance on the use of cookies. Of the 65 sites GAO reviewed, 57 did not use persistent cookies on their websites, eight used persistent cookies, four did not disclose such use in their privacy policy, and the remaining four sites using persistent cookies did provide disclosure but did not meet OMB's other conditions for using cookies. In addition, four other sites that did not use cookies did not post privacy policies on their home pages. Those sites were taking, or planning to take, corrective action to address their noncompliance with OMB guidance. GAO found that although OMB's guidance proved useful in ensuring that federal websites address privacy issues, the guidance remained fragmented, with multiple documents addressing various aspects of Web site privacy and cookie issues. In addition, the guidance did not provide clear direction on the disclosure of session cookies.

Under a demonstration project established by VBIA, from February 8, 2005, through September 30, 2007, and subsequently extended through November 16, 2007, OSC and DOL share responsibility for receiving and investigating USERRA claims and seeking corrective action for federal employees. While the legislation did not establish specific goals for the demonstration project, the language mandating that GAO conduct a review suggested that duplication of effort and delays in processing cases were of concern to Congress. The demonstration project gave OSC, an independent investigative and prosecutorial agency, authority to receive and investigate claims for federal employees whose social security numbers end in odd numbers. VETS investigated claims for individuals whose social security numbers end in even numbers. Under the demonstration project, OSC conducts an investigation of claims assigned to determine whether the evidence is sufficient to resolve the claimants’ USERRA allegations and, if so, seeks voluntary corrective action from the involved agency or initiates legal action against the agency before the Merit Systems Protection Board (MSPB). For claims assigned to DOL, VETS conducts an investigation, and if it cannot resolve a claim, DOL is to inform claimants that they may request to have their claims referred to OSC. OSC’s responsibility under USERRA for conducting independent reviews of referred claims after they are investigated but not resolved by VETS remained unchanged during the demonstration project. Before sending the referred claim to OSC, two additional levels of review take place within DOL. After OSC receives the referred claim from DOL, it reviews the case file, and if satisfied that the evidence is sufficient to resolve the claimant’s allegations and that the claimant is entitled to corrective action, OSC begins negotiations with the claimant’s federal executive branch employer. According to OSC, if an agreement for full relief via voluntary settlement by the employer cannot be reached, OSC may represent the servicemember before MSPB. If MSPB rules against the servicemember, OSC may appeal the decision to the U.S. Court of Appeals for the Federal Circuit. In instances where OSC finds that referred claims do not have merit, it informs servicemembers of its decision not to represent them and that they have the right to take their claims to MSPB without OSC representation. Figure 1 depicts USERRA claims’ processing under the demonstration project. Under the demonstration project, VETS and OSC used two different models to investigate federal employee USERRA claims. Both DOL and OSC officials have said that cooperation and communication increased between the two agencies concerning USERRA claims, raising awareness of the issues related to servicemembers who are federal employees. In addition, technological enhancements have occurred, primarily on the part of VETS since the demonstration project. For example, at VETS, an enhancement to its database enables the electronic transfer of information between agencies and the electronic filing of USERRA claims. However, we found that DOL did not consistently notify claimants concerning the right to have their claims referred to OSC for further investigation or to bring their claims directly to MSPB if DOL did not resolve their claims. We also found data limitations at both agencies that made claim outcome data unreliable. DOL agreed with our findings and recommendations and has begun to take corrective action. Since the start of the demonstration project on February 8, 2005, both DOL/VETS and OSC had policies and procedures for receiving, investigating, and resolving USERRA claims against federal executive branch employers. Table 1 describes the two models we reported DOL and OSC using to process USERRA claims. Once a VETS investigator completes an investigation and arrives at a determination on a claim, the investigator is to contact the claimant, discuss the findings, and send a letter to the claimant notifying him or her of VETS’s determination. When VETS is unsuccessful in resolving servicemembers’ claims, DOL is to notify servicemembers who filed claims against federal executive branch agencies that they may request to have their claims referred to OSC or file directly with MSPB. Our review of a random sample of claims showed that for claims VETS was not successful in resolving (i.e., claims not granted or settled), VETS (1) failed to notify half the claimants in writing, (2) correctly notified some claimants, (3) notified others of only some of their options, and (4) incorrectly advised some claimants of a right applicable only to nonfederal claimants—to have their claims referred to the Department of Justice or to bring their claims directly to federal district court. In addition, we found that the VETS USERRA Operations Manual failed to provide clear guidance to VETS investigators on when to notify servicemembers of their rights and the content of the notifications. VETS had no internal process to routinely review investigators’ determinations before claimants are notified of them. According to a VETS official, there was no requirement that a supervisor review investigators’ determinations before notifying the claimant of the determination. In addition, legal reviews by a DOL regional Office of the Solicitor occurred only when a claimant requested to have his or her claim referred to OSC. A VETS official estimated that about 7 percent of claimants ask for their claims to be referred to OSC or, for nonfederal servicemembers, to the Department of Justice. During our review, citing our preliminary findings, DOL officials required each region to revise its guidance concerning the notification of rights. Since that time, DOL has taken the following additional actions: reviewed and updated policy changes to incorporate into the revised Operations Manual and prepared the first draft of the revised Manual; issued a memo in July 2007 from the Assistant Secretary for Veteran’s Employment and Training to regional administrators, senior investigators, and directors requiring case closing procedure changes, including the use of standard language to help ensure that claimants (federal and nonfederal) are apprised of their rights; and began conducting mandatory training on the requirements contained in the memo in August 2007. In addition, according to DOL officials, beginning in January 2008, all claims are to be reviewed before the closure letter is sent to the claimant. These are positive steps. It is important for DOL to follow through with its plans to complete revisions to its USERRA Operations Manual, which according to DOL officials is expected in January 2008, to ensure that clear and uniform guidance is available to all involved in processing USERRA claims. Our review of data from VETS’s database showed that from the start of the demonstration project on February 8, 2005, through September 30, 2006, VETS investigated a total of 166 unique claims. We reviewed a random sample of case files to assess the reliability of VETS’s data and found that the closed dates in VETS’s database were not sufficiently reliable. Therefore, we could not use the dates for the time VETS spent on investigations in the database to accurately determine DOL’s average processing time. Instead, we used the correct closed dates from the case files in our random sample and statistically estimated the average processing time for VETS’s investigations from the start of the demonstration project through July 21, 2006—the period of our sample. Based on the random sample, there is at least a 95 percent chance that VETS’s average processing time for investigations ranged from 53 to 86 days. During the same period, OSC received 269 claims and took an average of 115 days to process these claims. We found the closed dates in OSC’s case tracking system to be sufficiently reliable. In his July 2007 memo discussed above, the Assistant Secretary for Veteran’s Employment and Training also instructed regional administrators, senior investigators, and directors that investigators are to ensure that the closed date of each USERRA case entered in VETS’s database matches the date on the closing letter sent to the claimant. We found data limitations at both agencies that affected our ability to determine outcomes of the demonstration project and could adversely affect Congress’s ability to assess how well federal USERRA claims are processed and whether changes are needed. At VETS, we found an overstatement in the number of claims and unreliable data in the VETS’s database. From February 8, 2005, through September 30, 2006, VETS received a total of 166 unique claims, although 202 claims were recorded as opened in VETS’s database. Duplicate, reopened, and transferred claims accounted for most of this difference. Also, in our review of a random sample of case files, we found the dates recorded for case closure in VETS’s database did not reflect the dates on the closure letters in 22 of 52 claims reviewed, so using the correct dates from the sample, we statistically estimated average processing time, and the closed code, which VETS uses to describe the outcomes of USERRA claims (i.e., claim granted, claim settled, no merit, withdrawn) was not sufficiently reliable for reporting specific outcomes of claims. At OSC, we assessed the reliability of selected data elements in OSC’s case tracking system in an earlier report and found that the corrective action data element, which would be used for identifying the outcomes of USERRA claims, was not sufficiently reliable. We separately reviewed those claims that VETS investigated but could not resolve and for which claimants requested referral of their claims to OSC. For these claims, two sequential DOL reviews take place: a VETS regional office prepares a report of the investigation, including a recommendation on the merits and a regional Office of the Solicitor conducts a separate legal analysis and makes an independent recommendation on the merits. From February 8, 2005, through September 30, 2006, 11 claimants asked VETS to refer their claims to OSC. Of those 11 claims, 6 claims had been reviewed by both a VETS regional office and a regional Office of the Solicitor and sent to OSC. For those 6 claims, from initial VETS investigation through the VETS regional office and regional Office of the Solicitor reviews, it took an average of 247 days or about 8 months before the Office of the Solicitor sent the claims to OSC. Of the 6 referred claims that OSC received from DOL during the demonstration project, as of September 30, 2006, OSC declined to represent the claimant in 5 claims and was still reviewing 1 of them, taking an average of 61 days to independently review the claims and determine if the claims had merit and whether to represent the claimants. You asked us about factors that could be considered in deciding whether to extend the demonstration project and to conduct a follow-up review. If the demonstration project were to be extended, it would be important to have clear objectives. Legislation creating the current demonstration project was not specific in terms of the objectives to be achieved. Having clear objectives would be important for the effective implementation of the extended demonstration project and would facilitate a follow-on evaluation. In this regard, our report provides baseline data that could inform this evaluation. Given adequate time and resources, an evaluation of the extended demonstration project could be designed and tailored to provide information to inform congressional decision making. Congress also may want to consider some potential benefits and limitations associated with options available if the demonstration is not extended. Table 2 presents two potential actions that could be taken and examples of potential benefits and limitations of each. The table does not include steps, such as enabling legislation that might be associated with implementing a particular course of action. At a time when the nation’s attention is focused on those who serve our country, it is important that employment and reemployment rights are protected for federal servicemembers who leave their employment to perform military or other uniformed service. Addressing the deficiencies that we identified during our review, including correcting inaccurate and unreliable data, is a key step to ensuring that servicemembers’ rights under USERRA are protected. While DOL is taking positive actions in this regard, it is important that these efforts are carried through to completion. Chairman Akaka, Senator Burr, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For further information regarding this statement, please contact George Stalcup, Director, Strategic Issues, at (202) 512-9490 or stalcupg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this statement included Belva Martin, Assistant Director; Karin Fangman; Tamara F. Stenzel; Kiki Theodoropoulos; and Greg Wilmoth. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) protects the employment and reemployment rights of federal and nonfederal employees who leave their employment to perform military or other uniformed service. Under a demonstration project from February 8, 2005, through September 30, 2007, and subsequently extended through November 16, 2007, the Department of Labor (DOL) and the Office of Special Counsel (OSC) share responsibility for receiving and investigating USERRA claims and seeking corrective action for federal employees. In July 2007, GAO reported on its review of the operation of the demonstration project through September 2006. This testimony describes the findings of our work and actions taken to address our recommendations. In response to the request from Congress, GAO also presents views on (1) factors to consider in deciding whether to extend the demonstration project and the merits of conducting a follow-up review and (2) options available if the demonstration is not extended. In preparing this statement, GAO interviewed officials from DOL and OSC to update actions taken on recommendations from our July 2007 report and developments since we conducted that review. Under the demonstration project, OSC receives and investigates claims for federal employees whose social security numbers end in odd numbers; DOL investigates claims for individuals whose social security numbers end in even numbers. Among GAO's findings were the following: DOL and OSC use two different models to investigate federal USERRA claims, with DOL using a nationwide network and OSC using a centralized approach, mainly within its headquarters. Since the demonstration project began, both DOL and OSC officials have said that cooperation and communication increased between the two agencies concerning USERRA claims, raising awareness of the issues related to servicemembers who are federal employees. DOL did not consistently notify claimants concerning the right to have their claims referred to OSC for further investigation or to bring their claims directly to the Merit Systems Protection Board if DOL did not resolve their claims. DOL had no internal process to routinely review investigators' determinations before claimants were notified of them. Data limitations at both agencies made claim outcome data unreliable. DOL officials agreed with GAO's findings and recommendations and are taking actions to address the recommendations. In July 2007, DOL issued guidance concerning case closing procedures, including standard language to ensure that claimants (federal and nonfederal) are apprised of their rights,and began conducting mandatory training on the guidance in August 2007. In addition, according to DOL officials, beginning in January 2008, all claims are to be reviewed before the closure letter is sent to the claimant. These are positive steps and it will be important for DOL to follow through with these and other actions. If the demonstration project were to be extended, it would be important that clear objectives be set. Legislation creating the current demonstration project was not specific in terms of the objectives to be achieved. Clear project objectives would also facilitate a follow-on evaluation. In this regard, GAO's July 2007 report provides baseline data that could inform this evaluation. Given adequate time and resources, an evaluation of the extended demonstration project could be designed and tailored to provide information to inform congressional decision making. GAO also presents potential benefits and limitations associated with options available if the demonstration project is not extended.

The Results Act is the centerpiece of a statutory framework to improve federal agencies’ management activities. The Results Act was designed to shift the focus of attention of federal agencies from the amount of money they spend, or the size of their workloads, to the results achieved by their programs. Agencies are expected to base goals on their results-oriented missions, develop strategies for achieving their goals, and measure actual performance against the goals. The Results Act requires agencies to consult with the Congress in developing their strategic plans. This consultation gives the Congress the opportunity to help ensure that the agencies’ missions and goals are focused on results, are consistent with the programs’ authorizing laws, and are reasonable in light of fiscal constraints. The products of these consultations are to be clearer guidance to agencies on their missions and goals, which should lead to better information to help the Congress choose among programs, consider alternative ways to achieve results, and assess how well agencies are achieving them. The Results Act required SBA and other executive agencies to complete their first strategic plans and submit them to the Congress and OMB by September 30, 1997. The act also requires that agencies submit their first annual performance plans, which set out measurable goals that define what will be accomplished during a fiscal year, to the Congress after the President submits his fiscal year 1999 budget to the Congress. OMB requested that agencies integrate, to the extent possible, their annual performance plans into their fiscal year 1999 budget submissions. OMB, in turn, is required to include a governmentwide performance plan in the President’s fiscal year 1999 budget submission to the Congress. SBA’s September 30, 1997, strategic plan is an improvement over the March 5, 1997, version of the plan. The September plan includes the two required elements that were lacking in the March version. First, the September plan includes a section on how program evaluations were used to develop the plan and mentions some specific evaluations that SBA plans in the future, such as those for business information centers. Second, it includes a section entitled “Linkages to Annual Performance Plans” that recognizes the need to link (1) the strategic goals in the plan to annual performance goals and (2) SBA’s annual budget submissions to annual performance goals. In addition, the five goals in the September plan—which are to (1) increase opportunities for small business success, (2) transform SBA into a 21st century, leading edge financial institution, (3) help businesses and families recover from disasters, (4) lead small business participation in welfare-to-work, and (5) serve as the voice of America’s small businesses—are, as a group, more clearly linked to SBA’s statutory mission than the goals in the March version of the plan. Also, the inclusion of date-specific performance objectives to help measure performance makes the strategic goals and objectives in the September plan more amenable to a future assessment of SBA’s progress. For example, Under the goal of increasing opportunities for small business success, one of SBA’s performance objectives is as follows: “By the year 2000, SBA will help increase the share of federal procurement dollars awarded to small firms to at least 23 percent.” Under the goal of transforming SBA into a 21st century, leading edge financial institution, one of SBA’s performance objectives is as follows: “By the year 2000, SBA will expand the Chief Financial Officer (CFO) annual financial audit to include a separate opinion on whether SBA’s internal control structure meets Committee of Sponsoring Organizations (COSO) of the Treadway Commission standards for financial reporting. By the year 2002, SBA will receive an unqualified opinion on its internal control structure for financial reporting.” SBA also improved its strategic plan by more clearly and explicitly linking the strategies in the September plan to the specific objectives that they are intended to achieve. Also, some of the strategies are more detailed and more clearly indicate how they will enable SBA to accomplish its goals and objectives. For example, under the objective of “implementing effective oversight” of lenders and other resource partners, SBA’s strategies include (1) establishing loan program credit, service, and mission standards to measure lenders’ performance and (2) developing a scoring system, based on objective criteria, that measures and determines whose performance is consistent with the laws and regulations governing SBA programs. Furthermore, certain strategies recognize the crosscutting nature of some activities; for example, a strategy for achieving SBA’s strategic goal to “help businesses and families recover from disasters” is to combine SBA’s home loss verification with that of the Federal Emergency Management Agency’s home inspections. We also observed certain other changes which we believe have improved SBA’s strategic plan: The mission statement in SBA’s September plan appears to incorporate observations we made in our July report: It is concise and reflects SBA’s key statutory authorities of aiding, counseling, and assisting small businesses and of providing disaster assistance to families and businesses. In general, the September plan does a better job of recognizing that SBA’s success in achieving certain goals and objectives in its plan is dependent on the actions of others. For example, one of the strategies under the objective “expanding small business procurement opportunities” calls for SBA to “work with other federal agencies to set higher small business procurement goals and assist these agencies in meeting those goals.” SBA significantly improved its September plan by more clearly and explicitly linking performance measures to the specific objectives that they are intended to assess. Performance measures are directly linked to 11 of the 14 performance objectives in the plan. An exception is SBA’s fifth goal of serving as a voice for America’s small business, where the performance measures are listed as a group at the end of the discussion of the goal’s three objectives. While SBA’s September 30, 1997, strategic plan is an improvement over the March 1997 version that we reviewed, we believe that further revisions to the plan as SBA continues to implement the Results Act and build on current efforts would enable SBA’s plan to better meet the purposes of the Results Act. As noted earlier, while the five goals in the September plan are more clearly linked to SBA’s statutory mission, the relationship of one goal—leading small businesses’ participation in the welfare-to-work effort—to SBA’s mission is unclear. While the performance objective for this goal places emphasis on helping small businesses meet their workforce needs, the subsequent discussion implies a focus on helping welfare recipients find employment; for example, the plan states that “SBA’s goal is to help 200,000 work-ready individuals make the transition from welfare to work . . . .” It is not clear in the plan why SBA is focusing on welfare recipients and not on other categories of potential employees to help meet small businesses’ workforce needs. Under the Results Act, strategy sections in the strategic plans are to briefly describe items, such as the human, capital, information, or other resources needed to achieve goals and objectives. The strategy sections in SBA’s September plan lack such a discussion. At the same time, the plan recognizes the need for information on resources needed to achieve the goals and objectives, and states that accountable program managers will develop an annual business plan that contains a set of program activities, milestones, and resources for each objective and strategy in the plan. The Results Act requires that strategic plans include a schedule of future program evaluations. SBA’s plan mentions certain program evaluations planned by SBA for future fiscal years; for example, the plan states that in fiscal 1998, SBA will (1) assess the results of counseling services provided by two pilot Women Business Centers and (2) conduct an assessment of the effectiveness and efficiency of existing United States Export Assistance Centers. The plan also states that SBA will continue its goal monitoring of field and headquarters offices. However, the September plan does not contain schedules of future comprehensive program evaluations for SBA’s major programs, such as the 7(a) loan program, which is SBA’s largest small business lending program, and the 8(a) business development program, which supports the establishment and growth of small firms by providing them with access to federal procurement opportunities. In addition, while SBA acknowledges in the September plan that it needs a more systematic approach for using program evaluations for measuring progress toward achieving its goals and objectives, the plan does not outline how SBA will develop and implement such an approach. It should be noted that the IG’s plan references future audits and evaluations that the IG plans to conduct as part of its effort to improve SBA’s management. Under OMB’s Circular A-11, strategic plans are to briefly describe key external factors and how each factor may influence achievement of the goals and objectives. A section added to the September plan identifies four external factors—the state of the economy, continued congressional and stakeholder support, public-private cooperation, and interagency coordination—that could affect the achievement of the plan’s goals. However, with the exception of the “interagency coordination” factor, the plan does not link these factors to particular goals or describe how each could affect achievement of the plan’s goals and objectives. Also, the plan does not articulate strategies that SBA would take to mitigate the effects of these factors. The added section also discusses how SBA’s programs and activities interact with other federal agencies’ programs and activities. While SBA states that it will work with other federal agencies to coordinate its activities, the section does not provide evidence that SBA coordinated with the other agencies in the plan’s development. The September plan, while recognizing the need for reliable information to measure progress toward the plan’s goals and objectives, notes that SBA currently does not collect or report many of the measures that it will require to assess performance. The plan would benefit from brief descriptions of how SBA plans to collect the data to measure progress toward its goals and objectives. Similarly, a section in the September plan discusses SBA’s efforts to improve internal controls and to obtain an unqualified opinion on its internal control structure for financial reporting by the year 2002. While this section implies that SBA will address management problems identified by GAO and others, such as SBA’s failure to reconcile certain fund balances with those of the Department of Treasury and the problem of overvalued or nonexistent collateral on liquidated 7(a) loans, specific strategies to address the identified management problems are not described. Unlike the March version that we reviewed, SBA’s September plan includes, as appendices, separate strategic plans for SBA’s Office of Inspector General (IG) and Office of Advocacy. In the March version of the plan, the IG material was presented under one of the plan’s seven goals, while the Office of Advocacy material did not appear at all. Generally, the goals and objectives in the IG and Advocacy plans appear consistent with, and may contribute to the achievement of, the goals and objectives in SBA’s plan, but the relationship is not explicit. SBA’s plan makes little mention of the IG and Advocacy plans and does not indicate if or how the IG and Advocacy activities are intended to help SBA achieve the agency’s strategic goals. Similarly, the IG and Advocacy plans do not make reference to the goals and objectives in the SBA plan. These plans could be more useful to decisionmakers if their relationships were clearer. In summary, SBA has made progress in its strategic planning efforts, based in part on its consultation with the Congress. As I noted earlier, SBA’s September 1997 strategic plan includes several improvements that make it more responsive to the requirements of the Results Act. However, as is the case with many other agencies, SBA’s development of a plan that conforms to the requirements of the Results Act and to OMB’s guidance is an evolving process. As my testimony notes, there are still several areas where improvements need to be made to SBA’s strategic plan in order to meet the purposes of the Results Act. This concludes my statement. I would be pleased to respond to any questions you or members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the September 30, 1997 strategic plan developed by the Small Business Administration (SBA), pursuant to the Government Performance and Results Act. GAO noted that: (1) SBA's plan represents an improvement over its March 1997 version; (2) the plan contains the six elements required by the Results Act; (3) the strategic goals, as a group, are more clearly linked to SBA's mission and are more amenable to measurement; (4) the strategies and performance measures are more clearly linked to the objectives that they are intended to achieve and measure; (5) other improvements in the plan encompass a mission statement that now includes the disaster loan program for families and more accurately reflects SBA's statutory authorities and a better recognition that SBA's success in achieving certain goals and objectives in the plan is dependent on the actions of others; (6) an additional section discusses how SBA's programs and activities interact with those of other federal agencies; (7) the plan could be further improved to better meet the purposes of the Results Act; (8) the relationship of one of the plan's goals, leading small business participation in the welfare-to-work effort, to SBA's mission is unclear; (9) the plan does not discuss the human, capital, and other resources needed by SBA to carry out the strategies identified in the plan; (10) the plan does not include comprehensive schedules of future program evaluations for major SBA programs; (11) the plan does not consistently link identified external factors to the particular goal or goals they could affect or describe how how each factor could affect the achievement of the goal; (12) in a departure from its March version, SBA's plan includes as appendices separate strategic plans for SBA's Office of Inspector General and Office of Advocacy; and (13) the relationship between the goals and objectives in the plans included in the appendices and those in SBA's plan is not explicit.

The National Park System is one of the most visible symbols of who we are as a land and a people. As the manager of this system, the National Park Service is caretaker of many of the nation’s most precious natural and cultural resources, ranging from the fragile ecosystems of Arches National Park in Utah to the historic structures of Philadelphia’s Independence Hall and the granite faces of Mount Rushmore in South Dakota. Over the past 30 years, more than a dozen major studies of the National Park System by independent experts as well as the Park Service itself have pointed out the importance of guiding resource management through the systematic collection of data—sound scientific knowledge. The recurring theme in these studies has been that to manage parks effectively, managers need information that allows for the detection and mitigation of threats and damaging changes to resources. Scientific data can inform managers, in objective and measurable terms, of the current condition and trends of park resources. Furthermore, the data allow managers to make resource management decisions based on measurable indicators rather than relying on judgment or general impressions. Managing with scientific data involves both collecting baseline data about resources and monitoring their condition over time. Park Service policy calls for managing parks on this basis, and park officials have told us that without such information, damage to key resources may go undetected until it is so obvious that correcting the problem is extremely expensive—or worse yet, impossible. Without sufficient information depicting the condition and trends of park resources, the Park Service cannot adequately perform its mission of preserving and protecting these resources. While acknowledging the importance of obtaining information on the condition of park resources, the Park Service has made only limited progress in developing it. Our reviews have found that information about many cultural and natural resources is insufficient or absent altogether. This was particularly true for park units that feature natural resources, such as Yosemite and Glacier National Parks. I would like to talk about a few examples of the actual impact of not having information on the condition of park resources, as presented in our 1995 report. Generally, managers at culturally oriented parks, such as Antietam National Battlefield in Maryland or Hopewell Furnace National Historic Site in Pennsylvania, have a greater knowledge of their resources than managers of parks that feature natural resources. Nonetheless, the location and status of many cultural resources—especially archaeological resources—were largely unknown. For example, at Hopewell Furnace National Historic Site, an 850-acre park that depicts a portion of the nation’s early industrial development, the Park Service has never conducted a complete archaeological survey, though the site has been in the park system since 1938. A park official said that without comprehensive inventory and monitoring information, it is difficult to determine whether the best management decisions about resources are being made. The situation was the same at large parks established primarily for their scenic beauty, which often have cultural resources as well. For example, at Shenandoah National Park in Virginia, managers reported that the condition of more than 90 percent of the identified sites with cultural resources was unknown. Cultural resources in this park include buildings and industrial artifacts that existed prior to the formation of the park. In our work, we found that many of these sites and structures have already been damaged, and many of the remaining structures have deteriorated into the surrounding landscape. The tragedy of not having sufficient information about the condition and trends of park resources is that when cultural resources, like those at Hopewell Furnace and Shenandoah National Park, are permanently damaged, they are lost to the nation forever. Under these circumstances, the Park Service’s mission of preserving these resources for the enjoyment of future generations is seriously impaired. Compared with the situation for cultural resources, at the parks we visited that showcase natural resources, even less was known about the condition and trends that are occurring to natural resources over time. For example: — At California’s Yosemite National Park, officials told us that virtually nothing was known about the types or numbers of species inhabiting the park, including fish, birds, and such mammals as badgers, river otters, wolverines, and red foxes. — At Montana’s Glacier National Park, officials said most wildlife-monitoring efforts were limited to four species protected under the Endangered Species Act. — At Padre Island National Seashore in Texas, officials said they lacked detailed data about such categories of wildlife as reptiles and amphibians as well as mammals such as deer and bobcats. Park managers told us that—except for certain endangered species, such as sea turtles—they had inadequate knowledge about whether the condition of wildlife was improving, declining, or staying the same. This lack of inventory and monitoring information affects not only what is known about park resources, but also the ability to assess the effect of management decisions. After 70 years of stocking nonnative fish in various lakes and waterways in Yosemite, for example, park officials realized that more harm than good had resulted. Nonnative fish outnumber native rainbow trout by a 4-to-1 margin, and the stocking reduced the numbers of at least one federally protected species (the mountain yellow-legged frog). The Park Service’s lack of information on the condition of the vast array of resources it must manage becomes even more significant when one considers the fact that many known threats exist that can adversely affect these resources. Since at least 1980, the Park Service has begun to identify threats to its resources, such as air and water pollution or vandalism, and to develop approaches for dealing with them. However, our recent reviews have found that sound scientific information on the extent and severity of these threats is limited. Yet preventing or mitigating these threats and their impact is at the core of the agency’s mission to preserve and protect the parks’ resources. We have conducted two recent reviews of threats to the parks, examining external threats in 1994 and internal threats in 1996. Threats that originate outside of a park are termed external and include such things as off-site pollution, the sound of airplanes flying overhead, and the sight of urban encroachment. Protecting park resources from the damage resulting from external threats is difficult because these threats are, by their nature, beyond the direct control of the Park Service. Threats that originate within a park are termed internal and include such activities as heavy visitation, the impact of private inholdings within park grounds, and vandalism. In our nationwide survey of park managers, they identified more than 600 external threats, and in a narrower review at just eight park units, managers identified more than 100 internal threats. A dominant theme in both reports was that managers did not have adequate information to determine the impact of these threats and correctly identify their source. For the most part, park managers said they relied on judgment, coupled with limited scientific data, to make these determinations. For some types of damage, such as the defacement of archaeological sites, observation and judgment may provide ample information to substantiate the extent of the damage. But for many other types of damage, Park Service officials agree that observation and judgment are not enough. Scientific research will generally provide better evidence about the types and severity of damage occurring and any trends in the severity of the threats. Scientific research also generally provides a more reliable guide for mitigating threats. Two examples will help illustrate this point. In California’s Redwood National Park, scientific information about resource damage is helping mitigation efforts. Scientists used research data that had been collected over a period of time to determine the extent to which damage occurring to trees, fish, and other resources could be attributed to erosion from logging and related road-building activities. On the basis of this research, the park’s management is now in a position to begin reducing the threat by advising adjacent landowners on better logging and road-building techniques that will reduce erosion. The second example, from Crater Lake National Park in Oregon, shows the disadvantage of not having such information. The park did not have access to wildlife biologists or forest ecologists to conduct scientific research identifying the extent of damage occurring from logging and its related activities. For example, damage from logging, as recorded by park staff using observation and a comparison of conditions in logged and unlogged areas, has included the loss of habitat and migration corridors for wildlife. However, without scientific research, park managers are not in a sound position to negotiate with the Forest Service and the logging community to reduce the threat. The information that I have presented to you today is not new to the National Park Service. Park Service managers have long acknowledged that to improve management of the National Park System, more sound scientific information on the condition of resources and threats to those resources is needed. The Park Service has taken steps to correct the situation. For example, automated systems are in place to track illegal activities such as looting, poaching, and vandalism, and an automated system is being developed to collect data on deficiencies in preserving, collecting, and documenting cultural and natural resource museum collections. For the most part, however, relatively limited progress has been made in gathering information on the condition of resources. When asked why more progress is not being made, Park Service officials generally told us that funds are limited and competing needs must be addressed. Our 1995 study found that funding increases for the Park Service have mainly been used to accommodate upgraded compensation for park rangers and deal with additional park operating requirements, such as safety and environmental regulations. In many cases, adequate funds are not made available to the parks to cover the cost of complying with additional operating requirements, so park managers have to divert personnel and/or dollars from other activities such as resource management to meet these needs. In addition, we found that, to some extent, these funds were used to cope with a higher number of park visitors. Making more substantial progress in improving the scientific knowledge base about resources in the park system will cost money. At a time when federal agencies face tight budgets, the park system continues to grow as new units are added—37 since 1985, and the Park Service faces such pressures as higher visitation rates and an estimated $4 billion backlog of costs related to just maintaining existing park infrastructures such as roads, trails, and visitor facilities. Dealing with these challenges calls for the Park Service, the administration, and the Congress to make difficult choices involving how national parks are funded and managed. Given today’s tight fiscal climate and the unlikelihood of substantially increased federal appropriations, our work has shown that the choices for addressing these conditions involve (1) increasing the amount of financial resources made available to the parks by increasing opportunities for parks to generate more revenue, (2) limiting or reducing the number of units in the park system, and (3) reducing the level of visitor services. Regardless of which, if any, of these choices is made, without an improvement in the Park Service’s ability to collect the scientific data needed to properly inventory park resources and monitor their condition over time, the agency cannot adequately perform its mission of preserving and protecting the resources entrusted to it. This concludes my statement, Mr. Chairman. I would be happy to respond to any questions you or other Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed its views on the National Park Service's (NPS) knowledge of the condition of the resources that the agency is entrusted to protect within the National Park System. GAO noted that: (1) GAO's work has shown that although NPS acknowledges, and its policies emphasize, the importance of managing parks on the basis of sound scientific information about resources, today such information is seriously deficient; (2) frequently, baseline information about natural and cultural resources is incomplete or nonexistent, making it difficult for park managers to have a clear knowledge about what condition the resources are in and whether the condition of those resources is deteriorating, improving, or staying the same; (3) at the same time, many of these park resources face significant threats, ranging from air pollution, to vandalism, to the development of nearby land; (4) however, even when these threats are known, NPS has limited scientific knowledge about the severity of them and their impact on affected resources; (5) these concerns are not new to NPS, and in fact, the agency has taken steps to improve the situation; (6) however, because of limited funds and other competing needs that must be completed, NPS has made relatively limited progress to correct this deficiency of information; (7) there is no doubt that it will cost money to make more substantial progress in improving the scientific knowledge base about park resources; (8) dealing with this challenge will require NPS, the administration, and the Congress to make difficult choices involving how parks are funded and managed; and (9) however, without such an improvement, NPS will be hindered in its ability to make good management decisions aimed at preserving and protecting the resources entrusted to it.

In February 2008, we reported that FERC had made few substantive changes to either its merger and acquisition review process or its postmerger oversight as a consequence of its new responsibilities and, as a result, does not have a strong basis for ensuring that harmful cross- subsidization does not occur. Specifically: Reviewing mergers and acquisitions. FERC’s merger and acquisition review relies primarily on company disclosures and commitments not to cross-subsidize. FERC-regulated companies that are proposing to merge with or acquire a regulated company must submit a public application for FERC to review and approve. If cross-subsidies already exist or are planned, companies are required to describe how these are in the public interest by, for example identifying how the planned cross-subsidy benefits utility ratepayers and does not harm others. FERC also requires company officials to attest that they will not engage in unapproved cross- subsidies in the future. This information becomes part of a public record that stakeholders or other interested parties, such as state regulators, consumer advocates, or others may review and comment on, and FERC may hold a public hearing on the merger. FERC officials told us that they evaluate the information in the public record for the application and do not collect evidence or conduct separate analyses of a proposed merger. On the basis of this information, FERC officials told us that they determine which, if any, existing or planned cross-subsidies to allow, then include this information in detail in the final merger or acquisition order. Between the time EPAct was enacted in 2005 and July 10, 2007––when FERC provided detailed information to us––FERC had reviewed or was in the process of reviewing 15 mergers, acquisitions, or sales of assets. FERC had approved 12 mergers, although it approved three of these with conditions– –for example, requiring the merging parties to provide further evidence of provisions to protect customers. Of the remaining three applications, one application was withdrawn by the merging parties prior to FERC’s decision and the other two were still pending. Postmerger oversight. FERC’s postmerger oversight relies on its existing enforcement mechanisms—primarily self-reporting and a limited number of compliance audits. FERC indicates that it places great importance on self-reporting because it believes companies can actively police their own behavior through internal and external audits, and that the companies are in the best position to detect and correct both inadvertent and intentional noncompliance. FERC officials told us that they expect companies to become more vigilant in monitoring their behavior because FERC can now levy much larger fines––up to $1 million per day per violation––and that a violating company’s actions in following this self-reporting policy, along with the seriousness of a potential violation, help inform FERC’s decision on the appropriate penalty. Key stakeholders have raised concerns that internal company audits tend to focus on areas of highest risk to the company profits and, as a result, may not focus specifically on affiliate transactions. One company official noted that the threat of large fines may “chill” companies’ willingness to self-report violations. Between the enactment of EPAct––when Congress formally highlighted its concern about cross-subsidization––and our February 2008 report, no companies had self-reported any of these types of violations. To augment self- reporting, FERC plans to conduct a limited number of compliance audits of holding companies each year, although at the time of our February 2008 report, it had not completed any audits to detect whether cross- subsidization is occurring. In 2008, FERC’s plans to audit 3 of the 36 companies it regulates—Exelon Corporation, Allegheny, Inc., and the Southern Company. If this rate continues, it would take FERC 12 years to audit each of these companies once, although FERC officials noted that they plan audits one year at a time and that the number of audits may change in future years. We found that FERC does not use a formal risk-based approach to plan its compliance audits––a factor that financial auditors and other experts told us is an important consideration in allocating audit resources. Instead, FERC officials plan audits based on informal discussions between FERC’s Office of Enforcement, including its Division of Audits, and relevant FERC offices with related expertise. To obtain a more complete picture of risk, FERC could more actively monitor company-specific data––something it currently does not do. In addition, we found that FERC’s postmerger audit reports on affiliate transactions often lack clear information––that they may not always fully reflect key elements such as objectives, scope, methodology, and the specific audit findings, and sometimes lacked key information, such as the type, number, and value of affiliate transactions at the company involved, the percentage of all affiliate transactions tested, and the test results. Without this information, these audit reports are of limited use in assessing the risk that affiliate transactions pose for utility customers, shareholders, bondholders, and other stakeholders. In our February 2008 report, we recommended that the Chairman of the Federal Energy Regulatory Commission (FERC) develop a comprehensive, risk-based approach to planning audits of affiliate transactions to better target FERC’s audit resources to highest priority needs. Specifically, we recommended that FERC monitor the financial condition of utilities, as some state regulators have found useful, by leveraging analyses done by the financial market and developing a standard set of performance indicators. In addition, we recommended that FERC develop a better means of collaborating with state regulators to leverage audit resources states have already applied to enforcement efforts and to capitalize on state regulators’ unique knowledge. We also recommended that FERC develop an audit reporting approach to clearly identify the objectives, scope and methodology, and the specific findings of the audit to improve public confidence in FERC’s enforcement functions and the usefulness of its audit reports. The Chairman strongly disagreed with our overall findings and the need for our recommendations; nonetheless, we maintain that implementing our recommendations would enhance the effectiveness of FERC’s oversight. States utility commissions’ views of their oversight capacities vary, but many states foresee a need for additional resources to respond to changes from EPAct. The survey we conducted for our February 2008 report highlighted the following concerns: Almost all states have merger approval authority, but many states expressed concern about their ability to regulate the resulting companies. All but 3 states (out of 50 responses) have authority to review and either approve or disapprove mergers, but their authorities varied. For example, one state could only disapprove a merger and, as such, allows a merger by taking no action to disapprove it. State regulators reported being mostly concerned about the impact of mergers on customer rates, but 25 of 45 reporting states also noted concerns that the resulting, potentially more complex company could be more difficult to regulate. In recent years, the difficulty of regulating merged companies has been cited by two state commissions––one in Montana and one in Oregon––that denied proposed mergers in their states. For example, a state commission official in Montana told us the commission denied a FERC-approved merger in July 2007 that involved a Montana regulated utility, whose headquarters was in South Dakota, which would have been bought by an Australian holding company. Most states have authorities over affiliate transactions, but many states report auditing few transactions. Nationally, 49 states noted they have some type of affiliate transaction authority, and while some states reported that they require periodic, specialized audits of affiliate transactions, 28 of the 49 reporting states reported auditing 1 percent or fewer over the last five years. Audit authorities vary from prohibitions against certain types of transactions to less restrictive requirements such as allowance of a transaction without prior review, but authority to disallow the transaction at a later time if it was deemed inappropriate. Only 3 states reported that affiliate transactions always needed prior commission approval. One attorney in a state utility commission noted that holding company and affiliate transactions can be very complex and time-consuming to review, and had concerns about having enough resources to do this. Some states report not having access to holding company books and records. Although almost all states report they have access to financial books and records from utilities to review affiliate transactions, many states reported they do not have such direct access to the books and records of holding companies or their affiliated companies. While EPAct provides state regulators the ability to obtain such information, some states expressed concern that this access could require them to be extremely specific in identifying needed information, which may be difficult. Lack of direct access, experts noted, may limit the effectiveness of state commission oversight and result in harmful cross-subsidization because the states cannot link financial risks associated with affiliated companies to their regulated utility customers. All of the 49 states that responded to this survey question noted that they require utilities to provide financial reports, and 8 of these states require reports that also include the holding company or both the holding company and the affiliated companies. States foresee needing additional resources to respond to the changes from EPAct. Specifically, 22 of the 50 states that responded to our survey said that they need additional staffing or funding, or both, to respond to the changes that resulted from EPAct. Further, 6 out of 30 states raised staffing as a key challenge in overseeing utilities since the passage of EPAct, and 8 states have proposed or actually increased staffing. In conclusion, the repeal of PUHCA 1935 opened the door for needed investment in the utility industry; however, it comes at the potential cost of complicating regulation of the industry. Further, the introduction of new types of investors and different corporate combinations––including the ownership of utilities by complex international companies, equity firms, or other investors with different incentives than providing traditional utility company services––could change the utility industry into something quite different than the industry that FERC and the states have overseen for decades. In light of these changes, we believe FERC should err on the side of a “vigilance first” approach to preventing potential cross- subsidization. As FERC and states approve mergers, the responsibility for ensuring that cross-subsidization will not occur shifts to FERC’s Office of Enforcement and state commission staffs. Without a risk-based approach to guide its audit planning––the active portion of its postmerger oversight– –FERC may be missing opportunities to demonstrate its commitment to ensuring that companies are not engaged in cross-subsidization at the expense of consumers and may not be using its audit resources in the most efficient and effective manner. Without reassessing its merger review and postmerger oversight, FERC may approve the formation of companies that are difficult and costly for it and states to oversee and potentially risky for consumers and the broader market. In addition, the lack of clear information in audit reports not only limits their value to stakeholders, but may undermine regulated companies’ efforts to understand the nature of FERC’s oversight concerns and to conduct internal audits to identify potential violations that are consistent with those conducted by FERC— key elements in improving their self-reporting. We continue to encourage the FERC Chairman to consider our recommendations. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Mark Gaffigan at (202) 512-3841 or at gaffiganm@gao.gov. Individuals who contributed to this statement include Dan Haas, Randy Jones, Jon Ludwigson, Alison O’Neill, Anthony Padilla, and Barbara Timmerman. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Under the Public Utility Holding Company Act of 1935 (PUHCA 1935) and other laws, federal agencies and state commissions have traditionally regulated utilities to protect consumers from supply disruptions and unfair pricing. The Energy Policy Act of 2005 (EPAct) repealed PUHCA 1935, removing some limitations on the companies that could merge with or invest in utilities, and leaving the Federal Energy Regulatory Commission (FERC), which already regulated utilities, with primary federal responsibility for regulating them. Because of the potential for new mergers or acquisitions between utilities and companies previously restricted from investing in utilities, there has been considerable interest in whether cross-subsidization--unfairly passing on to consumers the cost of transactions between utility companies and their "affiliates"--could occur. GAO was asked to testify on its February 2008 report, Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC (GAO-08-289), which (1) examined the extent to which FERC changed its merger review and post merger oversight since EPAct to protect against cross-subsidization and (2) surveyed state utility commissions about their oversight. In this report, GAO recommended that FERC adopt a risk-based approach to auditing and improve its audit reports, among other things. The FERC Chairman disagreed with the need for our recommendations, but GAO maintains that implementing them would improve oversight. In its February 2008 report, GAO reported that FERC had made few substantive changes to either its merger review process or its post merger oversight since EPAct and, as a result, does not have a strong basis for ensuring that harmful cross-subsidization does not occur. FERC officials told GAO that they plan to require merging companies to disclose any cross-subsidization and to certify in writing that they will not engage in unapproved cross-subsidization. After mergers have taken place, FERC intends to rely on its existing enforcement mechanisms--primarily companies' self-reporting noncompliance and a limited number of compliance audits--to detect potential cross-subsidization. FERC officials told us that they believe the threat of the large fines allowed under EPAct will encourage companies to investigate and self-report noncompliance. To augment self-reporting, FERC officials told us that, in 2008, they are using an informal plan to reallocate their limited audit staff to audit the affiliate transactions of 3 of the 36 holding companies it regulates. In planning these compliance audits, FERC officials told us that they do not formally consider companies' risk for noncompliance --a factor that financial auditors and other experts told us is an important consideration in allocating audit resources. Rather, they rely on informal discussions between senior FERC managers and staff. Moreover, we found that FERC's audit reporting approach results in audit reports that often lack a clear description of the audit objectives, scope, methodology, and findings--inhibiting their use to stakeholders. GAO's survey of state utility commissions found that states' views varied on their current regulatory capacities to review utility mergers and acquisitions and oversee affiliate transactions; however many states reported a need for additional resources, such as staff and funding, to respond to changes in oversight after the repeal of PUHCA 1935. All but a few states have the authority to approve mergers, but many states expressed concern about their ability to regulate the resulting companies. In recent years, two state commissions denied mergers, in part because of these concerns. Most states also have some type of authority to approve, review, and audit affiliate transactions, but many states review or audit only a small percentage of the transactions; 28 of the 49 states that responded to our survey question about auditing said they audited 1 percent or fewer transactions over the last five years. In addition, although almost all states reported that they had access to financial books and records from utilities to review affiliate transactions, many states reported they do not have such direct access to the books and records of holding companies or their affiliated companies. While EPAct provides state regulators the ability to obtain such information, some states expressed concern that this access could require them to be extremely specific in identifying needed information, thus potentially limiting their audit access. Finally, 22 of the 50 states that responded to our survey question about resources said that they need additional staffing or funding, or both, to respond to changes that resulted from EPAct, and 8 states have proposed or actually increased staffing since EPAct was enacted.

The National Capital Revitalization and Self-Government Improvement Act, Public Law 105-33 (the Revitalization Act), approved August 5, 1997, directed the Authority and the District of Columbia government to develop and implement management reform plans for nine major city agencies and four citywide functionsduring fiscal years 1998 and 1999. Funding for management reform was to be provided, for the most part, by existing budget authority within agencies and by the fiscal year 1998 surplus that resulted from the federal government’s assumption of the cost of certain functions previously financed through District revenue. The law gave the Authority the power to allocate surplus funds to management reform projects. The Authority reported in the FiscalYear1998Annual PerformanceReport:AReportonServiceImprovementsandManagement Reform,dated October 30, 1998, that the projects were selected using management reform criteria of customer satisfaction; empowering employees; long-term service delivery improvements; and greater internal capacity (through infrastructure changes, staff training, and automation). In September 1997, the Authority hired 11 consultants, at a cost of $6.6 million, to develop management reform plans for these agencies and functions. The District’s management reform team, consisting of the Chairman of the Authority, the former Mayor, the Chairman of the City Council, and the heads of each agency, approved the projects for implementation. The Authority then hired a Chief Management Officer (CMO) who was delegated responsibility for these projects. The CMO implemented a system to manage these projects that included development of operational plans, identification of the official directly responsible for each project, and periodic monitoring of each project. Agencies were required to report monthly on expenditures and the results of the projects. On October 30, 1998, the Authority reported in its Fiscal Year1998AnnualPerformanceReportthat 69 projects had been completed. In January 1999, the Authority returned responsibility for the nine city agencies and four citywide functions to the newly elected Mayor. District officials told us that the current administration established a new reform agenda that incorporated a small number of the remaining management reform projects. Specifically, the District selected 20of the remaining 200 projects that it considered to be the best projects to be continued in fiscal year 1999. The District also initiated 7 new projects, for a total of 27 projects that were funded in fiscal year 1999. To determine the status and results of the District’s management reform initiatives, we reviewed pertinent financial documents and reports provided by the Office of the Chief Financial Officer (OCFO), the Authority, the office of the former CMO, and the D.C. City Council. We also interviewed the Deputy Mayor for Operations, the Chief Financial Officer, and other officials from those offices and the Authority. We did not audit the District’s management reform funds or expenditures, and accordingly, we do not express an opinion or any other form of assurance on these reported amounts. Our work was done in accordance with generally accepted government auditing standards between April and June 2000. I will now discuss in more detail the matters I highlighted earlier. Authority and District officials have not consistently tracked the disposition of management reform initiatives from fiscal years 1998 and 1999. These officials were unable to provide adequate information on whether these management reform projects from fiscal years 1998 and 1999 achieved their intended goals or objectives. Although this information may be available on an agency-by-agency basis, currently, the District has no systematic process for monitoring and reporting on this information. During fiscal years 1998 and 1999, the District budgeted over $300 million to begin implementing over 250 management reform projects. The reported fiscal year 1998 investment in management reform of about $293 million included $112.6 million of operating fundsand $180.3 million of capital funds. For fiscal year 1999, the investment in management reform of $36.2 million included $30.9 million of operating funds and $5.3 million of capital funds. Of the $36.2 million, about $33 million was federal appropriations provided to the Authority specifically for management reform.Table 1 shows the total funds provided to the District for management reform for fiscal years 1998 through 2000, the amounts reported as obligated, estimated savings from those initiatives, and reported savings from those initiatives. The status of the funds appropriated for the management reform projects initially identified in fiscal year 1998 and the disposition of those projects is as follows: The District reported in its Final Fiscal Year 1998 Management Reform Summary of Operating and Capital Funds, as of September 30, 1998, that of the $292.8 million budgeted for management reform, approximately $126.9 million had been spent and about $165.9 million was available at the end of fiscal year 1998. Of this amount, approximately $2.3 million of operating funds lapsed,resulting in about $163.6 million remaining at the end of fiscal year 1998. About $3.2 million of operating funds (included in the $163.6 million above), which was not allocated to any particular project, was carried over to fiscal year 1999 for management reform projects in accordance with the District of Columbia Appropriations Act of 1999, Public Law 105-277. The remainder was allocated to 35 former management reform initiatives that were designated as capital projects and were no longer considered part of the management reform program. According to the District’s Expenditure Data on Capital Projects report, the $160.4 million in capital funds (included in the $163.6 million previously mentioned) unspent at the end of fiscal year 1998 was carried over into fiscal year 1999 for the 35 projects. Included in the 35 projects were initiatives for the Automated Integrated Tax System, implementing the Real Property Inventory System, and implementing a new Motor Vehicle Information System. According to the Authority, 69 projects had been completed. Included in the completed projects were the modification of the Department of Corrections Employee Pay Plan and an increase in the number of building inspections. Although the District’s Final Fiscal Year 1998 Management Reform Summary reported fiscal year spending on these management reform projects totaling about $127 million, the District could not specifically identify the amount of funds spent that was used to pay consultants, contractors, and District employees. According to District officials, the former CMO requested information regarding funds spent for consultants and contractors from the agencies during fiscal year 1998. This information was reported to the OCFO on a monthly basis. However, we found that the data was inconsistent, and no such information related to these management reform projects was requested in fiscal year 1999. The District, however, has acknowledged that management reform funds were used for projects other than management reform; for example, about $11.3 million was used for the pay increase for District of Columbia Public School teachers. District officials told us that the new administration of Mayor Williams inherited approximately 200 projects in various stages of completion. Rather than continue with the entire agenda, the new administration reviewed the projects and selected those it considered to be the best projects for incorporation into agencies’ long-term plans. In consultations with the Authority, the new administration chose the 20 best projects and added 7 new projects, giving it a total of 27 projects funded in fiscal year 1999. To implement these 27 management reform projects during fiscal year 1999, the District budgeted approximately $36.2 million, $33 million of which was federal appropriations. Twenty-six of these projects were funded with $30.9 million in operating funds and one project received about $5.3 million in capital funds. The District reported in its Fiscal Year 1999 Management and Regulatory Reform Funds, Agency Expenditure Summary as of May 15, 2000, that of the $36.2 million budgeted, approximately $29.1 million had been spent and about $7.1 million lapsed at the end of fiscal year 1999. As of June 16, 2000, the District had not determined the status of the 27 management reform projects for fiscal year 1999. In February 2000, the Office of the Deputy Mayor for Operations asked District agencies responsible for the projects to provide information on the original project goals and the results that had been achieved. According to District officials, they obtained information on only a few projects. The Deputy Mayor for Operations told us that he expected to have the status of each project by mid-June. As of June 26, 2000, we had not received this information. Included in the fiscal year 1999 budget was a line item that indicated that management reform initiatives would save approximately $10 million. District officials told us that these estimated savings were based on assumptions by the former CMO that an investment of about $93 million in operating funds would yield permanent cost savings. The estimated savings by agency were not defined in the fiscal year 1999 Appropriations Act; therefore, District officials determined the allocated savings based on the amount of each agency’s management reform investment. As of June 1, 2000, of the $10 million expected in savings, District officials reported that about 15 percent, or $1.5 million, had been realized. The fiscal year 2000 budget also included $41 million of projected savings from various initiatives, including management reform productivity savings. However, in discussions with us, District officials said that the management reform productivity savings and other savings included in the fiscal year 2000 budget are not likely to be realized. The $41 million in projected savings was comprised of the following: $7 million in management reform productivity savings; $14 million in savings resulting from the implementation of the District of Columbia Supply Schedule; and $20 million in productivity banksavings. The District does not know whether any savings will be realized from the $7 million of management reform productivity savings. District officials told us that the former CMO and the Authority set the goal of $7 million; however, no one identified the savings targets related to specific management reform initiatives prior to the formulation of the fiscal year 2000 budget. The District does not expect any savings in fiscal year 2000 from the $14 million, which was to be derived from the District’s establishment of a District Supply Schedule. District officials told us that the new Chief Procurement Officer had reviewed the D.C. Supply Schedule initiative in the summer of 1999 and determined that it did not offer advantages beyond existing federal schedules that District agencies were already utilizing. The District expects no savings from the $20 million productivity bank project, nor are these savings directly related to any management reform initiatives. The timing of congressional approval of the federal budget resulted in productivity bank funds not being available to agencies until the second quarter of fiscal year 2000. According to District officials, the timing of the budget approval, combined with the same year repayment requirement, has discouraged agencies from taking advantage of this fund, as productivity savings are often realized in small amounts within the first year and in increasing amounts in subsequent years. Originally proposed by the previous Mayor’s 1996 plan, ATransformed GovernmentofthePeopleofWashington,D.C., this group of initiatives was included as an appendix to the fiscal year 1998 budget. The projects, which ranged from reducing the number of District employees to streamlining services to promote economic development, were estimated to save about $152.4 million. According to District and Authority officials, many of the initiatives listed in the plan have not been implemented and no savings have been realized. In many instances, the initiatives have been overtaken by other events, such as the National Capital Improvement and Revitalization Act of 1997. Because so few of the initiatives have been implemented, District officials told us that information is not available to determine the net benefit to the District either in terms of dollars saved or improved efficiencies and effectiveness of District services. Since fiscal year 1998, the District Government has budgeted over $300 million to implement management reform initiatives or projects. During this same period, District budgets have stated that management reform initiatives and other cost-saving initiatives would save about $200 million. To date, only $1.5 million of management reform savings have been documented. Additional savings might have been realized, but the Authority and District officials had not systematically assessed project results and savings. In addition, they did not adequately track the costs of these projects and, as a result, sufficient information is not available to show how these funds were spent. These management reform projects and targeted savings have been an integral part of recent District budgets and identify important reforms needed to improve services. Mr. Chairman, this concludes my statement. I will be happy to answer any questions that you or Members of the Subcommittee may have. For further information regarding this testimony, please contact Gloria L. Jarmon at (202) 512-4476 or by e-mail at jarmong.aimd@gao.gov. Individuals making key contributions to this testimony included Norma Samuel, Linda Elmore, Timothy Murray, and Bronwyn Hughes. Event unobligated as of the end of the fiscal year. The President signed into law the District of Columbia FY 2000 Appropriations Act, P. L. 106-113. The act directed the CFO of the District to make reductions of $7 million for management reform savings in local funds to one or more of the appropriation headings in the act. The Authority notified the Deputy Mayor for Operations that it was conducting a closeout review of the results of the management reform initiatives and requested information about each of the initiatives through calendar year 1999. The Deputy Mayor for Operations distributed a survey to the agencies requesting the results of the fiscal year 1999 management reform initiatives. The Deputy Mayor for Operations provided the Authority a partial response to its January 14, 2000, request. The Authority notified the Deputy Mayor for Operations of its intent to finalize its closeout review of the results of the fiscal year 1999 management reform initiatives. To track the results of the initiatives, the Authority asked the Deputy Mayor for Operations to submit survey responses from each agency. The District’s proposed Fiscal Year 2001 Operating Budget and Financial Plan includes an estimated $37 million in management reform productivity savings. The Deputy Mayor for Operations provided GAO with a draft project status report of the fiscal year 1999 management reform operating projects as of September 30, 1999. (916354)

Pursuant to a congressional request, GAO discussed the District of Columbia's management reform initiatives. GAO noted that: (1) over the past 3 fiscal years, the District government has proposed hundreds of management reform initiatives that were estimated to save millions of dollars as well as improve government services; (2) however, as of June 1, 2000, the District had only reported savings of about $1.5 million related to these initiatives and had not consistently tracked the status of these projects; (3) neither the District of Columbia Financial Responsibility a nd Management Assistance Authority nor the District could provide adequate details on the goals achieved for all of the projects that had been reported as completed or in various stages of completion; (4) the District does not have a systematic process to monitor these management reform projects and determine where savings or customer service improvements have been realized; and (5) the District cannot say for certain how funds designated for management reform have been spent or whether the key goals of these initiatives have been realized.

Following the terrorist attacks of September 11, 2001, the United States began military operations to combat terrorism both in the United States and overseas. Operations to defend the United States from terrorist attacks are known as Operation Noble Eagle. Overseas operations to combat terrorism are known as Operation Enduring Freedom, which takes place principally in Afghanistan, and Operation Iraqi Freedom, which takes place in and around Iraq. Figure 1 shows the primary locations where U.S. forces conducted operations in support of the war in fiscal year 2003. To support the war in fiscal year 2003, Congress appropriated $68.7 billion to DOD: $6.1 billion in the Consolidated Appropriations Resolution, 2003, and $62.6 billion in the Emergency Wartime Supplemental Appropriations Act, 2003. While most of these funds were only available for expenditure in fiscal year 2003, some could be expended in subsequent fiscal years. Of the $68.7 billion appropriated for GWOT, almost $16 billion was appropriated in the fiscal year 2003 Wartime Supplemental to a transfer account called the Iraqi Freedom Fund. The Iraqi Freedom Fund is a special account providing funds for additional expenses for ongoing military operations in Iraq, and those operations authorized by P.L. 107-40 (Sept. 13, 2001), Authorization for Use of Military Force, and other operations and related activities in support of the global war on terrorism. Congress has also appropriated funds for the reconstruction of Iraq and Department of State and U.S. Agency for International Development projects. We are reviewing the contracts involved in the reconstruction, as well as the funding for other projects and will be issuing separate reports on these issues. As of September 30, 2003, DOD reported obligating a total of over $61 billion in fiscal year 2003 in support of the war. Among the operations that comprised the war on terrorism, Operation Iraqi Freedom amounted to about $39 billion or 64 percent of the total obligations, as shown in figure 2. The obligations reported for Iraqi Freedom are probably understated and the obligations reported for Operation Enduring Freedom overstated because, according to DOD officials, the initial obligations associated with the build up to Iraqi Freedom were charged to Enduring Freedom. Officials in the Office of the Under Secretary of Defense (Comptroller) reclassified reported obligations to the appropriate operation after Iraqi Freedom began, based on anticipated and projected GWOT operations. Of the overall reported amount obligated within DOD for GWOT during fiscal year 2003, the Army reported the largest amount of obligations, 46 percent of the total, as shown in figure 3. (The Army had the largest number of military personnel engaged in the war.) In addition to the obligations reported by the other military services, about 13 percent of DOD’s GWOT obligations were reported by a total of 15 other DOD organizations, such as the Defense Information Systems Agency and the Defense Logistics Agency. Of these DOD organizations, the Defense Logistics Agency reported the largest amount of obligations—over $3.6 billion. The obligations reported for GWOT fall into three categories—operation and maintenance, military personnel, and investment. Operation and maintenance account funds obligated in support of the war are used for a variety of purposes, including transportation of personnel, goods, and equipment; unit operating support costs; and intelligence, communications, and logistics support. Military personnel funds obligated in support of the war cover the pay and allowances of mobilized reservists as well as special payments or allowances for all qualifying military personnel both active and reserve, such as Imminent Danger Pay and Family Separation Allowance. Investment funds obligated for the war are used for procurement, military construction, and research, development, test and evaluation. As shown in figure 4, GWOT obligations reported in the operation and maintenance account amount to almost $44 billion or 71 percent of the total. The Consolidated Department of Defense Terrorist Response Cost Report displays obligations in all accounts by specific categories. As previously cited, chapter 23 of the DOD Financial Management Regulations, which governs how all DOD organizations report financial data for contingency operations, defines these categories. Within the operation and maintenance account, the operating support category had the largest amount of reported obligations for fiscal year 2003—over $32 billion or 74 percent of the total. This category, which includes obligations incurred for such things as training, operational support, equipment maintenance, and troop support, had the highest level of obligations, in part reflecting the cost of using civilian contractors to provide housing, food, water, and other services to over 180,000 troops deployed overseas in support of GWOT. A large part of the operating support costs category—48 percent— is in two miscellaneous categories, other supplies and equipment ($7 billion) and other services and miscellaneous contracts ($8.5 billion). Most of the remaining reported GWOT obligations, $15.6 billion or 26 percent, were in the military personnel accounts. Within the military personnel account, the category reserve component called to active duty had the highest level of reported obligations—almost $9.3 billion or 59 percent of the total. This category captures the obligations reported for the salaries paid to reservists mobilized for active duty. According to service officials, more reservists were called to active duty than originally estimated and remained on active duty longer than planned. As with operation and maintenance obligations, there was also a large miscellaneous category, other military personnel, which accounted for about $3.8 billion, or 24 percent, of all military personnel obligations. In discussing the results of our analysis with the Office of the Under Secretary of Defense (Comptroller) and the military services, there was recognition of the large amount of obligations captured in miscellaneous categories. The Office of the Under Secretary of Defense (Comptroller) is considering how best to provide more specific detail in future cost reports. The adequacy of funding available for fiscal year 2003 GWOT obligations reported in military personnel and operation and maintenance accounts varied by service. The funding available for the war consists of funds directly appropriated to the military services for GWOT, the net transfer of funds from the Iraqi Freedom Fund, and reprogrammed funds originally appropriated to the services for peacetime operations. Within the military personnel accounts, as shown in table 1, in fiscal year 2003 the Army, Navy, and Air Force reported more obligations in support of the war than they received in funding for the war. To cover the shortfall in GWOT funding, these services had to use funds appropriated for their budgeted peacetime operations. Officials from each of these services explained that the shortfall was a relatively small portion of their budgeted peacetime military personnel account. For example, the Army’s reported shortfall of $155.2 million represents less than 1 percent of its total peacetime appropriation. The Marine Corps, which had augmented its GWOT military personnel appropriation with funds from its peacetime military personnel account, ended the fiscal year with slightly less in obligations than it had in available funding—$1.8 million or less than 1 percent of its peacetime appropriation. Within the operation and maintenance accounts, as shown in table 2, in fiscal year 2003 the Army, Air Force, and Navy received funding that exceeded their reported GWOT obligations. At the same time the Marine Corps reported more GWOT obligations than it received in funding. In discussing our analysis of the difference between GWOT obligations and funding with the Army, Air Force, and Navy, we were told the following. The Army reported slightly more funding than obligations for the war. At the end of fiscal year 2003, the Army reported obligations that initially appeared to be more than $500 million less than the available funding. However, as of January 2004, the Army has subsequently updated its fiscal year 2003 reporting to reflect about $470 million in additional reported obligations. According to Army officials, the Army had not included in the September 30, 2003, consolidated cost report $494 million in obligations reported to support the Coalition Provisional Authority in Iraq. The Army received GWOT funding in fiscal year 2003 to support this organization, but the obligations were not captured in the Army’s accounting system used to record most other Army obligations. The Army also cancelled some obligations made before the end of the fiscal year, resulting in a total adjustment to the fiscal year 2003 cost report of $470 million. Thus the Army ended the year with about $30 million more in funding than reported obligations. Air Force officials told us that the $176.6 million, which appeared to be unobligated GWOT funding, was actually obligated late in the fiscal year. According to the officials, that amount was obligated for flying operations requirements that the Air Force decided were related to the war, but were not reported as such. Navy officials told us that the apparent unobligated GWOT funds ($299 million) were in fact obligated in support of the war but were originally, and incorrectly, reported as obligations in support of budgeted peacetime operations. These officials said that they would be updating their reporting for obligations incurred in fiscal year 2003 to reflect an additional $299 million in operation and maintenance obligations for the war. At the same time, the Navy returned $198 million to the Iraqi Freedom Fund that it believed was in excess of its operation and maintenance requirements for the war. The available funding in table 2 was adjusted to reflect the return of the $198 million. Returning these funds is in keeping with recommendations we made in our September 2003 report discussed above to monitor the obligation of funds in the services’ operation and maintenance accounts and ensure that all funds transferred to the services that are not likely to be obligated by the end of the fiscal year are transferred back to the Iraqi Freedom Fund. In subsequent work we plan to review GWOT obligations to detail the specific purposes for which funds were used and to determine whether the service requirements for which funding was obligated were war-related. The additional Air Force flying operations’ requirements and the funds the Navy recharacterized as being in support of the war will be included in that review. While the Marine Corps obligated $72.5 million more for GWOT than it had in funds at the end of fiscal year 2003, it, like the Navy, returned money to the Iraqi Freedom Fund. At the end of fiscal year 2003, Marine Corps officials believed that they could not obligate $152.2 million that had been transferred to the Marine Corps’ operation and maintenance account from the Iraqi Freedom Fund before the end of the fiscal year and so transferred it back to the fund. In retrospect, however, the Marines obligated more than expected. According to Marine Corps officials, this shortfall was covered by using normal peacetime operation and maintenance appropriations that units deployed in support of GWOT were not going to use. As noted with the Army and Navy analyses, the services have reported obligation updates to the Office of the Under Secretary of Defense (Comptroller) for inclusion in the Defense Finance and Accounting Service’s Consolidated DOD Terrorist Response Cost report for fiscal year 2003. The Defense Finance and Accounting Service is issuing monthly fiscal year 2003 update reports as the obligation data is updated, which must be added to the report as of September 30, 2003, to determine the total fiscal year 2003 obligations reported in support of GWOT. In official oral comments on a draft of this report, officials from DOD’s Office of the Under Secretary of Defense (Comptroller) stated that the department had no objections to the report. DOD also provided technical comments and we have incorporated them as appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House and Senate Budget Committees, the Secretary of Defense, the Secretaries of the military services, and the Director, Office of Management and Budget. We will also make copies available to others on request. In addition, the report will available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions, please contact me on (757) 552-8100 or by e-mail at curtinn@gao.gov. Major contributors to this report were Steve Sternlieb, Ann Borseth, Madelon Savaides, Leo Sullivan, and John Buehler.

The Global War on Terrorism--principally involving operations in Afghanistan and Iraq--was funded in fiscal year 2003 by Congress's appropriation of almost $69 billion. To assist Congress in its oversight of spending, GAO is undertaking a series of reviews relating to contingency operations in support of the Global War on Terrorism. In September 2003, GAO issued a report that discussed fiscal year 2003 obligations and funding for the war through June 2003. This report continues the review of fiscal year 2003 by analyzing obligations reported in support of the Global War on Terrorism and reviews whether the amount of funding received by the military services was adequate to cover DOD's obligations for the war from October 1, 2002, through September 30, 2003. GAO will also review the war's reported obligations and funding for fiscal year 2004. In fiscal year 2003, DOD reported obligations of over $61 billion in support of the Global War on Terrorism. GAO's analysis of the obligation data showed that 64 percent of fiscal year 2003 obligations reported for the war on terrorism went for Operation Iraqi Freedom; among the DOD components, the Army had the most obligations (46 percent); and among appropriation accounts the operation and maintenance account had the highest level of reported obligations (71 percent). The adequacy of funding available for the Global War on Terrorism for fiscal year 2003 military personnel and operation and maintenance accounts varied by service. For military personnel, the Army, Navy, and Air Force ended the fiscal year with more reported obligations for the war than funding and had to cover the shortfalls with money appropriated for their budgeted peacetime personnel costs. For operation and maintenance accounts, the Army, Navy, and Air Force appeared to have more funding than reported obligations for the war. However, the Navy and Air Force have stated that the seeming excess funding ($299 million and $176.6 million respectively) were in support of the war on terrorism, but had not been recorded as such. Therefore, Navy and Air Force obligations exactly match funding. The Marine Corps used funds appropriated for its budgeted peacetime operation and maintenance activities to cover shortfalls in funding for the war.

SBA was established by the Small Business Act of 1953 to fulfill the role of several agencies that previously assisted small businesses affected by the Great Depression and, later, by wartime competition. SBA’s stated purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. In addition, SBA serves as a small business advocate, working with other federal agencies to, among other things, reduce regulatory burdens on small businesses. SBA also provides low-interest, long-term loans to individuals and businesses to assist them with disaster recovery through its Disaster Loan Program—the only form of SBA assistance not limited to small businesses. Homeowners, renters, businesses of all sizes, and nonprofit organizations can apply for physical disaster loans for permanent rebuilding and replacement of uninsured or underinsured disaster-damaged property. Small businesses can also apply for economic injury disaster loans to obtain working capital funds until normal operations resume after a disaster declaration. SBA’s Disaster Loan Program differs from the Federal Emergency Management Agency’s (FEMA) Individuals and Households Program (IHP). For example, a key element of SBA’s Disaster Loan Program is that the disaster victim must have repayment ability before a loan can be approved whereas FEMA makes grants under the IHP that do not have to be repaid. Further, FEMA grants are generally for minimal repairs and, unlike SBA disaster loans, are not designed to help restore the home to its predisaster condition. In January 2005, SBA began using DCMS to process all new disaster loan applications. SBA intended for DCMS to help it move toward a paperless processing environment by automating many of the functions staff members had performed manually under its previous system. These functions include both obtaining referral data from FEMA and credit bureau reports, as well as completing and submitting loss verification reports from remote locations. Our July 2006 report identified several significant limitations in DCMS’s capacity and other system and procurement deficiencies that likely contributed to the challenges that SBA faced in providing timely assistance to Gulf Coast hurricane victims as follows: First, due to limited capacity, the number of SBA staff who could access DCMS at any one time to process disaster loans was restricted. Without access to DCMS, the ability of SBA staff to process disaster loan applications in an expeditious manner was diminished. Second, SBA experienced instability with DCMS during the initial months following Hurricane Katrina, as users encountered multiple outages and slow response times in completing loan processing tasks. According to SBA officials, the longest period of time DCMS was unavailable to users due to an unscheduled outage was 1 business day. These unscheduled outages and other system-related issues slowed productivity and affected SBA’s ability to provide timely disaster assistance. Third, ineffective technical support and contractor oversight contributed to the DCMS instability that SBA staff initially encountered in using the system. Specifically, a DCMS contractor did not monitor the system as required or notify the agency of incidents that could increase system instability. Further, the contractor delivered computer hardware for DCMS to SBA that did not meet contract specifications. In the report that we are releasing today, we identified other logistical challenges that SBA experienced in providing disaster assistance to Gulf Coast hurricane victims. For example, SBA moved urgently to hire more than 2,000 mostly temporary employees at its Ft. Worth, Texas disaster loan processing center through newspaper and other advertisements (the facility increased from about 325 staff in August 2005 to 2,500 in January 2006). SBA officials said that ensuring the appropriate training and supervision of this large influx of inexperienced staff proved very difficult. Prior to Hurricane Katrina, SBA had not maintained the status of its disaster reserve corps, which was a group of potential voluntary employees trained in the agency’s disaster programs. According to SBA, the reserve corps, which had been instrumental in allowing the agency to provide timely disaster assistance to victims of the September 11, 2001 terrorist attacks, shrank from about 600 in 2001 to less than 100 in August 2005. Moreover, SBA faced challenges in obtaining suitable office space to house its expanded workforce. For example, SBA’s facility in Ft. Worth only had the capacity to house about 500 staff whereas the agency hired more than 2,000 mostly temporary staff to process disaster loan applications. While SBA was able to identify another facility in Ft. Worth to house the remaining staff, it had not been configured to serve as a loan processing center. SBA had to upgrade the facility to meet its requirements. Fortunately, in 2005, SBA was also able to quickly reestablish a loan processing facility in Sacramento, California, that had been previously slated for closure under an agency reorganization plan. The facility in Sacramento was available because its lease had not yet expired, and its staff was responsible for processing a significant number of Gulf Coast hurricane related disaster loan applications. As a result of these and other challenges, SBA developed a large backlog of applications during the initial months following Hurricane Katrina. This backlog peaked at more than 204,000 applications 4 months after Hurricane Katrina. By late May 2006, SBA took about 74 days on average to process disaster loan applications, compared with the agency’s goal of within 21 days. As we stated in our July 2006 report, the sheer volume of disaster loan applications that SBA received was clearly a major factor contributing to the agency’s challenges in providing timely assistance to Gulf Coast hurricane. As of late May 2006, SBA had issued 2.1 million loan applications to hurricane victims, which was four times the number of applications issued to victims of the 1994 Northridge, California, earthquake, the previous single largest disaster that the agency had faced. Within 3 months of Hurricane Katrina making landfall, SBA had received 280,000 disaster loan applications or about 30,000 more applications than the agency received over a period of about 1 year after the Northridge earthquake. However, our two reports on SBA’s response to the Gulf Coast hurricanes also found that the absence of a comprehensive and sophisticated planning process contributed to the challenges that the agency faced. For example, in designing DCMS, SBA used the volume of applications received during the Northridge, California, earthquake and other historical data as the basis for planning the maximum number of concurrent agency users that the system could accommodate. SBA did not consider the likelihood of more severe disaster scenarios and, in contrast to insurance companies and some government agencies, use the information available from catastrophe models or disaster simulations to enhance its planning process. Since the number of disaster loan applications associated with the Gulf Coast hurricanes greatly exceeded that of the Northridge earthquake, DCMS’s user capacity was not sufficient to process the surge in disaster loan applications in a timely manner. Additionally, SBA did not adequately monitor the performance of a DCMS contractor or stress test the system prior to its implementation. In particular, SBA did not verify that the contractor provided the agency with the correct computer hardware specified in its contract. SBA also did not completely stress test DCMS prior to implementation to ensure that the system could operate effectively at maximum capacity. If SBA had verified the equipment as required or conducted complete stress testing of DCMS prior to implementation, its capacity to process Gulf Coast related disaster loan applications may have been enhanced. In the report we are releasing today, we found that SBA did not engage in comprehensive disaster planning for other logistical areas—such as workforce or space acquisition planning—prior to the Gulf Coast hurricanes at either the headquarters or field office levels. For example, SBA had not taken steps to help ensure the availability of additional trained and experienced staff such as (1) cross-training agency staff not normally involved in disaster assistance to provide backup support or (2) maintaining the status of the disaster reserve corps as I previously discussed. In addition, SBA had not thoroughly planned for the office space requirements that would be necessary in a disaster the size of the Gulf Coast hurricanes. While SBA had developed some estimates of staffing and other logistical requirements, it largely relied on the expertise of agency staff and previous disaster experiences—none of which reached the magnitude of the Gulf Coast hurricanes—and, as was the case with DCMS planning, did not leverage other planning resources, including information available from disaster simulations or catastrophe models. In our July 2006 report, we recommended that SBA take several steps to enhance DCMS, such as reassessing the system’s capacity in light of the Gulf Coast hurricane experience and reviewing information from disaster simulations and catastrophe models. We also recommended that SBA strengthen its DCMS contractor oversight and further stress test the system. SBA agreed with these recommendations. I note that SBA has completed an effort to expand DCMS’s capacity. SBA officials said that DCMS can now support a minimum of 8,000 concurrent agency users as compared with only 1,500 concurrent users for the Gulf Coast hurricanes. Additionally, SBA has awarded a new contract for the project management and information technology support for DCMS. The contractor is responsible for a variety of DCMS tasks on SBA’s behalf including technical support, software changes and hardware upgrades, and supporting all information technology operations associated with the system. In the report we are releasing today, we identified other measures that SBA has planned or implemented to better prepare for and respond to future disasters. These steps include appointing a single individual to coordinate the agency’s disaster preparedness planning and coordination efforts, enhancing systems to forecast the resource requirements to respond to disasters of varying scenarios, and redesigning the process for reviewing applications and disbursing loan proceeds. Additionally, SBA has planned or initiated steps to help ensure the availability of additional trained and experienced staff in the event of a future disaster. According to SBA officials, these steps include cross-training staff not normally involved in disaster assistance to provide back up support, reaching agreements with private lenders to help process a surge in disaster loan applications, and reestablishing the disaster reserve corps with 750 individuals as of January 2007. However, the report also discusses apparent limitations we found in SBA’s disaster planning processes. For example, SBA has not established a time line for completing the key elements of its disaster management plan, such as cross-training nondisaster staff to provide back up support. In addition, SBA has not assessed whether the agency could leverage outside resources to enhance its disaster planning and preparation efforts, such as information available from disaster simulations and catastrophe models. Finally, SBA had not established a long-term process to help ensure that it could acquire suitable office space to house an expanded workforce to respond to a future disaster. To strengthen SBA capacity to respond to a future disaster, the report recommends that SBA develop time frames for completing key elements of the disaster management plan (and a long-term strategy for acquiring adequate office space); and direct staff involved in developing the disaster plan to continue assessing whether the use of disaster simulations or catastrophe models would enhance the agency’s overall disaster planning process. SBA agreed to implement each of these recommendations. However, it remains to be seen how comprehensive SBA’s final disaster management plan will be and how effectively the agency will respond to a future disaster. Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact William B. Shear at (202) 512- 8678 or Shearw@gao.gov. Contact points for our Offices of Congressional Affairs and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony included Wesley Phillips, Assistant Director; Marshall Hamlett; Barbara S. Oliver; and Cheri Truett. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Small Business Administration (SBA) helps individuals and businesses recover from disasters such as hurricanes through its Disaster Loan Program. SBA faced an unprecedented demand for disaster loan assistance following the 2005 Gulf Coast hurricanes (Katrina, Rita, and Wilma), which resulted in extensive property damage and loss of life. In the aftermath of these disasters, concerns were expressed regarding the timeliness of SBA's disaster assistance. GAO initiated work and completed two reports under the Comptroller General's authority to conduct evaluations and determine how well SBA provided victims of the Gulf Coast hurricanes with timely assistance. This testimony, which is based on these two reports, discusses (1) challenges SBA experienced in providing victims of the Gulf Coast hurricanes with timely assistance, (2) factors that contributed to these challenges, and (3) steps SBA has taken since the Gulf Coast hurricanes to enhance its disaster preparedness. GAO visited the Gulf Coast region, reviewed SBA planning documents, and interviewed SBA officials. GAO identified several significant system and logistical challenges that SBA experienced in responding to the Gulf Coast hurricanes that undermined the agency's ability to provide timely disaster assistance to victims. For example, the limited capacity of SBA's automated loan processing system--the Disaster Credit Management System (DCMS)--restricted the number of staff who could access the system at any one time to process disaster loan applications. In addition, SBA staff who could access DCMS initially encountered multiple system outages and slow response times in completing loan processing tasks. SBA also faced challenges training and supervising the thousands of mostly temporary employees the agency hired to process loan applications and obtaining suitable office space for its expanded workforce. As of late May 2006, SBA processed disaster loan applications, on average, in about 74 days compared with its goal of within 21 days. While the large volume of disaster loan applications that SBA received clearly affected its capacity to provide timely disaster assistance to Gulf Coast hurricane victims, GAO's two reports found that the absence of a comprehensive and sophisticated planning process beforehand likely limited the efficiency of the agency's initial response. For example, in designing the capacity of DCMS, SBA primarily relied on historical data such as the number of loan applications that the agency received after the 1994 Northridge, California, earthquake--the most severe disaster that the agency had previously encountered. SBA did not consider disaster scenarios that were more severe or use the information available from disaster simulations (developed by federal agencies) or catastrophe models (used by insurance companies to estimate disaster losses). SBA also did not adequately monitor the performance of a DCMS contractor or completely stress test the system prior to its implementation. Moreover, SBA did not engage in comprehensive disaster planning prior to the Gulf Coast hurricanes for other logistical areas, such as workforce planning or space acquisition, at either the headquarters or field office levels. In the aftermath of the Gulf Coast hurricanes, SBA has planned or initiated several measures that officials said would enhance the agency's capacity to respond to future disasters. For example, SBA has completed an expansion of DCMS's user capacity to support a minimum of 8,000 concurrent users as compared with just 1,500 for the Gulf Coast hurricanes. Additionally, SBA initiated steps to increase the availability of trained and experienced disaster staff and redesigned its process for reviewing loan applications and disbursing funds. However, SBA has not established a time line for completing key elements of its disaster management plan, such as cross-training agency staff not typically involved in disaster assistance to provide back up support in an emergency. SBA also has not (1) assessed whether its disaster planning process could benefit from the supplemental use of disaster simulations or catastrophe models and (2) developed a long-term strategy to obtain suitable office space for its disaster staff. While SBA agreed with GAO's report recommendations to address these concerns, it remains to be seen how comprehensive the agency's final disaster plan will be and how the agency will respond to a future disaster.

The Comptroller General recognized that he needed to shift the emphasis of the then Office of Civil Rights from a reactive, complaint processing focus to a more proactive, integrated approach. He wanted to create a work environment where differences are valued and all employees are offered the opportunity to reach their full potential and maximize their contributions to the agency’s mission. In 2001, the Comptroller General changed the name of the Office of Civil Rights to the Office of Opportunity and Inclusiveness and gave the office responsibility for creating a fair and inclusive work environment by incorporating diversity principles in GAO’s strategic plan and throughout our human capital policies. Along with this new strategic mission, the Comptroller General changed organizational alignment of the Office of Opportunity and Inclusiveness by having the office report directly to him. Also, in 2001, I was selected as the first Managing Director of the Office of Opportunity and Inclusiveness. The Office of Opportunity and Inclusiveness (O&I) is the principal adviser to the Comptroller General on diversity and equal opportunity matters. The office manages GAO’s Equal Employment Opportunity (EEO) program, including informal precomplaint counseling, and GAO’s formal discrimination complaint process. We also operate the agency’s early resolution and mediation program by helping managers and employees resolve workplace disputes and EEO concerns without resorting to the formal process. In addition, O&I monitors the implementation of GAO’s disability policy and oversees the management of GAO’s interpreting service for our deaf and hard-of-hearing employees. But effective efforts to create a diverse, fair, and inclusive work place require much more. In furtherance of a more proactive approach, O&I monitors, evaluates, and recommends changes to GAO’s major human capital policies and processes including those related to recruiting, hiring, performance management, promotion, awards, and training. These reviews are generally conducted before final decisions are made in an effort to provide reasonable assurance that GAO’s human capital processes and practices promote fairness and support a diverse workforce. Throughout the year, O&I actively promotes diversity throughout GAO. For example, last year we met with the summer interns to discuss their experiences and to provide guidance on steps that interns can take to enhance their chances for successful conversion to permanent employment at GAO. We also took steps to increase retention of our entry- level staff by counseling our Professional Development Program advisers on the importance of consistent and appropriate training opportunities and job assignments that afford all staff the opportunity to demonstrate all of GAO’s competencies. I also made several presentations that reinforced the agency’s strategic commitment to diversity, including a panel discussion on diversity in the workforce, a presentation to new Band II analysts on the importance of promoting an environment that is fair and unbiased and that values opportunity and inclusiveness for all staff, and a presentation to Senior Executive Service (SES) managers on leading practices for maintaining diversity, focusing on top leadership commitment and ways that managers can communicate that commitment and hold staff accountable for results. This proactive and integrated approach to promoting inclusiveness and addressing diversity issues differs from my experience as Director of the Office of Civil Rights at a major executive branch agency. As Director of that office, a position I held immediately before coming to GAO, I had little direct authority to affect human capital decisions before they were implemented, even though those decisions could adversely affect protected groups within the agency. For the most part, my role was to focus on the required barrier analysis and planning process. The problem with this approach is that agencies generally make just enough of an effort to meet the minimal requirements of the plan developed by this process. In addition to these plans, diversity principles should be built into every major human capital initiative, along with effective monitoring and oversight functions. The war for talent, especially given increasing competition with the private sector, has made it more competitive for GAO and other federal agencies to attract and retain top talent. Graduates of color from our nation’s top colleges and universities have an ever increasing array of career options. In response to this challenge, GAO has taken a variety of steps to attract a diverse pool of top candidates. We have identified a group of colleges and universities that have demonstrated overall superior academic quality, and either have a particular program or a high concentration of minority students. They include several Historically Black Colleges and Universities, Hispanic-serving institutions, and institutions with a significant portion of Asian-American students. In addition, GAO has established partnerships with professional organizations and associations with members from groups that traditionally have been underrepresented in the federal workforce, such as the American Association of Hispanic CPAs, the National Association of Black Accountants, the Federal Asian Pacific American Council, the Association of Latino Professionals in Finance and Accounting, and the American Association of Women Accountants. GAO’s recruiting materials reflect the diversity of our workforce, and we annually train our campus recruiters on the best practices for identifying a broad spectrum of diverse candidates. GAO’s student intern program serves as a critically important pipeline for attracting high-quality candidates to GAO. In order to maximize the diversity of our summer interns, O&I reviews all preliminary student intern offers to ensure that the intern hiring is consistent with the agency’s strategic commitment to maintaining a diverse workforce. O&I also meets with a significant percentage of our interns in order to get their perspectives on the fairness of GAO’s work environment. Moreover, our office recently analyzed the operation of the summer intern program and the conversion process and identified areas for improvement. GAO is implementing changes to address these areas, including taking steps to better ensure consistency in the interns’ experiences and to improve the processes for evaluating their performance and making decisions about permanent job offers. Competency-based performance management systems are extremely complex. It is important to implement safeguards to monitor implementation of such systems. As a way to ensure accountability and promote transparency, the Comptroller General made an unprecedented decision to disseminate performance rating and promotion data. Over some objections, the Comptroller General agreed to place appraisal and promotion data by race, gender, age, disability, veteran status, location, and pay band on the GAO intranet and made this information available to all GAO staff. This approach allows all managers and staff to monitor the implementation of our competency-based performance management systems and serves as an important safeguard in relation to the processes. As far as I am aware, no other federal agency has ever done this, nor am I aware of any major corporation in America that has taken such an action. The Comptroller General rejected the argument that an increased litigation risk should drive the agency away from disseminating this information. Instead he stood by his position that the principles of accountability and transparency dictated that we should make this data available to all GAO employees. In addition to making this data available to all GAO staff, O&I and the Human Capital Office conduct separate and independent reviews of each performance appraisal and promotion cycle before ratings and promotions are final. In conducting its review of performance appraisals, O&I uses a two-part approach; we review statistical data on performance ratings by demographic group within each unit, and where appropriate, we conduct assessments of individual ratings. In conducting the individual assessments we (a) examine each individual rating within the specific protected group; (b) review the adequacy of any written justification; (c) determine whether GAO’s guidance on applying the standards for each of the performance competencies has been consistently followed, to the extent possible; and (d) compare the rating with the self-assessment to identify the extent to which there are differences. I meet with team managing directors to resolve any concerns we have after our review. In some instances ratings are changed, and in other cases we obtain additional information that addresses our concerns. Our promotion process review entails analyzing all recommended best- qualified (BQ) lists. We review each applicant’s performance ratings for the last three years. In addition, we also review each applicant’s supervisory experience. I discuss concerns about an applicant’s placement with the relevant panel chair. I then meet with the Chief Operating Officer and the Chief Administrative Officer to discuss any continuing concerns. A similar process is used regarding managing director’s selection decisions. In addition to these independent reviews, GAO provides employees with several avenues to raise specific concerns regarding their individual performance ratings. The agency has an administrative grievance process that permits employees to receive expedited reviews of performance appraisal matters. Moreover, employees have access to early resolution efforts and a formal complaint process with O&I and at the Personnel Appeals Board. Despite our continuing efforts to ensure a level playing field at GAO, more needs to be done. The data show that for 2002 to 2005 the most significant differences in average appraisal ratings were among African-Americans at all bands for most years compared with Caucasian analysts. Furthermore, the rating data for entry level staff show a difference in ratings for African- Americans in comparison to Caucasian staff at the entry-level from the first rating, with the gap widening in subsequent ratings. These differences are inconsistent with the concerted effort to hire analysts with very similar qualifications, educational backgrounds, and skill sets. In June 2006, we held an SES off-site meeting specifically focusing on concerns regarding the performance ratings of our African-American staff. Shortly thereafter, the Comptroller General decided that in view of the importance of this issue, GAO should undertake an independent, objective, third-party assessment of the factors influencing the average rating differences between African-Americans and Caucasians. I agree with this decision. We should approach our concern about appraisal ratings for African- Americans with the same analytical rigor and independence that we use when approaching any engagement. We must also be prepared to implement recommendations coming out of this review. While we continue to have a major challenge regarding the average performance ratings of African-Americans, the percentages of African- Americans in senior management positions at GAO have increased in the last several years. I believe that the O&I monitoring reviews, direct access to top GAO management, and the other safeguards have played a significant role in these improvements. Specifically, from fiscal year 2000 to fiscal year 2007, the percentage of African-American staff in the SES/Senior Level (SL) increased from 7.1 percent to 11.6 percent, and at the Band III level the percentages increased from 6.7 percent to 10.8 percent. The following table shows the change in representation of African-American staff at the SES/SL and Band III levels for each year. Furthermore, the percentages of African-Americans in senior management positions at GAO compare favorably to the governmentwide percentages. While the percentage of African-Americans at the SES/SL level at GAO was lower than the governmentwide percentage in 2000, by September 2006, the GAO percentage had increased and exceeded the governmentwide percentage. At the Band III/GS-15 level, the percentage of African- American staff at GAO exceeded the governmentwide percentage in 2000 as well as in 2006. Table 2 lists the GAO and governmentwide percentages. Nonetheless, as an agency that leads by example, additional steps should be taken. We must continue to improve our expectation-setting and feedback process so that it is more timely and specific. We need additional individualized training for designated staff, and we need to provide training for all supervisors on having candid conversations about performance. We also need to improve transparency in assigning supervisory roles, ensure that all staff have similar opportunities to perform key competencies, and hold managers accountable for results. Finally, we will implement an agencywide mentoring program this summer. We expect that this program will help all participants enhance job performance and career development opportunities. Overall, GAO is making progress toward improving its processes and implementing various program changes that will help address important issues. I believe there are two compelling diversity challenges confronting GAO and the federal government. First, is the continuing challenge of implementing sufficiently specific merit-based policies, safeguards, and training in order to minimize the ability of individual biases to adversely affect the outcome of those policies. Second, is the challenge of having managers that can communicate with diverse groups of staff, respecting their differences and effectively using their creativity to develop a more dynamic and productive work environment. For many people, the workplace is the most diverse place they encounter during the course of their day. We owe it to our employees and to the future of our country to improve our understanding of our differences, and to work toward a fairer and more inclusive workplace. Chairman Akaka, Chairman Davis, and members of the subcommittees, this concludes my prepared statement. At this time I would be pleased to answer any questions that you or other members of the subcommittees may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Vigorous enforcement of anti-discrimination laws remains an essential responsibility of government. Moreover, diversity in the federal government can be a key component for executing agency missions and achieving results. Not only is it the right thing to do, but an inclusive work environment can improve retention, reduce turnover, increase our ability to recruit, and improve overall organizational effectiveness. In 2001, the Comptroller General changed the name of the Office of Civil Rights to the Office of Opportunity and Inclusiveness and gave the office responsibility for creating a fair and inclusive work environment by incorporating diversity principles in GAO's strategic plan and throughout our human capital policies. Along with this new strategic mission, the Comptroller General changed organizational alignment of the Office of Opportunity and Inclusiveness (O&I) by having the office report directly to him. Despite our continuing efforts to ensure a level playing field at GAO, more needs to be done. The data show that for 2002 to 2005 the most significant differences in average appraisal ratings were among African-Americans at all bands for most years compared with Caucasian analysts. Furthermore, the rating data for entry level staff show a difference in ratings for African-Americans in comparison to Caucasian staff at the entry-level from the first rating, with the gap widening in subsequent ratings. These differences are inconsistent with the concerted effort to hire analysts with very similar qualifications, educational backgrounds, and skill sets. In June 2006, we held an Senior Executive Service (SES) off-site meeting specifically focusing on concerns regarding the performance ratings of our African-American staff. Shortly thereafter, the Comptroller General decided that in view of the importance of this issue, GAO should undertake an independent, objective, third-party assessment of the factors influencing the average rating differences between African-Americans and Caucasians. We should approach our concern about appraisal ratings for African-Americans with the same analytical rigor and independence that we use when approaching any engagement. We must also be prepared to implement recommendations coming out of this review. Additional Efforts to Enhance Diversity Are Needed and Planned While we continue to have a major challenge regarding the average performance ratings of African-Americans, the percentages of African-Americans in senior management positions at GAO have increased in the last several years. GAO believes that the O&I monitoring reviews, direct access to top GAO management, and the other safeguards have played a significant role in these improvements. Specifically, from fiscal year 2000 to fiscal year 2007, the percentage of African-American staff in the SES/Senior Level (SL) increased from 7.1 percent to 11.6 percent, and at the Band III level the percentages increased from 6.7 percent to 10.8 percent. Furthermore, the percentages of African-Americans in senior management positions at GAO compare favorably to the governmentwide percentages. While the percentage of African-Americans at the SES/SL level at GAO was lower than the governmentwide percentage in 2000, by September 2006, the GAO percentage had increased and exceeded the governmentwide percentage. At the Band III/GS-15 level, the percentage of African-American staff at GAO exceeded the governmentwide percentage in 2000 as well as in 2006. Nonetheless, as an agency that leads by example, additional steps should be taken.

Title insurance is designed to guarantee clear ownership of a property that is being sold. The policy is designed to compensate either the lender (through a lender’s policy) or the buyer (through an owner’s policy) up to the amount of the loan or the purchase price, respectively. Title insurance is sold primarily through title agents who check the history of a title by examining public records. The title policy insures the policyholder against any claims that existed at the time of purchase but were not in the public record. Title insurance premiums are paid only once during a purchase, refinancing, or, in some cases, home equity loan transaction. The title agent receives a portion of the premium as a fee for the title search and examination work and its commission. The party responsible for paying for the title policies varies by state. In many areas, the seller pays for the owner’s policy and the buyer pays for the lender’s policy, but the buyer may also pay for both policies—or split some, or all, of the costs with the seller. According to a recent nationwide survey, the average cost for simultaneously issuing lender’s and owner’s policies on a $180,000 loan (plus other associated title costs) was approximately $925, or about 34 percent of the average total loan origination and closing fees. We identified several important items for further study, including the way policy premiums are determined, the role played by title agents, the way that title insurance is marketed, the growth of affiliated business arrangements, and the involvement of and coordination among the regulators of the multiple types of entities involved in the marketing and sale of title insurance. For several reasons, the extent to which title insurance premium rates reflect insurers’ underlying costs is not always clear. First, the largest cost for title insurers is not losses from claims—as it is for most types of insurers—but expenses related to title searches and agent commissions (see fig. 1). However, most state regulators do not consider title search expenses to be part of the premium, and do not include them in regulatory reviews that seek to determine whether premium rates accurately reflect insurers’ costs. Second, many insurers provide discounted premiums on refinance transactions because the title search covers a relatively short period, but the extent of such discounts and their use is unclear. Third, the extent to which premium rates increase as loan amounts or purchase prices increase is also unclear. Costs for title search and examination work do not appear to rise as loan or purchase amounts increase, and such costs are insurers’ largest expense. If premium rates reflected the underlying costs, total premiums could reasonably be expected to increase at a relatively slow rate as loan or purchase amounts increased, however, it is not clear that they do so. Title agents play a more significant role in the title insurance industry than agents do in most other types of insurance, performing most underwriting tasks as well as the title search and examination work. However, the amount of attention they receive from state regulators is not clear. For example, according to data compiled by the American Land Title Association (ALTA), while most states require title agents to be licensed, 3 states plus the District of Columbia do not; 18 states and the District of Columbia do not require agents to pass a licensing exam. Although NAIC has produced model legislation that states can use in their regulatory efforts, according to NAIC, as of October 2005 only three states had passed the model law or similar legislation. For several reasons, the competitiveness of the title insurance market has been questioned. First, while consumers pay for title insurance, they generally do not know how to “shop around” for the best deal and may not even know that they can. Instead, they often rely on the advice of a real estate or mortgage professional in choosing a title insurer. As a result, title insurers and agents normally market their products exclusively to these types of professionals, who in some cases may recommend not the least expensive or most reputable title insurer or agent but the one that represents the professional’s best interests. Second, the title industry is highly concentrated. ATLA data show that in 2004 the five largest title insurers and their subsidiary companies accounted for over 90 percent of the total premiums written. Finally, the low level of losses title insurers generally suffer—and large increases in operating revenue in recent years—could create the impression of excessive profits, one potential sign of a lack of competition. The use of affiliated business arrangements involving title agents and others, such as lenders, real estate brokers, or builders has grown over the past several years. Within the title insurance industry, the term “affiliated business arrangements” generally refers to some level of joint ownership among a title insurer, title agent, real estate broker, mortgage broker, lender, and builder (see fig. 2). For example, a mortgage lender and a title agent might form a new jointly owned title agency, or a lender might buy a portion of an existing title agency. Such arrangements, which may provide consumers with “one-stop shopping” and lower costs, can also can also be abused, presenting conflicts of interest when they are used as conduits for giving referral fees back to the referring entity or when the profits from the title agency are significant to the referring entity. Several types of entities besides insurers and their agents are involved in the sale of title insurance, and the degree of involvement of and the extent of coordination among the regulators of these entities appears to vary. These entities include real estate brokers and agents, mortgage brokers, lenders, and builders, all of which may refer clients to particular agencies and insurers. These entities are generally overseen by a variety of state regulators, including insurance departments, real estate commissions, and state banking regulators, that interact to varying degrees. For example, one state insurance regulator with whom we spoke told us that the agency coordinated to some extent with the state real estate commission and at the federal level with HUD, but only informally. Another regulator said that it had tried to coordinate its efforts with other regulators in the state, but that the other regulators had generally not been interested. HUD, which is responsible for implementing RESPA, has conducted some investigations in conjunction with insurance regulators in some states. Some of these investigations of the marketing of title insurance by title insurers and agents, real estate brokers, and builders have turned up allegedly illegal activities. Federal and state investigations have identified two primary types of potentially illegal activities in the sale of title insurance, but the extent to which such activities occur in the title insurance industry is unknown. The first involves allegations of kickbacks–that is, fees that title agents or insurers may give to home builders, real estate agents and brokers, or lenders in return for referrals. Kickbacks are generally illegal. In several states, state insurance regulators identified captive reinsurance arrangements that title insurers and agents were allegedly using to inappropriately compensate others, such as builders or lenders, for referrals. State and federal investigators have also alleged the existence of inappropriate or fraudulent affiliated business arrangements. These involve a “shell” title agency that generally has no physical location, employees, or assets, and does not actually perform title and settlement business. Investigators alleged that the primary purpose of these shell companies was to provide kickbacks for business referrals. Investigators have also looked at the various types of alleged kickbacks that title agents have provided, including gifts, entertainment, business support services, training, and printing costs. Second, investigators have uncovered instances of alleged misappropriation or mishandling of customers’ premiums by title agents. For example, one licensed title insurance agent who was the owner (or partial owner) of more than 10 title agencies allegedly failed to remit approximately $500,000 in premiums to the title insurer. As a result, the insurer allegedly did not issue 6,400 title policies to consumers who had paid for them. In response to the investigations, insurers and industry associations say they have begun to address some concerns raised by affiliated businesses, but that clearer regulations and stronger enforcement are needed. One title insurance industry association told us that recent federal and state enforcement actions had motivated title insurers to address potential kickbacks and rebates through, for example, increased oversight of title agents. In addition, the insurers and associations said that competition from companies that break the rules hurt companies that were operating legally and that these businesses welcome greater enforcement efforts. Several associations also told us that clearer regulations regarding referral fees and affiliated business arrangements would aid the industry’s compliance efforts. Specifically, we were told that regulations need to be more transparent about the types of discounts and fees that are prohibited and the types that are allowed. Over the past several years, regulators and others have suggested changes to regulations that would affect the way title insurance is sold, and further study of the issues raised by these potential changes could be beneficial. In 2002, in order to simplify and improve the process of obtaining a home mortgage and to reduce settlement costs for consumers, HUD proposed revisions to the regulations that implement RESPA. But HUD later withdrew the proposal in response to considerable comments from the title industry, consumers, and other federal agencies. In June 2005, HUD announced that it was again considering revisions to the regulations. In addition, NAIC officials told us that the organization was considering changes to the model title insurance and agent laws to address current issues such as the growth of affiliated business arrangements and to more closely mirror RESPA’s provisions on referral fees and sanctions for violators. Finally, some consumer advocates have suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower costs for consumers, because lenders could then use their market power to force title insurers to compete for business based on price. The issues identified today raise a number of questions that we plan to address as part of our ongoing work. We look forward to the continued cooperation of the title industry, state regulators, and HUD as we continue this work. Mr. Chairman, this completes my prepared statement. I would be pleased to answer any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact Orice Williams on (202) 512-8678 or williamso@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributors to this testimony include Larry Cluff (Assistant Director), Tania Calhoun, Emily Chalmers, Nina Horowitz, Marc Molino, Donald Porteous, Melvin Thomas, and Patrick Ward. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Title insurance is a required element of almost all real estate purchases and is not an insignificant cost for consumers. However, consumers generally do not have the knowledge needed to "shop around" for title insurance and usually rely on professionals involved in real estate--such as lenders, real estate agents, and attorneys--for advice in selecting a title insurer. Recent state and federal investigations into title insurance sales have identified practices that may have benefited these professionals and title insurance providers at the expense of consumers. At the request of the House Financial Services Committee, GAO currently has work under way studying the title insurance industry, including pricing, competition, the size of the market, the roles of the various participants in the market, and how the industry is regulated. This testimony discusses the preliminary results of GAO's work to date and identifies issues for further study. In so doing, this testimony focuses on: (1) the reasonableness of cost structures and agent practices common to the title insurance market that are not typical of other insurance markets; (2) the implications of activities identified in recent state and federal investigations that may have benefited real estate professionals rather than consumers; and (3) the potential need for regulatory changes that would affect the way that title insurance is sold. Some cost structures and agent practices that are common to the title insurance market are not typical of other lines of insurance and merit further study. First, the extent to which premium rates reflect underlying costs is not always clear. For example, most states do not consider title search and examination costs--insurers' largest expense--to be part of the premium, and do not review these costs. Second, while title agents play a key role in the underwriting process, the extent to which state insurance regulators review agents is not clear. Few states collect information on agents, and three states do not license them. Third, the extent to which a competitive environment exists within the title insurance market that benefits consumers is also not clear. Consumers generally lack the knowledge necessary to "shop around" for a title insurer and therefore often rely on the advice of real estate and mortgage professionals. As a result, title agents normally market their business to these professionals, creating a form of competition from which the benefit to consumers is not always clear. Fourth, real estate brokers and lenders are increasingly becoming full or part owners of title agencies, which may benefit consumers by allowing one-stop shopping, but may also create conflicts of interest. Finally, multiple regulators oversee the different entities involved in the title insurance industry, but the extent of involvement and coordination among these entities is not clear. Recent state and federal investigations have identified potentially illegal activities--mainly involving alleged kickbacks--that also merit further study. The investigations alleged instances of real estate agents, mortgage brokers, and lenders receiving referral fees or other inducements in return for steering business to title insurers or agents, activities that may have violated federal or state anti-kickback laws. Participants allegedly used several methods to convey the inducements, including captive reinsurance agreements, fraudulent business arrangements, and discounted business services. For example, investigators identified several "shell" title agencies created by a title agent and a real estate or mortgage broker that had no physical location or employees and did not perform any title business, allegedly serving only to obscure referral payments. Insurers and industry associations with whom we spoke said that they had begun to address such alleged activities but also said that current regulations needed clarification. In the past several years, regulators, industry groups, and others have suggested changes to the way title insurance is sold, and further study of these suggestions could be beneficial. For example, the Department of Housing and Urban Development announced in June 2005 that it was considering revisions to the regulations implementing the Real Estate Settlement Procedures Act. In addition, the National Association of Insurance Commissioners is considering changes to model laws for title insurers and title agents. Finally, at least one consumer advocate has suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower consumers' costs.

Yellowstone National Park is at the center of about 20 million acres of publicly and privately owned land, overlapping three states—Idaho, Montana, and Wyoming. This area is commonly called the greater Yellowstone area or ecosystem and is home to numerous species of wildlife, including the largest concentration of free-roaming bison in the United States. Bison are considered an essential component of this ecosystem because they contribute to the biological, ecological, cultural, and aesthetic purposes of the park. However, because the bison are naturally migratory animals, they seasonally attempt to migrate out of the park in search of suitable winter range. The rate of exposure to brucellosis in Yellowstone bison is currently estimated at about 50 percent. Transmission of brucellosis from bison to cattle has been documented under experimental conditions, but not in the wild. Scientists and researchers disagree about the factors that influence the risk of wild bison transmitting brucellosis to domestic cattle and are unable to quantify the risk. Consequently, the IBMP partner agencies are working to identify risk factors that affect the likelihood of transmission, such as the persistence of the brucellosis-causing bacteria in the environment and the proximity of bison to cattle, and are attempting to limit these risk factors using various management actions. The National Park Service first proposed a program to control bison at the boundary of Yellowstone National Park in response to livestock industry concerns over the potential transmission of brucellosis to cattle in 1968. Over the next two decades, concerns continued over bison leaving the park boundaries, particularly after Montana’s livestock industry was certified brucellosis-free in 1985. In July 1990, the National Park Service, Forest Service, and Montana’s Department of Fish, Wildlife and Parks formed an interagency team to examine various alternatives for the long- term management of the Yellowstone bison herd. Later, the interagency team was expanded to include USDA’s Animal and Plant Health Inspection Service and the Montana Department of Livestock. In 1998, USDA and Interior jointly released a draft environmental impact statement (EIS) analyzing several proposed alternatives for long-term bison management and issued a final EIS in August 2000. In December 2000, the interagency team agreed upon federal and state records of decision detailing the long- term management approach for the Yellowstone bison herd, commonly referred to as the IBMP. “maintain a wild, free-ranging population of bison and address the risk of brucellosis transmission to protect the economic interest and viability of the livestock industry in Montana.” Although managing the risk of brucellosis transmission from bison to cattle is at the heart of the IBMP, the plan does not seek to eliminate brucellosis in bison. The plan instead aims to create and maintain a spatial and temporal separation between bison and cattle sufficient to minimize the risk of brucellosis transmission. In addition, the plan allows for the partner agencies to make adaptive management changes as better information becomes available through scientific research and operational experience. Under step one of the plan, bison are generally restricted to areas within or just beyond the park’s northern and western boundaries. Bison attempting to leave the park are herded back to the park. When attempts to herd the bison back to the park are repeatedly unsuccessful, the bison are captured or lethally removed. Generally, captured bison are tested for brucellosis exposure. Those that test positive are sent to slaughter, and eligible bison—calves and yearlings that test negative for brucellosis exposure—are vaccinated. Regardless of vaccination-eligibility, partner agency officials may take a variety of actions with captured bison that test negative including, temporarily holding them in the capture facility for release back into the park or removing them for research. In order to progress to step two, cattle can no longer graze in the winter on certain private lands north of Yellowstone National Park and west of the Yellowstone River. Step two, which the partner agencies expected to reach by the winter of 2002/2003, would use the same management methods on bison attempting to leave the park as in step one, with one exception—a limited number of bison, up to a maximum of 100, that test negative for brucellosis exposure would be allowed to roam in specific areas outside the park. Finally, step three would allow a limited number of untested bison, up to a maximum of 100, to roam in specific areas outside the park when certain conditions are met. These conditions include determining an adequate temporal separation period, gaining sufficient experience in managing bison in the bison management areas, and initiating an effective vaccination program using a remote delivery system for eligible bison inside the park. The partner agencies anticipated reaching this step on the northern boundary in the winter of 2005/2006 and the western boundary in the winter of 2003/2004. In 1997, as part of a larger land conservation effort in the greater Yellowstone area, the Forest Service partnered with the Rocky Mountain Elk Foundation—a nonprofit organization dedicated to ensuring the future of elk, other wildlife and their habitat—to develop a Royal Teton Ranch (RTR) land conservation project. The ranch is owned by and serves as the international headquarters for the Church Universal and Triumphant, Inc. (the Church)—a multi-faceted spiritual organization. It is adjacent to the northern boundary of Yellowstone National Park and is almost completely surrounded by Gallatin National Forest lands. The overall purpose of the conservation project was to preserve critical wildlife migration and winter range habitat for a variety of species, protect geothermal resources, and improve recreational access. The project included several acquisitions from the Church, including the purchase of land and a wildlife conservation easement, a land-for-land exchange, and other special provisions such as a long-term right of first refusal for the Rocky Mountain Elk Foundation to purchase remaining RTR lands. The project was funded using fiscal years 1998 and 1999 Land and Water Conservation Fund appropriations totaling $13 million. Implementation of the IBMP remains in step one because cattle continue to graze on RTR lands north of Yellowstone National Park and west of the Yellowstone River. All Forest Service cattle grazing allotments on its lands near the park are held vacant, and neither these lands nor those acquired from the Church are occupied by cattle. The one remaining step to achieve the condition of cattle no longer grazing in this area is for the partner agencies to acquire livestock grazing rights on the remaining private RTR lands. Until cattle no longer graze on these lands, no bison will be allowed to roam beyond the park’s northern border, and the agencies will not be able to proceed further under the IBMP. Although unsuccessful, Interior attempted to acquire livestock grazing rights on the remaining RTR lands in August 1999. The Church and Interior had signed an agreement giving Interior the option to purchase the livestock grazing rights, contingent upon a federally approved appraisal of the value of the grazing rights and fair compensation to the Church for forfeiture of this right. The appraisal was completed and submitted for federal review in November 1999. In a March 2000 letter to the Church, Interior stated that the federal process for reviewing the appraisal was incomplete and terminated the option to purchase the rights. As a result, the Church continues to exercise its right to graze cattle on the RTR lands adjacent to the north boundary of the park, and the agencies continue operating under step one of the IBMP. More recently, the Montana Department of Fish, Wildlife and Parks has re- engaged Church officials in discussions regarding a lease arrangement for Church-owned livestock grazing rights on the private RTR lands. Given the confidential and evolving nature of these negotiations, specific details about funding sources or the provisions being discussed, including the length of the lease and other potential conditions related to bison management, are not yet available. Although the agencies continue to operate under step one of the plan, they reported several accomplishments in their September 2005 Status Revew i of Adaptve Management Elements for 2000-2005. These accomplishments included updating interagency field operating procedures, vacating national forest cattle allotments within the bison management areas, and conducting initial scientific studies regarding the persistence of the brucellosis-causing bacteria in the environment. The lands and conservation easement acquired by the federal government through the RTR land conservation project sought to provide critical habitat for a variety of wildlife species including bighorn sheep, antelope, elk, mule deer, bison, grizzly bear, and Yellowstone cutthroat trout; however, the value of this acquisition for the Yellowstone bison herd is minimal because bison access to these lands remains limited. The Forest Service viewed the land conservation project as a logical extension of past wildlife habitat acquisitions in the northern Yellowstone region. While the Forest Service recognized bison as one of the migrating species that might use the habitat and noted that these acquisitions could improve the flexibility of future bison management, the project was not principally directed at addressing bison management issues. Through the RTR land conservation project, the federal government acquired from the Church a total of 5,263 acres of land and a 1,508-acre conservation easement using $13 million in Land and Water Conservation Fund appropriations. As funding became available and as detailed agreements could be reached with the Church, the following two phases were completed. In Phase I, the Forest Service used $6.5 million of its fiscal year 1999 Land and Water Conservation Fund appropriation to purchase Church-owned lands totaling 3,107 acres in June and December 1998 and February 1999. Of these lands, 2,316 acres were RTR lands, 640 acres were lands that provided strategic public access to other Gallatin National Forest lands, and 151 acres were an in-holding in the Absaroka Beartooth Wilderness area. In Phase II, BLM provided $6.3 million of its fiscal year 1998 Land and Water Conservation Fund appropriations for the purchase of an additional 2,156 acres of RTR lands and a 1,508-acre conservation easement on the Devil’s Slide area of the RTR property in August 1999. In a December 1998 letter to the Secretary of the Interior from the Chairs and Ranking Minority Members of the House and Senate Committees on Appropriations, certain conditions were placed on the use of these funds. The letter stated that “the funds for phase two should only be allocated by the agencies when the records of decision for the ‘Environmental Impact Statement for the Interagency Bison Management Plan for the State of Montana and Yellowstone National Park’ are signed and implemented.” The letter also stated that the Forest Service and Interior were to continue to consult with and gain the written approval of the governor of Montana regarding the terms of the conservation easement. Under the easement, numerous development activities, including the construction of commercial facilities and road, are prohibited. However, the Church specifically retained the right to graze domestic cattle in accordance with a grazing management plan that was to be reviewed and approved by the Church and the Forest Service. The Church’s grazing management plan was completed in December 2002, and the Forest Service determined in February 2003 that it was consistent with the terms of the conservation easement. The Church currently grazes cattle throughout the year on portions of its remaining 6,000 acres; however, as stipulated in the conservation easement and incorporated in the grazing management plan, no livestock can use any of the 1,508 acres covered by the easement between October 15 and June 1 of each calendar year, the time of year that bison would typically be migrating through the area. While purchased for wildlife habitat, geothermal resources, and recreational access purposes, the federally acquired lands and conservation easement have been of limited benefit to the Yellowstone bison. As previously noted, under the IBMP, until cattle no longer graze on private RTR lands north of the park and west of the Yellowstone River, no bison are allowed to migrate onto these private lands and the partner agencies are responsible for assuring that the bison remain within the park boundary. Mr. Chairman, this concludes my prepared statement. Because we are in the very early stages of our work, we have no conclusions to offer at this time regarding these bison management issues. We will continue our review and plan to issue a report near the end of this year. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact me at (202) 512- 3841 or nazzaror@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. David P. Bixler, Assistant Director; Sandra Kerr; Diane Lund; and Jamie Meuwissen made key contributions to this statement. Wid feManagement: Negota ons on a LongTerm Plan or Managing Yellowstone Bson Still Ongoing. GAO/RCED-00-7. Washington, D.C.: i November 1999. Wid feManagement: Issues Concernng the Management of Bson and Elk Herds n Ye owstone Natonal Park. GAO/T-RCED-97-200. llii Washington, D.C.: July 1997. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Yellowstone National Park, in northwest Wyoming, is home to a herd of about 3,600 free-roaming bison. Some of these bison routinely attempt to migrate from the park in the winter. Livestock owners and public officials in states bordering the park have concerns about the bison leaving the park because many are infected with brucellosis--a contagious bacterial disease that some fear could be transmitted to cattle, thus potentially threatening the economic health of the states' livestock industry. Other interested groups believe that the bison should be allowed to roam freely both within and outside the park. In an effort to address these concerns, five federal and Montana state agencies agreed to an Interagency Bison Management Plan (IBMP) in December 2000 that includes three main steps to "maintain a wild, free-ranging population of bison and address the risk of brucellosis transmission to protect the economic interest and viability of the livestock industry in Montana." This testimony discusses GAO's preliminary observations on the progress that has been made in implementing the IBMP and the extent to which bison have access to lands and an easement acquired for $13 million in federal funds. It is based on GAO's visit to the greater Yellowstone area, interviews with federal and state officials and other interested stakeholders, and review of related documents. More than 6 years after approving the IBMP, the five federal and state partnering agencies--the federal Department of the Interior's National Park Service and Department of Agriculture's Animal and Plant Health Inspection Service and Forest Service, and the state of Montana's Departments of Livestock and of Fish, Wildlife and Parks--remain in step one of the three-step plan primarily because cattle continue to graze on certain private lands. A key condition for the partner agencies to progress further under the plan requires that cattle no longer graze in the winter on certain private lands north of Yellowstone National Park and west of the Yellowstone River to minimize the risk of brucellosis transmission from bison to cattle; the agencies anticipated meeting this condition by the winter of 2002/2003. Until this condition is met, bison will not be allowed to roam beyond the park's northern border in this area. While a prior attempt to acquire grazing rights on these private lands was unsuccessful, Montana's Department of Fish, Wildlife and Parks is currently negotiating with the private land owner to acquire grazing rights on these lands. Yellowstone bison have limited access to the lands and conservation easement that federal agencies acquired north of the park. In 1998 and 1999, as part of a larger conservation effort to provide habitat for a variety of wildlife species, protect geothermal resources, and improve recreational access, federal agencies spent nearly $13 million to acquire 5,263 acres and a conservation easement on 1,508 acres of private lands north of the park's border--lands towards which bison frequently attempt to migrate in the winter. The conservation easement prohibits development, such as the construction of commercial facilities and roads, on the private land; cattle grazing rights were retained by the land owner. The Yellowstone bison's access to these lands will remain limited until cattle no longer graze on the easement and certain other private lands in the area.

Coast Guard operators and commanding officers told us that the National Security Cutter, Fast Response Cutter, and HC-144 are performing well during missions and are an improvement over the vessels and aircraft they are replacing. Operators primarily attribute the performance improvements to better endurance and communications capabilities, which help to position and keep these assets in high-threat areas. Specifically, these new assets have greater fuel capacity and efficiency, engine room and boat launch automation, handling/seakeeping, and food capacity, all of which increase endurance and effectiveness. To date, the improved capabilities of the four newly fielded assets have led to mission- related successes, according to Coast Guard asset commanders. In addition to performance in the field, each major acquisition is required to undergo operational testing by an independent test agency—in this case, the Navy’s Commander of Operational Test and Evaluation Force. Operational testing is important, as it characterizes the performance of the asset in realistic conditions. During operational testing, the test agency determines whether the asset is operationally effective (whether or not an asset can meet its missions) and operationally suitable (whether or not the agency can support the asset to an acceptable standard). The Fast Response Cutter and the HC-144 completed initial operational testing in September 2013 and October 2012, respectively. Based on the results, neither asset met all key requirements during this testing. The Fast Response Cutter partially met one of six key requirements, while the HC-144 met or partially met four of seven key requirements. The Fast Response Cutter was found to be operationally effective (with the exception of its cutter boat) though not operationally suitable, and the HC- 144 was found to be operationally effective and suitable. It is important to recognize that this was the initial operational testing and that the Coast Guard has plans in place to address most of the major issues identified. For example, in order to address issues with the seaworthiness of the Fast Response Cutter’s small boat, the Coast Guard will supply the Fast Response Cutter with a small boat developed for the National Security Cutter. However, DHS officials approved both assets to move into full rate production, and we found that guidance is not clear regarding when the minimum performance standards should be met—or what triggers the need for a program manager to submit a performance breach memorandum indicating that certain performance parameters were not demonstrated. The Coast Guard did not report that a breach had occurred for the HC-144 or the Fast Response Cutter, even though neither of these programs met certain key performance parameters during operational testing. Without clear acquisition guidance, it is difficult to determine when or by what measure an asset has breached its key performance parameters and, therefore, when DHS and certain congressional committees are to be notified. We recommended that DHS and the Coast Guard revise their acquisition guidance to specify when minimum performance standards should be met and clarify the performance data that should be used to determine whether a performance breach has occurred. DHS concurred with these recommendations and stated that it plans to make changes to its acquisition guidance by June 30, 2015. By not fully validating the capabilities of the National Security Cutter until late in production, the Coast Guard may have to spend more to ensure the ship meets requirements and is logistically supportable. The Coast Guard recently evaluated the National Security Cutter through operational testing, even though 7 of 8 National Security Cutters are under contract, but results are not expected until early fiscal year 2015. Coast Guard program officials stated that, prior to the operational test, the National Security Cutter had demonstrated most of its key performance parameters through non-operational tests and assessments, but we found that a few performance requirements, such as those relating to the endurance of the vessel and its self-defense systems, have yet to be assessed. Further, several issues occurred prior to the start of operational testing that required retrofits or design changes to meet mission needs. The total cost to conduct some of these retrofits and design changes has not yet been determined, but the cost of major changes for all eight hulls identified to date has totaled approximately $140 million, which is about one-third of the production cost of a single National Security Cutter. The Coast Guard continues to carry significant risk by not fully validating the capabilities of the National Security Cutter until late in production, which could result in the Coast Guard having to spend even more money in the future, beyond the changes that have already been identified. The Coast Guard has not yet evaluated the C4ISR system through operational testing even though the system has been fielded on nearly all new assets. Instead of evaluating that system’s key performance parameters, Coast Guard officials decided to test the system in conjunction with other assets—such as the HC-144 and the Fast Response Cutter—to save money and avoid duplication. However, the C4ISR system was not specifically evaluated during the HC-144 and Fast Response Cutter tests because those assets’ test plans did not fully incorporate testing the effectiveness and suitability of the C4ISR system. The Coast Guard now plans to test the key performance parameters for the next generation C4ISR system when follow on testing is conducted on the National Security Cutter; this testing has yet to be scheduled. By not testing the system, the Coast Guard has no assurance that it is purchasing a system that meets its operational needs. To address this issue, we recommended that the Coast Guard assess the C4ISR system by fully integrating this assessment into other assets’ operational test plans or by testing the C4ISR program on its own. In response, the Coast Guard stated that it now plans to test the C4ISR system’s key performance parameters during follow on testing for the National Security Cutter. As the Coast Guard continues to refine cost estimates for its major acquisitions, the expected cost of its acquisition portfolio has grown. There has been $11.3 billion in cost increases since 2007 across the eight programs that have consistently been part of the portfolio—the National Security Cutter, the Offshore Patrol Cutter, the Fast Response Cutter, the HC-144, the HC-130H/J, HH-65, C4ISR, and Unmanned Aircraft System. These cost increases are consuming a large portion of funding. Consequently, the Coast Guard is farther from fielding its planned fleet today than it was in 2009, in terms of money needed to finish these programs. Senior Coast Guard acquisition officials told us that many of the cost increases are due to changes from preliminary estimates and that they expect to meet their current cost estimates. However, the Coast Guard has yet to construct the largest asset in the portfolio—the Offshore Patrol Cutter—and if the planned costs for this program increase, difficulties in executing the portfolio as planned will be further exacerbated. Figure 1 shows the total cost of the portfolio and cost to complete the major programs included in the Coast Guard’s 2007 baseline in 2009 and 2014. Coast Guard, DHS, and OMB officials have acknowledged that the Coast Guard cannot afford to recapitalize and modernize its assets in accordance with the current plan at current funding levels. According to budget documents, Coast Guard acquisition funding levels have been about $1.5 billion for each of the past 5 years, and the President’s budget requests $1.1 billion for fiscal year 2015. To date, efforts to address this affordability imbalance have yet to result in the significant trade-off decisions that would be needed to do so. We have previously recommended that DHS and the Coast Guard establish a process to make the trade-off decisions needed to balance the Coast Guard’s resources and needs. While they agreed with the recommendation, they have yet to implement it. In the meantime, the extent of expected costs—and how the Coast Guard plans to address them through budget trade-off decisions—is not being clearly communicated to Congress. The mechanism in place for reporting to certain congressional committees, the Capital Investment Plan, does not reflect the full effects of these trade-off decisions on the total cost and schedule of its acquisition programs. This information is not currently required by statute, but without it, decision makers do not have the information to understand the full extent of funding that will be required to complete the Coast Guard’s planned acquisition programs. For example, in the Fiscal Years 2014 through 2018 Capital Investment Plan, cost and schedule totals did not match the funding levels presented for many programs. The plan proposed lowering the Fast Response Cutter procurement to two per year but still showed the total cost and schedule estimates for purchasing three or six per year—suggesting that this reduced quantity would have no effect on the program’s total cost and schedule. Given that decreasing the quantity purchased per year would increase the unit and total acquisition cost, the Coast Guard estimated that the decision to order fewer ships will likely add $600 to 800 million in cost and 5 years to the cutter’s final delivery date, but this was absent from the plan. Reporting total cost and delivery dates that do not reflect funding levels could lead to improper conclusions about the effect of these decisions on the program’s total cost and schedule and the overall affordability of the Coast Guard’s acquisition portfolio. In our report, we suggest that Congress consider amending the law that governs the 5- year Capital Investment Plan to require the Coast Guard to submit cost and schedule information that reflects the impact of the President’s annual budget request on each acquisition across the portfolio. To address budget constraints, the Coast Guard is repeatedly delaying and reducing its capability through its annual budget process. However, the Coast Guard does not know the extent to which its mission needs can be tailored through the annual budget process and still achieve desired results. In addition, this approach puts pressure on future budgets and delays fielding capability, which is reducing performance. Thus, the Coast Guard’s ability to meet future needs is uncertain and gaps are materializing in its current fleet. In fact, the Coast Guard has already experienced a gap in heavy icebreaking capability and is falling short of meeting operational hour goals for its major cutter fleet—comprised of the National Security Cutter and the in-service high and medium endurance cutters. These capability gaps may persist, as funding replacement assets will remain difficult at current funding levels. Without a long-term plan that considers service levels in relation to expected acquisition funding, the Coast Guard does not have a mechanism to aid in matching its requirements and resources. For example, the Coast Guard does not know if it can meet its other acquisition needs while the Offshore Patrol Cutter is being built. According to the current program of record, acquisition of the Offshore Patrol Cutter will conclude in about 20 years and will account for about two-thirds of the Coast Guard’s overall acquisition budget during this time frame. In addition, as we have previously found, the Coast Guard is deferring costs—such as purchasing unmanned systems or replacing its Buoy Tender fleet—that could lead to an impending spike in the requirement for additional funds. The Coast Guard has no method in place to capture the effects of deferring such costs on the future of the acquisition portfolio. The Coast Guard is not currently required to develop a long-term fleet modernization plan that considers its current service levels for the next 20 years in relation to its expected acquisition funding. However, the Coast Guard’s acquisition guidance supports using a long range capital planning framework. According to OMB capital planning guidance referenced by the Coast Guard’s Major Systems Acquisition Manual, each agency is encouraged to have a plan that defines its long-term capital asset decisions. This plan should include, among other things, (1) an analysis of the portfolio of assets already owned by the agency and in procurement, (2) the performance gap and capability necessary to bridge the old and new assets, and (3) justification for new acquisitions proposed for funding. OMB officials stated that they support DHS and the Coast Guard conducting a long term review of the Coast Guard’s acquisitions to assess the capabilities it can afford. A long-term plan can enable trade-offs to be seen and addressed in advance, leading to better informed choices and making debate possible before irreversible commitments are made to individual programs. Without this type of plan, decision makers do not have the information they need to better understand the Coast Guard’s long-term outlook. When we discussed such an approach with the Coast Guard, the response was mixed. Some Coast Guard budget officials stated that such a plan is not worthwhile because the Coast Guard cannot predict the level of funding it will receive in the future. However, other Coast Guard officials support the development of such a plan, noting that it would help to better understand the effects of funding decisions. Without such a plan, we believe it will remain difficult for the Coast Guard to fully understand the extent to which future needs match the current level of resources and its expected performance levels—and capability gaps—if funding levels remain constant. Consequently, we recommended that the Coast Guard develop a 20-year fleet modernization plan that identifies all acquisitions needed to maintain the current level of service and the fiscal resources necessary to build the identified assets. While DHS concurred with our recommendation, the response does not fully address our concerns or set forth an estimated date for completion, as the response did for the other recommendations. We continue to believe that a properly constructed 20- year fleet modernization plan is necessary to illuminate what is feasible in the long term and will also provide a basis for informed decisions that align the Coast Guard’s needs and resources. Chairman Hunter, Ranking Member Garamendi, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this statement, please contact Michele Mackin at (202) 512-4841 or mackinm@gao.gov. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are Katherine Trimble, Assistant Director; Laurier R. Fish; Peter W. Anderson; William Carrigg; John Crawford; Sylvia Schatz; and Lindsay Taylor. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony summarizes the information contained in GAO's June 2014 report, entitled Coast Guard Acquistions: Better Information on Performance and Funding Needed to Address Shortfalls , GAO-14-450 . The selected Coast Guard assets that GAO reviewed are generally demonstrating improved performance--according to Coast Guard operators--but GAO found that they have yet to meet all key requirements. Specifically, two assets, the HC-144 patrol aircraft and Fast Response Cutter, did not meet all key requirements during operational testing before being approved for full-rate production, and Department of Homeland Security (DHS) and Coast Guard guidance do not clearly specify when this level of performance should be achieved. Additionally, the Coast Guard changed its testing strategy for the Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) system and, as a result, is no longer planning to test the system's key requirements. Completing operational testing for the C4ISR system would provide the Coast Guard with the knowledge of whether this asset meets requirements. As acquisition program costs increase across the portfolio, consuming significant amounts of funding, the Coast Guard is farther from fielding its planned fleet today than it was in 2009, in terms of the money needed to finish these programs. In 2009, GAO found that the Coast Guard needed $18.2 billion to finish its 2007 baseline, but now needs $20.7 billion to finish these assets. To inform Congress of its budget plans, the Coast Guard uses a statutorily required 5-year Capital Investment Plan, but the law does not require the Coast Guard to report the effects of actual funding levels on individual projects and, thus, it has not done so. For example, the Coast Guard has received less funding than planned in its annual budgets, but has not reflected the effects of this reduced funding in terms of increased cost or schedule for certain projects. Without complete information, Congress cannot know the full cost of the portfolio. The Coast Guard has repeatedly delayed and reduced its capability through its annual budget process and, therefore, it does not know the extent to which it will meet mission needs and achieve desired results. This is because the Coast Guard does not have a long-term fleet modernization plan that identifies all acquisitions needed to meet mission needs over the next two decades within available resources. Without such a plan, the Coast Guard cannot know the extent to which its assets are affordable and whether it can maintain service levels and meet mission needs. Congress should consider requiring the Coast Guard to include additional information in its Capital Investment Plan. In addition, the Secretary of DHS should clarify when minimum performance standards should be achieved, conduct C4ISR testing, and develop a long-term modernization plan. DHS concurred with the recommendations, but its position on developing a long-term plan does not fully address GAO's concerns as discussed in the report.

Demand for GAO’s analysis and advice remains strong across the Congress. During the past 3 years, GAO has received requests or mandated work from all of the standing committees of the House and the Senate and over 90 percent of their subcommittees. In fiscal year 2007, GAO received over 1,200 requests for studies. This is a direct result of the high quality of GAO’s work that the Congress has come to expect as well as the difficult challenges facing the Congress where it believes having objective information and professional advice from GAO is instrumental. Not only has demand for our work continued to be strong, but it is also steadily increasing. The total number of requests in fiscal year 2007 was up 14 percent from the preceding year. This trend has accelerated in fiscal year 2008 as requests rose 26 percent in the first quarter and are up 20 percent at the mid-point of this fiscal year from comparable periods in 2007. As a harbinger of future congressional demand, potential mandates for GAO work being included in proposed legislation as of February 2008 totaled over 600, or an 86 percent increase from a similar period in the 109th Congress. The following examples illustrate this demand: Over 160 new mandates for GAO reviews were imbedded in law, including the Consolidated Appropriations Act of 2008, the Defense Appropriations Act of 2008, and 2008 legislation implementing the 9/11 Commission recommendations; New recurring responsibilities were given to GAO under the Honest Leadership and Open Government Act of 2007 to report annually on the compliance by lobbyists of registration and reporting requirements; and Expanded bid protest provisions applied to GAO that 1) allow federal employees to file protests concerning competitive sourcing decisions (A- 76), 2) establish exclusive bid protest jurisdiction at GAO over issuance of task and delivery orders valued at over $10 million, and 3) provide GAO bid protest jurisdiction over contracts awarded by the Transportation Security Administration. Further evidence of GAO’s help in providing important advice to the Congress is found in the increased numbers of GAO appearances at hearings on topics of national significance and keen interest (see table 1). In fiscal year 2007 GAO testified at 276 hearings, 36 more than fiscal year 2006. The fiscal year 2007 figure was an all-time high for GAO on a per capita basis and among the top requests for GAO input in the last 25 years. This up tempo of GAO appearances at congressional hearings has continued, with GAO already appearing at 140 hearings this fiscal year, as of April 4th. Our FTE level in fiscal year 2008 is 3,100—the lowest level ever for GAO. We are proud of the results we deliver to the Congress and our nation with this level, but with a slightly less than 5 percent increase in our FTEs to 3,251 we can better meet increased congressional requests for GAO assistance. While this increase would not bring GAO back to the 3,275 FTE level of 10 years ago, it would allow us to respond to the increased workload facing the Congress. GAO staff are stretched in striving to meet Congress’s increasing needs. People are operating at a pace that cannot be sustained over the long run. I am greatly concerned that if we try to provide more services with the existing level of resources, the high quality of our work could be diminished in the future. But I will not allow this to occur. This is not in the Congress’s nor GAO’s interest. One consequence of our demand vs. supply situation is the growing list of congressional requests that we are not able to promptly staff. While we continue to work with congressional committees to identify their areas of highest priority, we remain unable to staff important requests. This limits our ability to provide timely advice to congressional committees dealing with certain issues that they have slated for oversight, including Safety concerns such as incorporating behavior-based security programs into TSA’s aviation passenger screening process, updating our 2006 study of FDA’s post-market drug safety system, and reviewing state investigations of nursing home complaints. Operational improvements such as the effectiveness of Border Security checkpoints to identify illegal aliens, technical and programmatic challenges in DOD’s space radar programs, oversight of federally-funded highway and transit projects and the impact of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. Opportunities to increase revenues or stop wasteful spending including reducing potential overstatements of charitable deductions and curbing potential overpayments and contractor abuses in food assistance programs. Our fiscal year 2009 budget request seeks to better position us to maintain our high level of support for the Congress and better meet increasing requests for help. This request would help replenish our staffing levels at a time when almost 20 percent of all GAO staff will be eligible for retirement. Accordingly, our fiscal year 2009 budget request seeks funds to ensure that we have the increased staff capacity to effectively support the Congress’s agenda, cover pay and uncontrollable inflationary cost increases, and undertake critical investments, such as technology improvement. GAO is requesting budget authority of $545.5 million to support a staff level of 3,251 FTEs needed to serve the Congress. This is a fiscally prudent request of 7.5 percent over our fiscal year 2008 funding level, as illustrated in table 2. Our request includes about $538.1 million in direct appropriations and authority to use about $7.4 million in offsetting collections. This request also reflects a reduction of about $6 million in nonrecurring fiscal year 2008 costs. Our request includes funds needed to increase our staffing level by less than 5 percent to help us provide more timely responses to congressional requests for studies; enhance employee recruitment, retention, and development programs, which increase our competitiveness for a talented workforce; recognize dedicated contributions of our hardworking staff through awards and recognition programs; address critical human capital components, such as knowledge capacity building, succession planning, and staff skills and competencies; pursue critical structural and infrastructure maintenance and improvements; restore program funding levels to regain our lost purchasing power; and undertake critical initiatives to increase our productivity. Key elements of our proposed budget increase are outlined as follows: Pay and inflationary cost increases We are requesting funds to cover anticipated pay and inflationary cost increases resulting primarily from annual across-the-board and performance-based increases and annualization of prior fiscal year costs. These costs also include uncontrollable, inflationary increases imposed by vendors as the cost of doing business. GAO generally loses about 10 percent of its workforce annually to retirements and attrition. This annual loss places GAO under continual pressure to replace staff capacity and renew institutional memory. In fiscal year 2007, we were able to replace only about half of our staff loss. In fiscal year 2008, we plan to replace only staff departures. Our proposed fiscal year 2009 staffing level of 3,251 FTEs would restore our staff capacity through a modest FTE increase, which would allow us to initiate congressional requests in a timelier manner and begin reducing the backlog of pending requests. Critical technology and infrastructure improvements We are requesting funds to undertake critical investments that would allow us to implement technology improvements, as well as streamline and reengineer work processes to enhance the productivity and effectiveness of our staff, make essential investments that have been deferred year after year but cannot continue to be delayed, and implement responses to changing federal conditions. Human capital initiatives and additional legislative authorities GAO is working with the appropriate authorization and oversight committees to make reforms that are designed to benefit our employees and to provide a means to continue to attract, retain, and reward a top- flight workforce, as well as help us improve our operations and increase administrative efficiencies. Among the requested provisions, GAO supports the adoption of a “floor guarantee” for future annual pay adjustments similar to the agreement governing 2008 payment adjustments reached with the GAO Employees Organization, IFPTE. The floor guarantee reasonably balances our commitment to performance-based pay with an appropriate degree of predictability and equity for all GAO employees. At the invitation of the House federal workforce subcommittee, we also have engaged in fruitful discussions about a reasonable and practical approach should the Congress decide to include a legislative provision to compensate GAO employees who did not receive the full base pay increases of 2.6 percent in 2006 and 2.4 percent in 2007. We appreciate their willingness to provide us with the necessary legal authorities to address this issue and look forward to working together with you and our oversight committee to obtain necessary funding to cover these payments. The budget authority to cover the future impact of these payments is not reflected in this budget request. As you know, on September 19, 2007, our Band I and Band II Analysts, Auditors, Specialists, and Investigators voted to be represented by the GAO Employees Organization, IFPTE, for the purpose of bargaining with GAO management on various terms and conditions of employment. GAO management is committed to working constructively with employee union representatives to forge a positive labor-management relationship. Since September, GAO management has taken a variety of steps to ensure it is following applicable labor relations laws and has the resources in place to work effectively and productively in this new union environment. Our efforts have involved delivering specialized labor-management relations training to our establishing a new Workforce Relations Center to provide employee and labor relations advice and services; hiring a Workforce Relations Center director, who also serves as our chief negotiator in collective bargaining deliberations, and postponing work on several initiatives regarding our current performance and pay programs. In addition, we routinely notify union representatives of meetings that may qualify as formal discussions, so that a representative of the IFPTE can attend the meeting. We also regularly provide the IFPTE with information about projects involving changes to terms and conditions of employment over which the union has the right to bargain. We are pleased that GAO and the IFPTE reached a prompt agreement on 2008 pay adjustments. The agreement was overwhelmingly ratified by bargaining unit members on February 14, 2008, and we have applied the agreed-upon approach to the 2008 adjustments to all GAO staff, with the exception of the SES and Senior Level staff, regardless of whether they are represented by the union. In fiscal year 2007, we addressed many difficult issues confronting the nation, including the conflict in Iraq, domestic disaster relief and recovery, national security, and criteria for assessing lead in drinking water. For example, GAO has continued its oversight on issues directly related to the Iraq war and reconstruction, issuing 20 products in fiscal year 2007 alone—including 11 testimonies to congressional committees. These products covered timely issues such as the status of Iraqi government actions, the accountability of U.S.-funded equipment, and various contracting and security challenges. GAO’s work spans the security, political, economic, and reconstruction prongs of the U.S. national strategy in Iraq. Highlights of the outcomes of GAO work are outlined below. See appendix II for a detailed summary of GAO’s annual measures and targets. Additional information on our performance results can be found in Performance and Accountability Highlights Fiscal Year 2007 at www.gao.gov. GAO’s work in fiscal year 2007 generated $45.9 billion in financial benefits. These financial benefits, which resulted primarily from actions agencies and the Congress took in response to our recommendations, included about $21.1 billion resulting from changes to laws or regulations, $16.3 billion resulting from improvements to core business processes, and $8.5 billion resulting from agency actions based on our recommendations to improve public services. Many of the benefits that result from our work cannot be measured in dollar terms. During fiscal year 2007, we recorded a total of 1,354 other improvements in government resulting from GAO work. For example, in 646 instances federal agencies improved services to the public, in 634 other cases agencies improved core business processes or governmentwide reforms were advanced, and in 74 instances information we provided to the Congress resulted in statutory or regulatory changes. These actions spanned the full spectrum of national issues, from strengthened screening procedures for all VA health care practitioners to improved information security at the Securities and Exchange Commission. See table 4 for additional examples. In January 2007, we also issued our High-Risk Series: An Update, which identifies federal areas and programs at risk of fraud, waste, abuse, and mismanagement and those in need of broad-based transformations. Issued to coincide with the start of each new Congress, our high-risk list focuses on major government programs and operations that need urgent attention. Overall, this program has served to help resolve a range of serious weaknesses that involve substantial resources and provide critical services to the public. GAO added the 2010 Census as a high-risk area in March 2008. GAO’s achievements are of great service to the Congress and American taxpayers. With your support, we will be able to continue to provide the high level of performance that has come to be expected of GAO. Madam Chair, this concludes my statement. At this time, I would be pleased to respond to questions. GAO exists to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people. Provide Timely, Quality Service to the Congress and the Federal Government to . . . . . . Address Current and Emerging Challenges to the Well-being and Financial Security of the American People relted to . . . Viable commnitieNl rerce usnd environmentl protection Phyicl infrastrctre . . . Respond to Changing Security Threats and the Challenges of Global Interdependence involving . . . Advncement of U.S. intereGlobal mrket forceHelp Transform the Federal Government’s Role and How It Does Business to Meet 21st Century Challenges assssing . . . 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The budget authority GAO is requesting for fiscal year 2009--$545.5 million--represents a prudent request of 7.5 percent to support the Congress as it confronts a growing array of difficult challenges. GAO will continue to reward the confidence you place in us by providing a strong return on this investment. In fiscal year 2007 for example, in addition to delivering hundreds of reports and briefings to aid congressional oversight and decisionmaking, our work yielded: financial benefits, such as increased collection of delinquent taxes and civil fines, totaling $45.9 billion--a return of $94 for every dollar invested in GAO; over 1,300 other improvements in government operations spanning the full spectrum of national issues, ranging from helping Congress create a center to better locate children after disasters to strengthening computer security over sensitive government records and assets to encouraging more transparency over nursing home fire safety to strengthening screening procedures for VA health care practitioners; and expert testimony at 276 congressional hearings to help Congress address a variety of issues of broad national concern, such as the conflict in Iraq and efforts to ensure drug and food safety. GAO's work in fiscal year 2007 generated $45.9 billion in financial benefits. These financial benefits, which resulted primarily from actions agencies and the Congress took in response to our recommendations, included about $21.1 billion resulting from changes to laws or regulations, $16.3 billion resulting from improvements to core business processes, and $8.5 billion resulting from agency actions based on our recommendations to improve public services.

Since its creation in 1970, OMB has had two distinct but parallel roles. OMB serves as a principal staff office to the President by preparing the President’s budget, coordinating the President’s legislative agenda, and providing policy analysis and advice. The Congress has also assigned OMB specific responsibilities for ensuring the implementation of a number of statutory management policies and initiatives. Most importantly, it is the cornerstone agency for overseeing a framework of recently enacted financial, information resources, and performance management reforms designed to improve the effectiveness and responsiveness of federal departments and agencies. This framework includes the 1995 Paperwork Reduction Act and the 1996 Clinger-Cohen Act; the 1990 Chief Financial Officers Act, as expanded by the 1994 Government Management Reform Act; and the 1993 Government Performance and Results Act. OMB faces perennial challenges in carrying out these and other management responsibilities in an environment where its budgetary role necessarily remains a vital and demanding part of its mission. OMB’s resource management offices (RMOs) have integrated responsibilities for examining agency management, budget, and policy issues. The RMOs are supported by three statutory offices whose responsibilities include developing governmentwide management policies: the Office of Federal Financial Management, the Office of Federal Procurement Policy, and the Office of Information and Regulatory Affairs. In fiscal year 1996, OMB obligated $56 million and employed over 500 staff to carry out its budget and management responsibilities. The Results Act requires a strategic plan that includes six elements: (1) a comprehensive agency mission statement, (2) long-term goals and objectives for the major functions and operations of the agency, (3) approaches or strategies to achieve goals and objectives and the various resources needed to do so, (4) a discussion of the relationship between long-term goals/objectives and annual performance goals, (5) an identification of key external factors beyond agency control that could significantly affect achievement of strategic goals, and (6) a description of how program evaluations were used to establish or revise strategic goals and a schedule for future program evaluations. Although OMB’s July draft included elements addressing its mission, goals and objectives, strategies, and key external factors affecting its goals, we suggested that these elements could be enhanced to better reflect the purposes of the Results Act and to more explicitly discuss how OMB will achieve its governmentwide management responsibilities. Furthermore, the July draft plan did not contain a discussion of two elements required under the Results Act: (1) the relationship between the long-term and annual performance goals and (2) the use of program evaluation in developing goals. The structural and substantive changes OMB made to its July 1997 strategic plan constitute a significant improvement in key areas. In general, OMB’s revised plan provides a more structured and explicit presentation of its objectives, strategies, and the influence of external factors. Each objective contains a discussion of these common elements, facilitating an understanding of OMB’s goals and strategies. OMB’s September plan addresses the six required elements of the Results Act. At the same time, enhancements could make the plan more useful to OMB and the Congress in assessing OMB’s progress in meeting its goals. The September plan’s mission statement recognizes both OMB’s statutory responsibilities and its responsibilities to advise the President, and the goals and objectives are more results-oriented and comprehensive than in the July draft. For example, the plan contains a new, results-oriented objective—“maximize social benefits of regulation while minimizing the costs and burdens of regulation”—for its key statutory responsibility regarding federal regulation review. The breadth of OMB’s mission makes it especially important that OMB emphasize well-defined and results-oriented goals and objectives that address OMB’s roles in both serving the President and overseeing the implementation of statutory governmentwide management policies. OMB more clearly defines its strategies for reaching its objectives in the September plan, particularly with regard to some of its management objectives. For example, in the draft plan, OMB did not discuss the accomplishments needed to fulfill its statutory procurement responsibilities. In contrast, the September plan lays out OMB’s long-term goal to achieve a federal procurement system comparable to those of high performing commercial enterprises. It says that OMB will identify annual goals to gauge OMB’s success, and discusses the means and strategies (such as working with agencies to promote the use of commercial buying practices) it will use to accomplish this goal. OMB also commits to working with the Federal Acquisition Regulation Council to revise regulations and publish a best practices document. In the area of regulatory reform, OMB also commits to improving the quality of data and analyses used in regulatory decision-making and to developing a baseline measure of the net benefits for Federal regulations. OMB’s clear and specific description of its strategies for its procurement and regulatory review objectives could serve as models for developing strategies for its Results Act and crosscutting objectives. Although strategies to provide management leadership in certain areas are more specific, other strategies could benefit from a clearer discussion of time frames, priorities, and expected accomplishments. For example, to meet its objective of working within and across agencies to identify solutions to mission-critical problems, OMB states it will work closely with agencies and a list of other organizations to resolve these issues. However, OMB does not describe specific problems it will seek to address in the coming years or OMB’s role and strategies for solving these issues. In defining its mission, goals and objectives, and strategies, OMB’s plan recognizes its central role in “managing the coordination and integration of policies for cross-cutting interagency programs.” The plan states that in each year’s budget, major crosscutting and agency-specific management initiatives will be presented along with approaches to solving them. The plan also provides a fuller discussion than was included in the July draft of the nature and extent of interagency groups that OMB actively works with in addressing a variety of functional management issues. Specific functional management areas, such as procurement, financial, and information management, are incorporated as long-term objectives. However, OMB’s plan could more specifically address how OMB intends to work with agencies to resolve long-standing management problems and high-risk issues with governmentwide implications. For example, in the information management area, OMB’s September plan refers to critical information technology issues, but it does not provide specific strategies for solving these issues. OMB discusses the ability of agencies’ computer systems to accommodate dates beyond 1999 (the Year 2000 problem) as a potential performance measure and states how it will monitor agencies’ progress. However, the plan does not describe any specific actions OMB will take to ensure this goal is met. We have previously reported on actions OMB needs to take to implement sound technology investment in federal agencies. In a related area, OMB has elsewhere defined strategies and guidance for agency capital plans that are not explicitly discussed in the strategic plan. With respect to programmatic crosscutting issues, questions dealing with mission and program overlap are discussed only generically as components of broader objectives (such as working with agencies to identify solutions or to carry out the Results Act). The Congress and a large body of our work have identified the fragmented nature of many federal activities as the basis for a fundamental reexamination of federal programs and structures. Our recent report identified fragmentation and overlap in nearly a dozen federal missions and over 30 programs. Such unfocused efforts can waste scarce funds, confuse and frustrate program customers, and limit overall program effectiveness. The OMB plan states that the governmentwide performance plan, which OMB must prepare and submit as part of its responsibilities under the Results Act, will provide the “context for cross-cutting analyses and presentations,” but provides no additional specification. OMB’s strategic plan also does not explicitly discuss how goals and objectives will be communicated to staff and how staff will be held accountable. For example, OMB’s plan states that OMB staff are expected to provide leadership for and to be catalysts within interagency groups. Yet, the plan does not explain how OMB’s managers and staff will be made aware of and held accountable for this or other strategies for achieving OMB’s goals. As we noted in our review of the July draft plan, OMB’s staff and managers have a wide and expanded scope of responsibilities, and many of OMB’s goals depend on concerted actions with other agencies. In particular, tackling crosscutting issues will also require extensive collaboration between offices and functions within OMB, which the plan could discuss in more detail. In this environment, communicating results and priorities and assigning responsibility for achieving them are critical. The September plan more consistently discusses the relationship between annual and long-term goals as part of a discussion of each of its objectives. The plan provides useful descriptions of the performance measures OMB may use to assess its progress in its annual performance plan. For example, the plan suggests that “clean audit opinions” could measure how OMB is achieving its objective in the area of financial management. Such efforts are noteworthy because some of OMB’s activities, such as developing the President’s budget or coordinating the administration’s legislative program, present challenges for defining quantifiable performance measures and implementation schedules. Although the September plan provides a more consistent and thorough treatment of key external factors in achieving its goals, OMB could explain how it can mitigate the consequences of these factors. For example, OMB states that its goal of ensuring timely, accurate, and high-quality budget documents depends on the accuracy and timeliness of agency submissions of technical budget information. However, there is a role for OMB in assisting agencies to improve the accuracy and timeliness of data, particularly for such complex issues as estimating subsidy costs for loan and loan guarantee programs. OMB’s discussion of program evaluation could provide more information about how evaluations were used in developing its plan and how evaluations will be used to assess OMB’s and federal agencies’ capacity and progress in achieving the purposes of the Results Act. In preparing its strategic plan, OMB states that it reviewed and considered several studies of its operations prepared by OMB, GAO, and other parties. The plan also states that OMB will continue to prepare studies of its operational processes, organizational structures, and workforce utilization and effectiveness. However, OMB does not indicate clearly how prior studies were used, and OMB does not provide details on a schedule for its future studies, both of which are required by the Results Act. OMB officials have said it would be worthwhile to more fully discuss the nature and dimension of program evaluation in the context of the Results Act. As we noted in our review of the July draft plan, evaluations are especially critical for providing a source of information for the Congress and others to ensure the validity and reasonableness of OMB’s goals and strategies and to identify factors likely to affect the results of programs and initiatives. A clearer discussion of OMB’s responses to and plans for future evaluations could also provide insight into how the agency intends to address its major internal management challenges. For example, a critical question facing OMB is whether the approach it has adopted toward integrating management and budgeting, as well as its implementation of statutory management responsibilities, can be sustained over the long term. In view of OMB’s significant and numerous management responsibilities and the historic tension between the two concepts—of integrating or segregating management and budget responsibilities—we believe it is important that OMB understand how the reorganization has affected its capacity to provide sustained management leadership. In our 1995 review of OMB’s reorganization, we recommended that OMB review the impact of its reorganization as part of its planned broader assessment of its role in formulating and implementing management policies for the government. We suggested that the review focus on specific concerns that need to be addressed to promote more effective integration, including (1) the way OMB currently trains its program examiners and whether this is adequate given the additional management responsibilities assigned to these examiners and (2) the effectiveness of the different approaches taken by OMB in the statutory offices to coordinate with its resource management offices and provide program examiners with access to expertise. In commenting on our recommendation, OMB agreed that its strategic planning process offered opportunities to evaluate this initiative and could address issues raised by the reorganization. Although OMB’s plan states that it will increase the opportunities for all staff to enhance their skills and capabilities, it does not describe the kinds of knowledge, skills, and abilities needed to accomplish its mission nor a process to identify alternatives to best meet those needs. In summary, OMB has made significant improvements in its strategic plan. However, much remains to be done in improving federal management. We will be looking to OMB to more explicitly define its strategies to address important management issues and work with federal agencies and the Congress to resolve these issues. Mr. Chairman, this concludes our statement this morning. We would be pleased to respond to any questions you or other Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO discussed how well the Office of Management and Budget's (OMB) strategic plan addresses the Government Performance and Results Act's requirements and some of the challenges remaining for OMB to address in future planning efforts. GAO noted that: (1) since its July 1997 draft, OMB has made changes to the plan based on its continuing planning efforts, congressional consultations, and comments from others; (2) overall, OMB's September 1997 plan addresses all required elements of the Results Act and reflects several of the enhancements GAO suggested in its review of the July draft; (3) specific improvements include: (a) goals and objectives that show a clearer results-orientation; (b) more clearly defined strategies for achieving these goals and objectives; and (c) an increased recognition of some of the crosscutting issues OMB needs to address; (4) however, additional enhancements to several of the plan's required elements and a fuller discussion of major management challenges confronting the federal government could help make the plan more useful to the Congress and OMB; (5) for example, the plan could provide a more explicit discussion of OMB's strategies on such subjects as information technology, high-risk issues, overlap among federal missions and programs, and strengthening program evaluation; (6) OMB's strategic plan indicates that the agency will use its annual performance plan, the governmentwide performance plan, other functional management plans, and the President's Budget to provide additional information about how it plans to address some of these and other critical management issues; (7) GAO will continue to review OMB's plans and proposals as additional detail concerning objectives, time frames, and priorities is established; and (8) GAO's intention is to apply an integrated perspective in looking at these plans, consistent with the intent of the Results Act, to ensure that OMB achieves the results expected by its statutory authorities.

Countries provide food aid through either in-kind donations or cash donations. In-kind food aid is food procured and delivered to vulnerable populations, while cash donations are given to implementing organizations to purchase food in local, regional, or global markets. U.S. food aid programs are all in-kind, and no cash donations are allowed under current legislation. However, the administration has recently proposed legislation to allow up to 25 percent of appropriated food aid funds to purchase commodities in locations closer to where they are needed. Other food aid donors have also recently moved from providing primarily in-kind aid to more or all cash donations for local procurement. Despite ongoing debates as to which form of assistance are more effective and efficient, the largest international food aid organization, the United Nations (UN) World Food Program (WFP), continues to accept both. The United States is both the largest overall and in-kind provider of food aid to WFP, supplying about 43 percent of WFP’s total contributions in 2006 and 70 percent of WFP’s in-kind contributions in 2005. Other major donors of in-kind food aid in 2005 included China, the Republic of Korea, Japan, and Canada. In fiscal year 2006, the United States delivered food aid through its largest program to over 50 countries, with about 80 percent of its funding allocations for in-kind food donations going to Africa, 12 percent to Asia and the Near East, 7 percent to Latin America, and 1 percent to Eurasia. Of the 80 percent of the food aid funding going to Africa, 30 percent went to Sudan, 27 percent to the Horn of Africa, 18 percent to southern Africa, 14 percent to West Africa, and 11 percent to Central Africa. Over the last several years, funding for nonemergency U.S. food aid programs has declined. For example, in fiscal year 2001, the United States directed approximately $1.2 billion of funding for international food aid programs to nonemergencies. In contrast, in fiscal year 2006, the United States directed approximately $698 million for international food aid programs to nonemergencies. U.S. food aid is funded under four program authorities and delivered through six programs administered by USAID and USDA; these programs serve a range of objectives, including humanitarian goals, economic assistance, foreign policy, market development, and international trade. (For a summary of the six programs, see app. I.) The largest program, P.L. 480 Title II, is managed by USAID and represents approximately 74 percent of total in-kind food aid allocations over the past 4 years, mostly to fund emergency programs. The Bill Emerson Humanitarian Trust, a reserve of up to 4 million metric tons of grain, can be used to fulfill P.L. 480 food aid commitments to meet unanticipated emergency needs in developing countries or when U.S. domestic supplies are short. U.S. food aid programs also have multiple legislative and regulatory mandates that affect their operations. One mandate that governs U.S. food aid transportation is cargo preference, which is designed to support a U.S.-flag commercial fleet for national defense purposes. Cargo preference requires that 75 percent of the gross tonnage of all government-generated cargo be transported on U.S.-flag vessels. A second transportation mandate, known as the Great Lakes Set-Aside, requires that up to 25 percent of Title II bagged food aid tonnage be allocated to Great Lakes ports each month. Multiple challenges in logistics hinder the efficiency of U.S. food aid programs by reducing the amount, timeliness, and quality of food provided. While in some cases agencies have tried to expedite food aid delivery, most food aid program expenditures are for logistics, and the delivery of food from vendor to village is generally too time-consuming to be responsive in emergencies. Factors that increase logistical costs and lengthen time frames include uncertain funding processes and inadequate planning, ocean transportation contracting practices, legal requirements, and inadequate coordination in tracking and responding to food delivery problems. While U.S. agencies are pursuing initiatives to improve food aid logistics, such as prepositioning food commodities and using a new transportation bid process, their long-term cost-effectiveness has not yet been measured. In addition, the current practice of selling commodities to generate cash resources for development projects—monetization—is an inherently inefficient yet expanding use of food aid. The current practice of selling commodities as a means to generate resources for development projects—monetization—is an inherently inefficient yet expanding use of food aid. Monetization entails not only the costs of procuring, shipping, and handling food, but also the costs of marketing and selling it in recipient countries. Furthermore, the time and expertise needed to market and sell food abroad requires NGOs to divert resources from their core missions. However, the permissible use of revenues generated from this practice and the minimum level of monetization allowed by the law have expanded. The monetization rate for Title II nonemergency food aid has far exceeded the minimum requirement of 15 percent, reaching close to 70 percent in 2001 but declining to about 50 percent in 2005. Despite these inefficiencies, U.S. agencies do not collect or maintain data electronically on monetization revenues, and the lack of such data impedes the agencies’ ability to fully monitor the degree to which revenues can cover the costs related to monetization. USAID used to require that monetization revenues cover at least 80 percent of costs associated with delivering food to recipient countries, but this requirement no longer exists. Neither USDA nor USAID was able to provide us with data on the revenues generated through monetization. These agencies told us that the information should be in the results reports, which are in individual hard copies and not available in any electronic database. Various challenges to implementation, improving nutritional quality, and monitoring reduce the effectiveness of food aid programs in alleviating hunger. Since U.S. food aid assists only about 11 percent of the estimated hungry population worldwide, it is critical that donors and implementers use it effectively by ensuring that it reaches the most vulnerable populations and does not cause negative market impact. However, challenging operating environments and resource constraints limit implementation efforts in terms of developing reliable estimates of food needs and responding to crises in a timely manner with sufficient food and complementary assistance. Furthermore, some impediments to improving the nutritional quality of U.S. food aid, including lack of interagency coordination in updating food aid products and specifications, may prevent the most nutritious or appropriate food from reaching intended recipients. Despite these concerns, USAID and USDA do not sufficiently monitor food aid programs, particularly in recipient countries, as they have limited staff and competing priorities and face legal restrictions on the use of food aid resources. Some impediments to improving nutritional quality further reduce the effectiveness of food aid. Although U.S. agencies have made efforts to improve the nutritional quality of food aid, the appropriate nutritional value of the food and the readiness of U.S. agencies to address nutrition- related quality issues remain uncertain. Further, existing interagency food aid working groups have not resolved coordination problems on nutrition issues. Moreover, USAID and USDA do not have a central interagency mechanism to update food aid products and their specifications. As a result, vulnerable populations may not be receiving the most nutritious or appropriate food from the agencies, and disputes may occur when either agency attempts to update the products. Although USAID and USDA require implementing organizations to regularly monitor and report on the use of food aid, these agencies have undertaken limited field-level monitoring of food aid programs. Agency inspectors general have reported that monitoring has not been regular and systematic, that in some cases intended recipients have not received food aid, or that the number of recipients could not be verified. Our audit work also indicates that monitoring has been insufficient due to various factors including limited staff, competing priorities, and legal restrictions on the use of food aid resources. In fiscal year 2006, although USAID had some non-Title II-funded staff assigned to monitoring, it had only 23 Title II- funded USAID staff assigned to missions and regional offices in 10 countries to monitor programs costing about $1.7 billion in 55 countries. USDA administers a smaller proportion of food aid programs than USAID and its field-level monitoring of food aid programs is more limited. Without adequate monitoring from U.S. agencies, food aid programs may not effectively direct limited food aid resources to those populations most in need. As a result, agencies may not be accomplishing their goal of getting the right food to the right people at the right time. U.S. international food aid programs have helped hundreds of millions of people around the world survive and recover from crises since the Agricultural Trade Development and Assistance Act (P.L. 480) was signed into law in 1954. Nevertheless, in an environment of increasing emergencies, tight budget constraints, and rising transportation and business costs, U.S. agencies must explore ways to optimize the delivery and use of food aid. U.S. agencies have taken some measures to enhance their ability to respond to emergencies and streamline the myriad processes involved in delivering food aid. However, opportunities for further improvement remain to ensure that limited resources for U.S. food aid are not vulnerable to waste, are put to their most effective use, and reach the most vulnerable populations on a timely basis. To improve the efficiency of U.S. food aid—in terms of its amount, timeliness, and quality—we recommended in our previous report that the Administrator of USAID and the Secretaries of Agriculture and Transportation (1) improve food aid logistical planning through cost- benefit analysis of supply-management options; (2) work together and with stakeholders to modernize ocean transportation and contracting practices; (3) seek to minimize the cost impact of cargo preference regulations on food aid transportation expenditures by updating implementation and reimbursement methodologies to account for new supply practices; (4) establish a coordinated system for tracking and resolving food quality complaints; and (5) develop an information collection system to track monetization transactions. To improve the effective use of food aid, we recommended that the Administrator of USAID and the Secretary of Agriculture (1) enhance the reliability and use of needs assessments for new and existing food aid programs through better coordination among implementing organizations, make assessments a priority in informing funding decisions, and more effectively build on lessons from past targeting experiences; (2) determine ways to provide adequate nonfood resources in situations where there is sufficient evidence that such assistance will enhance the effectiveness of food aid; (3) develop a coordinated interagency mechanism to update food aid specifications and products to improve food quality and nutritional standards; and (4) improve monitoring of food aid programs to ensure proper management and implementation. DOT, USAID, and USDA—the three U.S. agencies to whom we direct our recommendations—provided comments on a draft of our report. These agencies—along with the Departments of Defense and State, FAO, and WFP—also provided technical comments and updated information, which we have incorporated throughout the report as appropriate. DOT stated that it strongly supports the transportation initiatives highlighted in our report, which it agrees could reduce ocean transportation costs. USAID stated that we did not adequately recognize its recent efforts to strategically focus resources to reduce food insecurity in highly vulnerable countries. Although food security was not a research objective of this study, we recognize the important linkages between emergencies and development programs and used the new USAID Food Security Strategic Plan for 2006-2010 to provide context, particularly in our discussion on the effective use of food aid. USDA took issue with a number of our findings and conclusions because it believes that hard analysis was lacking to support many of the weaknesses that we identified. We disagree. Each of our report findings and recommendations was based on a rigorous and systematic review of multiple sources of evidence, including procurement and budget data, site visits, previous audits, agency studies, economic literature, and testimonial evidence collected in both structured and unstructured formats. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have. Should you have any questions about this testimony, please contact Thomas Melito, Director, at (202) 512-9601 or MelitoT@gao.gov. Other major contributors to this testimony were Phillip Thomas (Assistant Director), Carol Bray, Ming Chen, Debbie Chung, Martin De Alteriis, Leah DeWolf, Mark Dowling, Etana Finkler, Kristy Kennedy, Joy Labez, Kendall Schaefer, and Mona Sehgal. The United States has principally employed six programs to deliver food aid: Public Law (P.L.) 480 Titles I, II, and III; Food for Progress; the McGovern-Dole Food for Education and Child Nutrition; and Section 416(b). Table 1 provides a summary of these food aid programs.

The United States is the largest global food aid donor, accounting for over half of all food aid supplies to alleviate hunger and support development. Since 2002, Congress has appropriated an average of $2 billion per year for U.S. food aid programs, which delivered an average of 4 million metric tons of food commodities per year. Despite growing demand for food aid, rising business and transportation costs have contributed to a 52 percent decline in average tonnage delivered between 2001 and 2006. These costs represent 65 percent of total emergency food aid, highlighting the need to maximize its efficiency and effectiveness. This testimony is based on a recent GAO report that examined some key challenges to the (1) efficiency of U.S. food aid programs and (2) effective use of U.S. food aid. Multiple challenges hinder the efficiency of U.S. food aid programs by reducing the amount, timeliness, and quality of food provided. Factors that cause inefficiencies include (1) insufficiently planned food and transportation procurement, reflecting uncertain funding processes, that increases delivery costs and time frames; (2) ocean transportation and contracting practices that create high levels of risk for ocean carriers, resulting in increased rates; (3) legal requirements that result in awarding of food aid contracts to more expensive service providers; and (4) inadequate coordination between U.S. agencies and food aid stakeholders in tracking and responding to food and delivery problems. U.S. agencies have taken some steps to address timeliness concerns. USAID has been stocking or prepositioning food domestically and abroad, and USDA has implemented a new transportation bid process, but the long-term cost effectiveness of these initiatives has not yet been measured. The current practice of using food aid to generate cash for development projects--monetization--is also inherently inefficient. Furthermore, since U.S. agencies do not collect monetization revenue data electronically, they are unable to adequately monitor the degree to which revenues cover costs. Numerous challenges limit the effective use of U.S. food aid. Factors contributing to limitations in targeting the most vulnerable populations include (1) challenging operating environments in recipient countries; (2) insufficient coordination among key stakeholders, resulting in disparate estimates of food needs; (3) difficulties in identifying vulnerable groups and causes of their food insecurity; and (4) resource constraints that adversely affect the timing and quality of assessments, as well as the quantity of food and other assistance. Further, some impediments to improving the nutritional quality of U.S. food aid may reduce its benefits to recipients. Finally, U.S. agencies do not adequately monitor food aid programs due to limited staff, competing priorities, and restrictions on the use of food aid resources. As a result, these programs are vulnerable to not getting the right food to the right people at the right time.

The Bureau’s mission is to provide comprehensive data about the nation’s people and economy. The 2010 census enumerates the number and location of people on Census Day, which is April 1, 2010. However, census operations begin long before Census Day and continue afterward. For example, address canvassing for the 2010 census will begin in April 2009, while the Secretary of Commerce must report tabulated census data to the President by December 31, 2010, and to state governors and legislatures by March 31, 2011. The decennial census is a major undertaking for the Bureau that includes the following major activities: Establishing where to count. This includes identifying and correcting addresses for all known living quarters in the United States (address canvassing) and validating addresses identified as potential group quarters, such as college residence halls and group homes (group quarters validation). Collecting and integrating respondent information. This includes delivering questionnaires to housing units by mail and other methods, processing the returned questionnaires, and following up with nonrespondents through personal interviews (nonresponse follow-up). It also includes enumerating residents of group quarters (group quarters enumeration) and occupied transitional living quarters (enumeration of transitory locations), such as recreational vehicle parks, campgrounds, and hotels. It also includes a final check of housing unit status (field verification) where Bureau workers verify potential duplicate housing units identified during response processing. Providing census results. This includes tabulating and summarizing census data and disseminating the results to the public. Automation and IT are to play a critical role in the success of the 2010 census by supporting data collection, analysis, and dissemination. Several systems will play a key role in the 2010 census. For example, enumeration “universes,” which serve as the basis for enumeration operations and response data collection, are organized by the Universe Control and Management (UC&M) system, and response data are received and edited to help eliminate duplicate responses using the Response Processing System (RPS). Both UC&M and RPS are legacy systems that are collectively called the Headquarters Processing System. Geographic information and support to aid the Bureau in establishing where to count U.S. citizens are provided by the Master Address File/Topologically Integrated Geographic Encoding and Referencing (MAF/TIGER) system. The Decennial Response Integration System (DRIS) is to provide a system for collecting and integrating census responses from all sources, including forms and telephone interviews. The Field Data Collection Automation (FDCA) program includes the development of handheld computers for the address canvassing operation and the systems, equipment, and infrastructure that field staff will use to collect data. Paper-Based Operations (PBO) was established in August 2008 primarily to handle certain operations that were originally part of FDCA. PBO includes IT systems and infrastructure needed to support the use of paper forms for operations such as group quarters enumeration activities, nonresponse follow-up activities, enumeration at transitory locations activities, and field verification activities. These activities were originally to be conducted using IT systems and infrastructure developed by the FDCA program. Finally, the Data Access and Dissemination System II (DADS II) is to replace legacy systems for tabulating and publicly disseminating data. As stated in our testing guide and the Institute of Electrical and Electronics Engineers (IEEE) standards, complete and thorough testing is essential for providing reasonable assurance that new or modified IT systems will perform as intended. To be effective, testing should be planned and conducted in a structured and disciplined fashion that includes processes to control each incremental level of testing, including testing of individual systems, the integration of those systems, and testing to address all interrelated systems and functionality in an operational environment. Further, this testing should be planned and scheduled in a structured and disciplined fashion. Comprehensive testing that is effectively planned and scheduled can provide the basis for identifying key tasks and requirements and better ensure that a system meets these specified requirements and functions as intended in an operational environment. In preparation for the 2010 census, the Bureau planned what it refers to as the Dress Rehearsal. The Dress Rehearsal includes systems and integration testing, as well as end-to-end testing of key operations in a census-like environment. During the Dress Rehearsal period, running from February 2006 through June 2009, the Bureau is developing and testing systems and operations, and it held a mock Census Day on May 1, 2008. The Dress Rehearsal activities, which are still under way, are a subset of the activities planned for the actual 2010 census and include testing of both IT and non-IT related functions, such as opening offices and hiring staff. The Dress Rehearsal identified significant technical problems during the address canvassing and group quarters validation operations. For example, during the Dress Rehearsal address canvassing operation, the Bureau encountered problems with the handheld computers, including slow and inconsistent data transmissions, the devices freezing up, and difficulties collecting mapping coordinates. As a result of the problems observed during the Dress Rehearsal, cost overruns and schedule slippage in the FDCA program, and other issues, the Bureau removed the planned testing of several key operations from the Dress Rehearsal and switched key operations, such as nonresponse follow-up, to paper-based processes instead of using the handheld computers as originally planned. Through the Dress Rehearsal and other testing activities, the Bureau has completed key system tests, but significant testing has yet to be done, and planning for this is not complete. Table 1 summarizes the status and plans for system testing. Effective integration testing ensures that external interfaces work correctly and that the integrated systems meet specified requirements. This testing should be planned and scheduled in a disciplined fashion according to defined priorities. For the 2010 census, each program office is responsible for and has made progress in defining system interfaces and conducting integration testing, which includes testing of these interfaces. However, significant activities remain to be completed. For example, for systems such as PBO, interfaces have not been fully defined, and other interfaces have been defined but have not been tested. In addition, the Bureau has not established a master list of interfaces between key systems, or plans and schedules for integration testing of these interfaces. A master list of system interfaces is an important tool for ensuring that all interfaces are tested appropriately and that the priorities for testing are set correctly. As of October 2008, the Bureau had begun efforts to update a master list it had developed in 2007, but it has not provided a date when this list will be completed. Without a completed master list, the Bureau cannot develop comprehensive plans and schedules for conducting systems integration testing that indicate how the testing of these interfaces will be prioritized. With the limited amount of time remaining before systems are needed for 2010 operations, the lack of comprehensive plans and schedules increases the risk that the Bureau may not be able to adequately test system interfaces, and that interfaced systems may not work together as intended. Although several critical operations underwent end-to-end testing in the Dress Rehearsal, others did not. As of December 2008, the Bureau had not established testing plans or schedules for end-to-end testing of the key operations that were removed from the Dress Rehearsal, nor has it determined when these plans will be completed. These operations include enumeration of transitory locations, group quarters enumeration, and field verification. The decreasing time available for completing end-to-end testing increases the risk that testing of key operations will not take place before the required deadline. Bureau officials have acknowledged this risk in briefings to the Office of Management and Budget. However, as of January 2009, the Bureau had not completed mitigation plans for this risk. According to the Bureau, the plans are still being reviewed by senior management. Without plans to mitigate the risks associated with limited end-to-end testing, the Bureau may not be able to respond effectively if systems do not perform as intended. As stated in our testing guide and IEEE standards, oversight of testing activities includes both planning and ongoing monitoring of testing activities. Ongoing monitoring entails collecting and assessing status and progress reports to determine, for example, whether specific test activities are on schedule. In addition, comprehensive guidance should describe each level of testing and the types of test products expected. In response to prior recommendations, the Bureau took initial steps to enhance its programwide oversight; however, these steps have not been sufficient. For example, in June 2008, the Bureau established an inventory of all testing activities specific to all key decennial operations. However, the inventory has not been updated since May 2008, and officials have no plans for further updates. In another effort to improve executive-level oversight, the Decennial Management Division began producing (as of July 2008) a weekly executive alert report and has established (as of October 2008) a dashboard and monthly reporting indicators. However, these products do not provide comprehensive status information on the progress of testing key systems and interfaces. Further, the assessment of testing progress has not been based on quantitative and specific metrics. The lack of quantitative and specific metrics to track progress limits the Bureau’s ability to accurately assess the status and progress of testing activities. In commenting on our draft report, the Bureau provided selected examples where they had begun to use more detailed metrics to track the progress of end-to-end testing activities. The Bureau also has weaknesses in its testing guidance. According to the Associate Director for the 2010 census, the Bureau did establish a policy strongly encouraging offices responsible for decennial systems to use best practices in software development and testing, as specified in level 2 of Carnegie Mellon’s Capability Maturity Model® Integration. However, beyond this general guidance, there is no mandatory or specific guidance on key testing activities such as criteria for each level or the type of test products expected. The lack of guidance has led to an ad hoc—and, at times—less than desirable approach to testing. In our report, we are making ten recommendations for improvements to the Bureau’s testing activities. Our recommendations include finalizing system requirements and completing development of test plans and schedules, establishing a master list of system interfaces, prioritizing and developing plans to test these interfaces, and establishing plans to test operations removed from the Dress Rehearsal. In addition, we are recommending that the Bureau improve its monitoring of testing progress and improve executive-level oversight of testing activities. In written comments on the report, the department had no significant disagreements with our recommendations. The department stated that its focus is on testing new software and systems, not legacy systems and operations used in previous censuses. However, the systems in place to conduct these operations have changed substantially and have not yet been fully tested in a census-like environment. Consistent with our recommendations, finalizing test plans and schedules and testing all systems as thoroughly as possible will help to ensure that decennial systems will work as intended. In summary, while the Bureau’s program offices have made progress in testing key decennial systems, much work remains to ensure that systems operate as intended for conducting an accurate and timely 2010 census. This work includes system, integration, and end-to-end testing activities. Given the rapidly approaching deadlines of the 2010 census, completing testing and establishing stronger executive-level oversight are critical to ensuring that systems perform as intended when they are needed. Mr. Chairman and members of the subcommittee, this concludes our statement. We would be pleased to respond to any questions that you or other members of the subcommittee may have at this time. If you have any questions about matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or pownerd@gao.gov or Robert Goldenkoff at (202) 512-2757 or goldenkoffr@gao.gov. Other key contributors to this testimony include Sher`rie Bacon, Barbara Collier, Neil Doherty, Vijay D’Souza, Elizabeth Fan, Nancy Glover, Signora May, Lee McCracken, Ty Mitchell, Lisa Pearson, Crystal Robinson, Melissa Schermerhorn, Cynthia Scott, Karl Seifert, Jonathan Ticehurst, Timothy Wexler, and Katherine Wulff. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Decennial Census is mandated by the U.S. Constitution and provides vital data that are used, among other things, to reapportion and redistrict congressional seats and allocate federal financial assistance. In March 2008, GAO designated the 2010 Decennial Census a high-risk area, citing a number of long-standing and emerging challenges, including weaknesses in the U.S. Census Bureau's (Bureau) management of its information technology (IT) systems and operations. In conducting the 2010 census, the Bureau is relying on both the acquisition of new IT systems and the enhancement of existing systems. Thoroughly testing these systems before their actual use is critical to the success of the census. GAO was asked to testify on its report, being released today, on the status and plans of testing of key 2010 decennial IT systems. Although the Bureau has made progress in testing key decennial systems, critical testing activities remain to be performed before systems will be ready to support the 2010 census. Bureau program offices have completed some testing of individual systems, but significant work still remains to be done, and many plans have not yet been developed (see table below). In its testing of system integration, the Bureau has not completed critical activities; it also lacks a master list of interfaces between systems and has not developed testing plans and schedules. Although the Bureau had originally planned what it refers to as a Dress Rehearsal, starting in 2006, to serve as a comprehensive end-to-end test of key operations and systems, significant problems were identified during testing. As a result, several key operations were removed from the Dress Rehearsal and did not undergo end-to-end testing. The Bureau has neither developed testing plans for these key operations, nor has it determined when such plans will be completed. Weaknesses in the Bureau's testing progress and plans can be attributed in part to a lack of sufficient executive-level oversight and guidance. Bureau management does provide oversight of system testing activities, but the oversight activities are not sufficient. For example, Bureau reports do not provide comprehensive status information on progress in testing key systems and interfaces, and assessments of the overall status of testing for key operations are not based on quantitative metrics. Further, although the Bureau has issued general testing guidance, it is neither mandatory nor specific enough to ensure consistency in conducting system testing. Without adequate oversight and more comprehensive guidance, the Bureau cannot ensure that it is thoroughly testing its systems and properly prioritizing testing activities before the 2010 Decennial Census, posing the risk that these systems may not perform as planned.

Under the authority of the Ports and Waterways Safety Act of 1972, as amended, the Coast Guard operates VTS systems in eight ports. Operations and maintenance costs for these systems, which totaled about $19 million in fiscal year 1995, are borne by the Coast Guard and are not passed on to the ports or the shipping industry. Two other ports, Los Angeles/Long Beach and Philadelphia/Delaware Bay, have user-funded systems. Study of VTS systems was prompted by the Oil Pollution Act of 1990 (P.L. 101-380), passed after the 1989 Exxon Valdez oil spill and other accidents in various ports. The Act directed the Secretary of Transportation to prioritize U.S. ports and channels in need of new, expanded, or improved VTS systems. The resulting report, called the Port Needs Study, was submitted to the Congress in March 1992. This study laid much of the groundwork for the proposal for VTS 2000. Making funding decisions today about VTS 2000 is complicated by several as-yet-unanswered questions regarding the need for the system in certain ports, the system’s cost, and available alternatives to VTS 2000. Having more complete, up-to-date information on these questions is critical to deciding whether to move forward with the program. One uncertainty relates to which ports will receive VTS 2000 systems. Most of the 17 candidate ports were identified in the 1991 Port Needs Study, which quantified (in dollar terms) the benefits of building new VTS systems at port areas nationwide. The Coast Guard is not scheduled to make a final decision on which ports to include in the program until fiscal year 2000, but the information developed to date suggests that the number of ports ultimately selected could be much less than 17. The Port Needs Study and the follow-on studies completed so far show that a new system would produce little or no added benefit at about two-thirds of the ports being considered. Budget information the Coast Guard has provided to the Congress thus far has not fully reflected the limited benefits of installing VTS 2000 systems in many of the ports being considered. For example, the Coast Guard should provide to the Congress updated information on the added benefits, if any, that would be achieved by installing VTS 2000 at various ports, especially for those that already have VTS systems. In our view, this information, coupled with the Coast Guard’s current thinking on the high and low priority locations for VTS 2000, is critical to assist the Congress in deciding on whether a development effort for 17 ports is warranted. We realize that the Coast Guard is not in a position to make a final decision on all ports at this time, because it is still gathering information and conducting follow-on studies to reassess some ports on the list. However, having the most current and complete data will allow the Congress to better decide on funding levels for the VTS 2000 program and provide direction to the Coast Guard. A second major area of uncertainty is the cost to develop VTS 2000. This cost is considerable, regardless of whether it is installed at a few ports or all 17. The Coast Guard initially estimated that development costs alone (exclusive of installation costs at most sites) would total $69 million to $145 million, depending on the number of sites that receive VTS 2000 and the extent of software development. The estimated costs to install equipment and build facilities at each site ranged from $5 million to $30 million, bringing the program’s total costs to between $260 million and $310 million. The Coast Guard’s updated estimate of annual operating costs for a 17-site system is $42 million. At present, the Coast Guard plans to pay for all of these costs from its budget instead of passing them on to users. A few days ago, the Coast Guard awarded contracts for initial development of the VTS 2000 system. The bids from three vendors currently competing for the contract to design the system were substantially lower than earlier estimates. Further refinements to the Coast Guard cost estimates will be made in early 1997 when the Coast Guard plans to select a single contractor to build the VTS 2000 system. The system’s costs will also depend on the Coast Guard’s decision about how sophisticated the system should be. VTS 2000 can be developed in four phases; and additional capability can be added at each phase. For example, phase 1, originally estimated to cost $69 million, would create a system with operational capabilities that are about on a par with upgraded VTS systems currently being installed at some ports. The Coast Guard’s development plan allows for stopping after phase 1 (or any other phase) if cost or other considerations preclude further development. To date, the Coast Guard’s approach has not involved much consideration of whether feasible alternatives exist to VTS 2000 at individual ports under consideration. I want to emphasize that we did not attempt to assess whether other alternatives were preferable, but many would appear to merit consideration or study. Here are a few of these alternatives: Reliance on existing VTS systems. The systems in place at seven locations may be sufficient. For example, the port of Los Angeles/Long Beach, which is on the Coast Guard’s “short list” for the first round of VTS 2000 systems, now has a VTS system, which cost about $1 million to build and meets nearly all of VTS 2000’s operational requirements, according to a Coast Guard study. The Coast Guard is reconsidering its decision to keep the port on the “short list” but is still evaluating it for VTS 2000. Other VTS systems in Houston/Galveston, Puget Sound, Philadelphia/Delaware Bay, New York, San Francisco, and Valdez all have been recently upgraded or enhanced or are scheduled to be upgraded in the near future irrespective of VTS 2000. Therefore, these systems may provide protection similar to that of VTS 2000 now and into the future. VTS systems with smaller scope than proposed thus far under VTS 2000. The Port Needs Study and follow-on studies have proposed blanketing an entire port area with VTS coverage, but less comprehensive VTS coverage might be sufficient. For example, some key stakeholders at Port Arthur/Lake Charles, which has no radar-based VTS coverage, said such coverage was needed at only a few key locations, instead of portwide. A group is studying the feasibility of a more limited, privately-funded system. One vendor estimated that a system to cover key locations at Port Arthur/Lake Charles would cost $2 million to $3 million. Coast Guard officials told us that reduced coverage is an option they could consider when site-specific plans are established for VTS 2000. Non-VTS approaches. In some cases, improvements have been proposed that are not as extensive as installing a VTS system. For example, several years ago in Mobile/Pascagoula, the Coast Guard Captain of the Port proposed a means to enhance port safety at two locations where the deep ship channels (for ocean-going ships) intersect the Intracoastal Waterway (which mainly has barge traffic and small vessels). The proposal involved establishing “regulated navigation areas” that would require vessels from both directions to radio their approach and location to all other vessels in the vicinity. This proposal may merit further consideration before a decision is made on the need for a VTS in this port area. At the ports we visited, few stakeholders said they had been involved with the Coast Guard in discussing whether such alternatives are a viable alternative to VTS 2000 systems in their port. In discussions with us, Coast Guard officials agreed that greater communication with key stakeholders is an essential step in making decisions about VTS 2000. An additional study currently being conducted by the Marine Board of the National Research Council may provide additional information that will be useful in assessing VTS 2000. Among other things, this study will address the role of the public and private sectors in developing and operating VTS systems in the United States. An interim report is due to be completed in June 1996. Most of the stakeholders we interviewed did not support installing a VTS 2000 system at their port. Their opinions were predominantly negative at five ports, about evenly split at two, and uncertain at one. Many who opposed VTS 2000 perceived the proposed system as being more expensive than needed. Support for VTS 2000 was even less when we asked if stakeholders would be willing to pay for the system, perhaps through fees levied on vessels. A clear majority of the stakeholders was not willing to fund VTS 2000 at six of the ports; at the other two, support was mixed. The stakeholders interviewed at six ports generally supported some form of VTS system that they perceived to be less expensive than VTS 2000. However, at the four ports with VTS systems, this support did not reflect a belief that a new system was needed; most stakeholders said that existing systems were sufficient. The two locations without a VTS system (New Orleans and Tampa) supported an alternative VTS system. In contrast, at Mobile/Pascagoula, most stakeholders were opposed to a VTS system, saying that the low volume of ocean-going vessels did not warrant such a system. At Port Arthur/Lake Charles, views were evenly mixed as to whether a system was needed. In general, because stakeholders perceived that other alternative VTS systems could be less costly than VTS 2000, they were somewhat more disposed to consider paying for them. At two locations with existing private VTS systems, they are already doing so. At the remaining six ports, the stakeholders had the following views on paying for alternative VTS systems: stakeholders’ views were generally supportive at three, opposed at one, and mixed at the other two. In discussions with key stakeholders at each of the eight ports we visited, three main concerns emerged that could impede private-sector involvement in building and operating VTS systems. Obtaining funding for construction. At half of the six ports that do not have a privately funded VTS, the stakeholders were concerned that if local VTS systems are to be funded by the user community rather than through tax dollars, the lack of adequate funding for constructing such a system may pose a barrier. The cost of a VTS depends on its size and complexity; however, radar equipment, computer hardware and software, and a facility for monitoring vessel traffic alone could cost $1 million or more at each port. The privately funded systems at Los Angeles/Long Beach and Philadelphia/Delaware Bay initially faced similar financing concerns; both received federal or state assistance, either financial or in-kind. Obtaining liability protection. At each of the same six ports, most of the stakeholders were concerned that private VTS operators might be held liable for damages if they provided inaccurate information to vessel operators that contributed to an accident. At locations such as Tampa and San Francisco, where the possibility of privately funded systems has been discussed, the stakeholders believe that securing liability protection is a key issue that must be resolved before they would move forward to establish a VTS system. Currently, the two existing privately funded VTS systems receive liability protection under state laws, except in cases of intentional misconduct or gross negligence. However, these laws have yet to be tested in court. Defining the Coast Guard’s role. Federal law does not address what role, if any, the Coast Guard should play in privately funded systems. At seven of the ports, most of the stakeholders said the Coast Guard should have a role. In support of this position, they cited such things as the (1) need for the Coast Guard’s authority to require mandatory participation by potential VTS users and to ensure consistent VTS operations and (2) Coast Guard’s expertise in and experience with other VTS systems. In summary, difficult choices need to be made about how to improve marine safety in the nation’s ports. There is an acknowledged need to improve marine safety at a number of ports, but not much agreement about how it should be done. Decisions about whether VTS 2000 represents the best approach are made more difficult by the uncertainties surrounding the scope, cost, and appropriateness of VTS 2000 over other alternatives in a number of locations. While some unresolved questions cannot be immediately answered, we think it is vitally important for the Coast Guard to present a clearer picture to the Congress as soon as possible of what VTS 2000 is likely to entail. Complete, up-to-date information will put the Congress in a better position to make informed decisions about the development of VTS 2000. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or the Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. 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GAO discussed the Coast Guard's vessel traffic service (VTS) 2000 program. GAO noted that: (1) it is difficult to judge whether VTS 2000 is the best marine safety system because it is unknown how many ports need the system, how much it will cost, and whether other cost-effective alternatives are available; (2) most key stakeholders do not support VTS 2000 because they believe it will be too costly; (3) most key stakeholders oppose user fees or other funding methods that would shift the financial costs of VTS 2000 from the Coast Guard to users; (4) support for a VTS system of any kind varied among key stakeholders at different ports, but most favored the least expensive options available; and (5) issues affecting privately funded or privately operated VTS systems include the initial costs of a VTS system, the private sector's exposure to liability, and the Coast Guard's oversight role.

Madam Chairman and Members of the Subcommittee: We are pleased to be here to assist the Subcommittee in its inquiry into the classification of workers either as employees or independent contractors for federal tax purposes. Proper classification of workers has been the subject of several of our reports and congressional testimonies. Today, I would like to make 4 points taken from these reports and testimonies. • First, in deciding how to classify workers, employers may misclassify employees as independent contractors. In its most recent estimate on misclassification, IRS has estimated that 756,000 of 5.15 million employers (15 percent) misclassified workers as independent contractors in 1984. Many factors can cause misclassification, including cost considerations and confusion over the classification rules. For example, not incurring the costs of employment taxes (i.e., social security tax, unemployment tax, and income tax withholding) and employee benefits can give employers cost advantages over competitors who use employees. Further, both we and the Treasury Department have found that the common law rules used for classifying workers are unclear and subject to conflicting interpretations. • Second, even with the confusing rules, IRS is responsible as the nation’s tax administrator to enforce compliance with them. Under its Employment Tax Examination Program (ETEP), IRS has completed 12,983 audits, resulting in $830 million in recommended tax assessments and 527,000 workers reclassified to “employee” status between fiscal years 1988 and 1995. • Third, deliberations over any changes to the classification rules may need to consider potential impacts on income tax compliance. IRS has found that independent contractors compared to employees have lower compliance in paying income taxes and account for a higher proportion of the income tax gap. We identified two approaches that could boost independent contractor compliance within the existing common law rules. They include (1) improved information reporting on payments made to independent contractors and (2) withholding income taxes from such payments. • Fourth, aside from tax issues, an important consideration in these deliberations is the body of laws that create a safety net for American workers. Such laws generally apply only to employees. If changes to the classification rules lead to more workers being classified as independent contractors instead of employees, these worker protection laws would cover fewer people. I would like to discuss each of these points in more detail after providing an overview on factors that affect the classification decision. The rules for classifying a worker as either an employee or an independent contractor come from the common law. Under common law, the degree of control, or right to control, that a business has over a worker governs the classification. Thus, if a worker must follow instructions on when, where, and how to do the work, he or she is more likely to be an employee. IRS has adopted 20 common law rules to help employers classify workers (see appendix I). If workers are determined to be employees, employers must withhold and deposit income and social security taxes from wages paid as well as pay unemployment taxes and the employers’ share of social security taxes. In addition, the employers may be subjected to laws that govern the use of employees and any benefits provided to them. Employers do not have these responsibilities if the workers are independent contractors. Independent contractors must pay their own income and social security taxes on payments received. They have no unemployment tax responsibility but may purchase benefit packages to cover this contingency as well as others (e.g., health insurance). Ultimately, the decision to classify a worker as an employee or independent contractor depends on each employer’s circumstances. And, the extent to which a worker accepts the classification and understands its consequences plays a role. misclassification involved all industry groups and up to 20 percent of the employers in some industry groups. This noncompliance produced an estimated tax loss for 1984, after accounting for taxes paid by the misclassified independent contractors, of $1.6 billion in social security tax, unemployment tax, and income tax that should have been withheld from wages. In another set of estimates, IRS issued an employment tax gap report in 1995 that included the estimated tax gap associated with misclassification. This estimated tax gap was $2.3 billion in 1987 and $3.3 billion in 1992 for just social security and unemployment taxes. In doing these estimates, IRS did not identify the reasons for the misclassification but factors such as costs and unclear classification rules can play a role. For example, employers can lower their costs, such as payments of employment taxes or benefits, by using independent contractors. This cost advantage could be offset if an independent contractor can negotiate higher payments to purchase their own health, retirement, or other benefits. Otherwise, the incentive to misclassify workers as independent contractors exists. Second, many employers struggle in making the classification decision because of the unclear rules. Until the classification rules are clarified, we are not optimistic that the confusion over who is an independent contractor and who is an employee can be avoided. The Treasury Department characterized the situation in 1991 in the same terms as it used in 1982; namely, that “applying the common law test in employment tax issues does not yield clear, consistent, or satisfactory answers, and reasonable persons may differ as to the correct classification.” the cases reviewed, section 530 prohibited IRS from assessing $7 million of $17 million in recommended taxes and penalties against employers for misclassifying employees. The employers usually avoided the assessments by claiming a prior audit protection, even when the prior audit did not address employee classification or occurred over 20 years earlier. Section 530 also has precluded IRS from issuing clarifying regulations since 1978. IRS is responsible as the nation’s tax administrator to enforce the classification rules. Because of concerns about misclassification and income tax noncompliance by independent contractors, IRS centralized a portion of its employment tax compliance efforts into an Employment Tax Examination Program (ETEP) during 1987. IRS’ strategy was to identify any misclassification and require employers to correct it. Employers whose employees are reclassified are liable for the portion of the employment taxes that they would have owed if the worker had been classified as an employee for the audited tax years. From 1988 through 1995, IRS completed 12,983 ETEP audits. These audits recommended $830 million in employment tax assessments and reclassified 527,000 workers as employees. In addition, the IRS Examination Division auditors, as part of their regular income tax audits, also may address classification issues. However, the Examination Division does not accumulate data to identify audit results on these issues. Since late 1995, IRS has implemented initiatives to improve its enforcement of the classification rules and ease the burdens on those being audited. For example, IRS is revising its training to better ensure consistent application of the rules. IRS has circulated a draft of its training program so that employers know how IRS intends to interpret the rules. Further, IRS is testing ways to expedite and improve the settlement of disputes with employers over misclassification. These initiatives are too new for us to know whether they are working. Since 1977, we have supported measures to simplify the classification rules. However, the development of clearer rules for all types of working relationships and businesses is neither simple nor easy. In an effort to clarify the classification rules, we proposed a straightforward test in 1977 (see appendix III for details of this proposal). In sum, we proposed excluding workers from the common law definition of employee when they met each of four criteria. If the worker met three of the criteria, we proposed that the common law criteria should be applied. Otherwise, we proposed that the worker should be considered an employee. Our proposal was not widely accepted for various reasons, which we had recognized. For example, Treasury and IRS were concerned about lower tax compliance and lost tax revenue from having more self-employed workers and fewer employees. We have viewed our 1977 proposal as a good starting point for clarifying the classification rules. In doing so, the deliberations also may need to consider the potential impact on income tax compliance. IRS studies since the 1970s have documented a much lower level of income tax compliance by independent contractors compared to employees. IRS data for 1988 suggest that independent contractors accounted for most of the income tax gap created by those self-employed individuals who underreported their business income. do not distinguish between independent contractors and other self-employed individuals such as those who make or sell goods. Recognizing these concerns, our 1992 report identified other approaches to improve independent contractor compliance within the framework of the existing classification rules. These approaches would (1) require businesses to withhold taxes from payments to independent contractors or (2) improve information reporting on payments made to independent contractors. While each approach would increase to some extent the burdens on independent contractors and businesses that use them, we believe each approach can help improve income tax compliance. For example, withholding is the cornerstone of our tax compliance system for employees. It has worked well with over 99 percent of wages voluntarily reported. In addition, it provides a gradual and systematic method to pay taxes and better ensure credit for social security coverage. As early as 1979, we concluded that noncompliance among independent contractors was serious enough to warrant some form of tax withholding on payments to them. We continue to believe that withholding taxes from payments made to independent contractors has merit as a way to improve their income tax compliance. Several administrative problems would need to be resolved. For example, independent contractors with substantial business expenses, which lower taxable income, may have too much tax withheld from gross payments made to them. Appendix IV discusses such problems and possible solutions. returns but only 29 percent of the income not covered by information returns. While other options may exist, our 1992 report identified eight options that could strengthen information reporting and close potential loopholes: (1) Significantly increase the $50 penalty for not filing an information return. (2) Do not penalize businesses for past noncompliance with information reporting laws if they begin to file information returns when the penalty is increased. (3) Require IRS to administer an education program to make the business community aware of the filing requirement and of IRS’ intention to vigorously enforce it. (4) Lower the $600 reporting threshold for payments to independent contractors. (5) Require information reporting for payments to incorporated independent contractors. (6) Require businesses to separately report on their tax return the total amount of payments to independent contractors. (7) Require businesses to validate the tax identification numbers (TIN) of independent contractors before making any payments and withhold a portion of the payments until the TIN is validated. (8) Require businesses to provide independent contractors with a written explanation of their tax obligations and rights. Each of these options involves tradeoffs between taxpayer burden and tax compliance. Appendix V summarizes the pros and cons of each option. contractors. Changes to the classification rules could increase the number of unprotected independent contractors. For example, unemployment insurance is nearly universal, covering over 90 percent of American workers. This 60-year old program provides short-term financial support for covered workers who, through no fault of their own, become unemployed. It also helps the unemployed from having to turn to public assistance programs. During economic downturns, payments made to the unemployed may take on added significance, serving a macro-economic role of helping to stabilize the economy. However, federal law does not require coverage of independent contractors for unemployment insurance, although one state (California) has provisions that would allow independent contractors to apply for self-coverage. While we have not made an extensive survey to determine all affected laws, they are quite numerous. They include basic protections involving issues such as minimum wage, mandatory overtime pay, discrimination, occupational safety and health requirements, workers compensation insurance, and employer-sponsored fringe benefits such as pensions. Thus, if clarification of the classification rules pushes significantly more employees into independent contractor status, the worker protection laws would cover fewer people. Madam Chairman, this concludes my testimony. I would be pleased to answer any questions you or other members of the Subcommittee may have.

GAO discussed the classification of workers as employees or independent contractors for federal tax purposes. GAO noted that: (1) the Internal Revenue Service (IRS) has adopted 20 common law rules to help employers classify workers; (2) the rules require employers to withhold and deposit income and social security taxes, and pay the unemployment and social security taxes for workers determined to be employees; (3) employers that use independent contractors do not have these responsibilities because they pay their own social security and income taxes; (4) classifying a worker as an employee or independent contractor depends on the employer's circumstances, and the extent to which the worker accepts the classification; (5) in 1984, IRS estimated that about 756,000 employers misclassified their workers as independent contractors; (6) this noncompliance resulted in an estimated tax loss of $1.6 billion; (7) misclassifications occur because it is cheaper to hire independent contractors, but the rules for doing so are unclear; (8) IRS completed 12,983 employment tax examination program audits from 1988 to 1995, and recommended $830 million in employment tax assessments and that 527,000 workers be reclassified as employees; and (9) IRS is revising its training program to better ensure consistent application of common law rules, circulating a draft of its training program so that employers know how to interpret the rules, and testing ways to expedite disputes over worker misclassifications.

Ex-Im’s mission is to support U.S. exports and jobs by providing export financing on terms that are competitive with the official export financing support offered by other governments. It had about 350 full-time staff positions in fiscal year 2010. Between fiscal years 2003 and 2008, Ex-Im authorized financing averaging $12.8 billion annually. In fiscal year 2009, Ex-Im had a record year, financing more than $21 billion in 2,891 authorizations. Since fiscal year 2008, Ex-Im has been “self-sustaining” for appropriations purposes, financing its operations from receipts collected from its borrowers. Exports, and trade more broadly, contribute to the U.S. economy in a variety of ways. Trade enables the United States to achieve a higher standard of living by exporting goods and services that are produced here relatively efficiently and importing goods and services that are produced here relatively inefficiently. An indication of this is that firms engaged in the international marketplace tend to exhibit higher rates of productivity growth and pay higher wages and benefits to their workers than domestically oriented firms of the same size. U.S. exports of goods grew from $820 billion in 2004 to $1.30 trillion in 2008, and were $1.1 trillion in 2009. In addition to the longer-term benefits of trade and exports, exports can serve as a countercyclical force for the U.S. economy—that is, strengthening the economy when other parts of it are relatively weaker. For a number of years, as the United States increasingly imported more than it exported, the U.S. economy was an engine of growth for other nations. In contrast, from December 2007 through June 2009—what has been officially labeled a recession period—U.S. economic growth was boosted by an improving trade balance. More recently, strong U.S. exports have been outpaced by import growth. The President created the National Export Initiative on March 11, 2010, with an ambitious goal of doubling exports in the next 5 years to support job creation. To facilitate achieving this goal, the National Export Initiative established an Export Promotion Cabinet that includes Ex-Im as well as 15 other agencies and executive departments. On September 16, 2010, the White House released a report on the initiative that provides an overview of progress made and lays out a plan for reaching the President’s goal. Ex-Im has a critical role to play in one of the report’s priority areas— increasing export credit. The report identifies several actions for Ex-Im. They include, for example, launching new products designed to ensure credit is available to small and medium-sized enterprises (SME); focusing efforts on high-potential industries such as medical technology, renewable power, and transportation; increasing the number and scope of partnerships with financial intermediaries; and introducing a simplified application for credit insurance. GAO has not evaluated the report or other aspects of the National Export Initiative, but would welcome the opportunity to continue its work with the Congress on oversight of these efforts. GAO has reported on Ex-Im’s efforts to achieve specific targets set by Congress regarding the composition of Ex-Im’s export financing. For example, Congress has shown interest in the level of financing Ex-Im provides to small businesses, including those owned by women and minorities, and Ex-Im’s efforts to increase that financing. Congress has also given Ex-Im directives regarding the share of its financing for environmentally beneficial exports, including renewable energy. Congressional interest in Ex-Im’s financing of environmentally beneficial exports span many years. In 1989, Congress directed that Ex-Im should seek to provide at least 5 percent of its energy sector financing for renewable energy projects and should undertake efforts to promote renewable energy. In 2008, Congress directed Ex-Im to provide not less than 10 percent of its annual financing for environmentally beneficial exports; in 2009-2010, Congress narrowed the targeted environmentally beneficial categories. Congress has also required Ex-Im to develop a strategy for increasing its environmental export financing, and to report on this financing and how the bank tracks it. GAO recently reviewed Ex-Im’s environmentally beneficial export financing and its efforts to meet congressional directives in this area. We found, first, that Ex-Im had fallen far short of achieving the 10 percent environmentally beneficial financing targets set by Congress. However, we also found that Ex-Im’s financing for renewable energy has recently increased; the level of renewable energy financing in the first two quarters of fiscal year 2010 exceeded its renewable energy financing for all of fiscal year 2009, which in turn represented a large increase over 2008 financing. We also reported that Ex-Im needs to further clarify its definitions and improve its reporting on environmentally beneficial exports. For Ex-Im, the term “environmentally beneficial exports” constitutes an overarching category that includes renewable energy, energy efficiency exports including energy efficient end-use technologies, and a mix of other products with beneficial effects on the environment. Ex-Im recently sought to clarify its definitions of energy efficiency exports by publicly providing examples of products it considers to be in that category, and it began to track its financing for those exports in its internal data. However, the examples Ex-Im released do not clearly identify which energy efficient end-use technologies would count towards their 10 percent financing target. Given the congressional interest in financing in this area, it is important that Ex-Im be as clear as possible in its application of terms to facilitate communicating financing goals to potential exporters and others and communicating progress in meeting targets to Congress. GAO recommended that Ex-Im develop and provide clear definitions for its subcategories of environmentally beneficial exports and report annually on the level of financing for each of the subcategories. We reported that while Ex-Im has taken steps to increase financing for environmentally beneficial exports, it could benefit from more consistently following strategic planning practices such as involving stakeholders and realigning resources. Ex-Im routinely shares information with stakeholders such as other U.S. agencies and lending institutions, but has not generally involved them in communicating goals or discussing strategies for achieving them. Ex-Im has considered reorganizing some staff into more focused teams to target priority industries and countries, but this effort has not included an analysis of the resources required to accomplish the goal of increasing certain types of environmentally beneficial exports. On the other hand, Ex-Im has taken some steps to assess factors that affect its financing of environmentally beneficial exports such as conducting analysis of the renewable energy markets to identify the best sectoral and geographic opportunities for Ex-Im financing. In order for Ex-Im to provide valuable information for the Congress and key stakeholders, GAO recommended that the bank consistently implement key practices for effective strategic planning, including clearly communicating the bank’s priorities for increasing financing of renewable energy and energy efficient end-use technologies to both internal and external stakeholders. Ex-Im agreed with our recommendations and stated that it would strive to implement them promptly. Promoting exports by small business has been a long-time priority of Congress as well as the executive branch, given these exports’ role in generating growth and employment. While many small businesses export, it is widely recognized that they face a number of challenges in exporting. For example, they typically do not have overseas offices and may not have much knowledge regarding foreign markets. Export promotion agencies have developed various goals with respect to their small business assistance, and in some cases Congress has mandated specific requirements for supporting small businesses. Since the 1980s, Congress has required that Ex-Im make available a certain percentage of its export financing for small business. In 2002, Congress established several new requirements for Ex-Im relating to small business, including increasing from 10 to 20 percent the proportion of Ex-Im’s aggregate loan, guarantee, and insurance authority that must be made available for the direct benefit of small business. When reauthorizing the bank’s charter in 2006, Congress again established new requirements for Ex-Im. These included creating a small business division with an office of financing for socially and economically disadvantaged small business concerns and small business concerns owned by women, designating small business specialists in all divisions, creating a small business committee to advise the bank president, and defining standards to measure the bank’s success in financing small business. For the past 4 fiscal years—2006-2009—Ex-Im has met the Congressional requirement to make available not less than 20 percent of its financing authority for small businesses. Percentages have ranged from almost 27 percent in fiscal year 2007 to about 21 percent in fiscal year 2009. The financing amount for small business was actually highest in 2009, given Ex-Im’s overall record financing that year. In fiscal years 2002-2005, Ex-Im did not reach the goal, with its small business financing share ranging from 16.9 percent to 19.7 percent. GAO has reported on several aspects of Ex-Im’s financing for small business exports. In 2006, we identified weaknesses in Ex-Im’s data systems for tracking and reporting on its small business financing and made recommendations for improvement. Ex-Im has implemented those recommendations. For example, Ex-Im moved to an electronic, web-based process that allows exporters, brokers, and financial institutions to transact with Ex-Im electronically. This contributed to more timely and accurate information on Ex-Im’s financing, and thus a greater level of confidence in Ex-Im’s reporting on its efforts relative to congressional goals. More recently, we reported on the performance standards that Ex-Im established for assessing its small business financing efforts. We found that Ex-Im had developed performance standards in most, although not all, of the areas specified by Congress, ranging from providing excellent customer service to increasing outreach. We also found that some measures for monitoring progress against the standards lacked targets and time frames, and that Ex-Im was just beginning to compile and use the small business information it was collecting to improve operations. GAO made several recommendations to Ex-Im for improving its performance standards for small business. Ex-Im has provided to GAO information on actions and specific steps it is taking to implement certain of these recommendations. For example, Ex-Im has identified targets for reducing the average turnaround time for processing certain types of small business transactions. GAO looks forward to continuing to work with Ex- Im in documenting that the recommendations have been implemented. Mr. Chairmen, the National Export Initiative has focused the spotlight on U.S. agencies that assist U.S. exporters as a way of expanding economic growth and creating jobs in the United States. As the nation’s export credit agency, the Export-Import Bank is a key part of the initiative, and there are a number of detailed initiatives related to export credit in the report that was released on September 16, 2010. However, the goal of doubling U.S. exports in 5 years is an ambitious goal and would require not only increased activity by agencies such as Ex-Im but also increases in demand in key nations around the world. This heightened emphasis on overall exports and increasing the level of Ex-Im financing takes place in the context of specific congressional directives regarding the composition of that financing. Our work on Ex- Im’s financing with respect to small business—including minority and women-owned businesses—and environmentally beneficial exports has demonstrated that substantial steps have been taken, and Ex-Im continues to face substantial challenges. While Ex-Im has had more success in achieving the congressional targets for small business than for environmentally beneficial exports, opportunities remain for a more strategic use of resources and for better communication with Congress and other stakeholders. More broadly, Ex-Im faces the challenge of contributing to the doubling of U.S. exports along with meeting other congressional requirements, including operating at little or no cost to the taxpayer. How any sharp increase in Ex-Im financing levels will affect specific targets we have described is not clear, and is likely to be an area requiring further discussion on how to balance these overall priorities. Chairman Moore, Chairman Meeks, Ranking Member Biggert, and Ranking Member Miller, this concludes my prepared remarks. I appreciate the opportunity to discuss these issues with you today. I would be pleased to respond to any questions you or other members of the subcommittees may have at this time. For further information about this testimony, please contact Loren Yager at (202) 512-4347 or by e-mail at YagerL@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of the statement. Individuals who made key contributions to this testimony include Celia Thomas, Shirley Brothwell, Karen Deans, Emily Suarez-Harris, Richard Krashevski, Justine Lazaro, Valerie Nowak, and Jennifer Young. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses the role of the U.S. Export-Import Bank (Ex-Im) in promoting exports and achieving other U.S. policy goals. As Congress considers policies to achieve more robust growth in the U.S. economy, it must consider the full range of tools available to further growth and create new jobs for U.S. workers. Some of these tools are related to promoting exports, which can have broad benefits to the U.S. economy. As the official export credit agency of the United States, Ex-Im has a key role in helping many U.S. firms achieve sales in foreign markets. In addition to establishing Ex-Im's broad mandate of supporting U.S. employment through exports, Congress has laid out specific, targeted goals for the bank in areas such as increasing financing for environmentally beneficial exports and expanding services to small and minority-owned businesses. This testimony provides some broad observations regarding Ex-Im's contribution to the export promotion goals announced in the President's National Export Initiative. It also describes progress Ex-Im has made in achieving the specific targets set by Congress, as well as some challenges the bank faces in meeting those targets. The statement also provides some background information concerning the ways in which exports can enhance U.S. economic output. The President's National Export Initiative has put forth an ambitious goal of doubling exports in the next 5 years. Ex-Im has been identified as having a key role in the initiative, and a recent administration report identifies a number of specific actions for Ex-Im. Our work on Ex-Im's financing with respect to small business found areas where Ex-Im needed to improve its data systems for accurate reporting as well as its tracking of efforts to increase small business financing. Regarding Ex-Im's environmentally beneficial exports financing, we found that the bank could benefit from more consistently following strategic planning practices. Ex-Im has taken a number of steps in response to GAO recommendations, but opportunities for improvement remain. Additional attention to these issues will enable Ex-Im to develop better communication with Congress and other stakeholders regarding the balance between the small business and environmental export targets and the broader priorities in the National Export Initiative.

Our review of the pilot test identified several challenges related to pilot planning, data collection, and reporting, which affected the completeness, accuracy, and reliability of the results. DHS did not correct planning shortfalls that we identified in our November 2009 report. We determined that these weaknesses presented a challenge in ensuring that the pilot would yield information needed to inform Congress and the card reader rule and recommended that DHS components implementing the pilot—TSA and USCG—develop an evaluation plan to guide the remainder of the pilot and identify how it would compensate for areas where the TWIC reader pilot would not provide the information needed. DHS agreed with the recommendations; however, while TSA developed a data analysis plan, TSA and USCG reported that they did not develop an evaluation plan with an evaluation methodology or performance standards, as we recommended. The data analysis plan was a positive step because it identified specific data elements to be captured from the pilot for comparison across pilot sites. If accurate data had been collected, adherence to the data analysis plan could have helped yield valid results. However, TSA and the independent test agent did not utilize the data analysis plan. According to officials from the independent test agent, they started to use the data analysis plan but stopped using the plan because they were experiencing difficulty in collecting the required data and TSA directed them to change the reporting approach. TSA officials stated that they directed the independent test agent to change its collection and reporting approach because of TSA’s inability to require or control data collection to the extent required to execute the plan. We identified eight areas where TWIC reader pilot data collection, supporting documentation, and recording weaknesses affected the completeness, accuracy, and reliability of the pilot data. 1. Installed TWIC readers and access control systems could not collect required data on TWIC reader use, and TSA and the independent test agent did not employ effective compensating data collection measures. The TWIC reader pilot test and evaluation master plan recognizes that in some cases, readers or related access control systems at pilot sites may not collect the required test data, potentially requiring additional resources, such as on-site personnel, to monitor and log TWIC card reader use issues. Moreover, such instances were to be addressed as part of the test planning. However, the independent test agent reported challenges in sufficiently documenting reader and system errors. For example, the independent test agent reported that the logs from the TWIC readers and related access control systems were not detailed enough to determine the reason for errors, such as biometric match failure, an expired TWIC card, or that the TWIC was identified as being on the list of revoked credentials. The independent test agent further reported that the inability to determine the reason for errors limited its ability to understand why readers were failing, and thus it was unable to determine whether errors encountered were due to TWIC cards, readers, or users, or some combination thereof. 2. Reported transaction data did not match underlying documentation. A total of 34 pilot site reports were issued by the independent test agent. According to TSA, the pilot site reports were used as the basis for DHS’s report to Congress. We separately requested copies of the 34 pilot site reports from both TSA and the independent test agent. In comparing the reports provided, we found that 31 of the 34 pilot site reports provided to us by TSA did not contain the same information as those provided by the independent test agent. Differences for 27 of the 31 pilot site reports pertained to how pilot site data were characterized, such as the baseline throughput time used to compare against throughput times observed during two phases of testing. However, at two pilot sites, Brownsville and Staten Island Ferry, transaction data reported by the independent test agent did not match the data included in TSA’s reports. Moreover, data in the pilot site reports did not always match data collected by the independent test agent during the pilot. 3. Pilot documentation did not contain complete TWIC reader and access control system characteristics. Pilot documentation did not always identify which TWIC readers or which interface (e.g., contact or contactless interface) the reader used to communicate with the TWIC card during data collection. For example, at one pilot site, two different readers were tested. However, the pilot site report did not identify which data were collected using which reader. 4. TSA and the independent test agent did not record clear baseline data for comparing operational performance at access points with TWIC readers. Baseline data, which were to be collected prior to piloting the use of TWIC with readers, were to be a measure of throughput time, that is, the time required to inspect a TWIC card and complete access-related processes prior to granting entry. However, it is unclear from the documentation whether acquired data were sufficient to reliably identify throughput times at truck, other vehicle, and pedestrian access points, which may vary. 5. TSA and the independent test agent did not collect complete data on malfunctioning TWIC cards. TSA officials observed malfunctioning TWIC cards during the pilot, largely because of broken antennas. If a TWIC with a broken antenna was presented for a contactless read, the reader would not identify that a TWIC had been presented, as the broken antenna would not communicate TWIC information to a contactless reader. In such instances, the reader would not log that an access attempt had been made and failed. 6. Pilot participants did not document instances of denied access. Incomplete data resulted from challenges documenting how to manage individuals with a denied TWIC across pilot sites. Specifically, TSA and the independent test agent did not require pilot participants to document when individuals were granted access based on a visual inspection of the TWIC, or deny the individual access as may be required under future regulation. This is contrary to the TWIC reader pilot test and evaluation master plan, which calls for documenting the number of entrants “rejected” with the TWIC card reader system operational as part of assessing the economic impact. Without such documentation, the pilot sites were not completely measuring the operational impact of using TWIC with readers. 7. TSA and the independent test agent did not collect consistent data on the operational impact of using TWIC cards with readers. TWIC reader pilot testing scenarios included having each individual present his or her TWIC for verification; however, it is unclear whether this actually occurred in practice. For example, at one pilot site, officials noted that during testing, approximately 1 in 10 individuals was required to have his or her TWIC checked while entering the facility because of concerns about causing a traffic backup. Despite noted deviations in test protocols, the reports for these pilot sites do not note that these deviations occurred. Noting deviations in each pilot site report would have provided important perspective by identifying the limitations of the data collected at the pilot site and providing context when comparing the pilot site data with data from other pilot sites. 8. Pilot site records did not contain complete information about installed TWIC readers’ and access control systems’ design. TSA and the independent test agent tested the TWIC readers at each pilot site to ensure they worked before individuals began presenting their TWIC cards to the readers during the pilot. However, the data gathered during the testing were incomplete. For example, 10 of 15 sites tested readers for which no record of system design characteristics were recorded. In addition, pilot reader information was identified for 4 pilot sites but did not identify the specific readers or associated software tested. According to TSA, a variety of challenges prevented TSA and the independent test agent from collecting pilot data in a complete and consistent fashion. Among the challenges noted by TSA, (1) pilot participation was voluntary, which allowed pilot sites to stop participation at any time or not adhere to established testing and data collection protocols; (2) the independent test agent did not correctly and completely collect and record pilot data; (3) systems in place during the pilot did not record all required data, including information on failed TWIC card reads and the reasons for the failure; and (4) prior to pilot testing, officials did not expect to confront problems with nonfunctioning TWIC cards. Additionally, TSA noted that it lacked the authority to compel pilot sites to collect data in a way that would have been in compliance with federal standards. In addition to these challenges, the independent test agent identified the lack of a database to track and analyze all pilot data in a consistent manner as an additional challenge to data collection and reporting. The independent test agent, however, noted that all data collection plans and resulting data representation were ultimately approved by TSA and USCG. As required by the SAFE Port Act and the Coast Guard Authorization Act of 2010, DHS’s report to Congress on the TWIC reader pilot presented several findings with respect to technical and operational aspects of implementing TWIC technologies in the maritime environment. However, DHS’s reported findings were not always supported by the pilot data, or were based on incomplete or unreliable data, thus limiting the report’s usefulness in informing Congress about the results of the TWIC reader pilot. For example, reported entry times into facilities were not based on data collected at pilot sites as intended. Further, the report concluded that TWIC cards and readers provide a critical layer of port security, but data were not collected to support this conclusion. Because of the number of concerns that we identified with the TWIC pilot, in our March 13, 2013, draft report to DHS, we recommended that DHS not use the pilot data to inform the upcoming TWIC card reader rule. However, after receiving the draft that we sent to DHS for comment, on March 22, 2013, USCG published the TWIC card reader NPRM, which included results from the TWIC card reader pilot. We subsequently removed the recommendation from our final report, given that USCG had moved forward with issuing the NPRM and had incorporated the pilot results into the proposed rulemaking. In its official comments on our report, DHS asserted that some of the perceived data anomalies we cited were not significant to the conclusions TSA reached during the pilot and that the pilot report was only one of multiple sources of information available to USCG in drafting the TWIC reader NPRM. We recognize that USCG had multiple sources of information available to it when drafting the proposed rule; however, the pilot was used as an important basis for informing the development of the NPRM, and the issues and concerns that we identified remain valid. Given that the results of the pilot are unreliable for informing the TWIC card reader rule on the technology and operational impacts of using TWIC cards with readers, we recommended that Congress consider repealing the requirement that the Secretary of Homeland Security promulgate final regulations that require the deployment of card readers that are consistent with the findings of the pilot program, and that Congress should consider requiring that the Secretary of Homeland Security complete an assessment that evaluates the effectiveness of using TWIC with readers for enhancing port security. This would be consistent with the recommendation that we made in our May 2011 report. These results could then be used to promulgate a final regulation as appropriate. Given DHS’s challenges in implementing TWIC over the past decade, at a minimum, the assessment should include a comprehensive comparison of alternative credentialing approaches, which might include a more decentralized approach, for achieving TWIC program goals. Chairman Miller, Ranking Member Jackson-Lee, and members of the subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have. For questions about this statement, please contact Steve Lord at (202) 512-4379 or lords@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Dave Bruno, Assistant Director; Joseph P. Cruz; and James Lawson. Key contributors for the previous work that this testimony is based on are listed within each individual product. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses GAO's recent work examining the Department of Homeland Security's (DHS) Transportation Worker Identification Credential (TWIC) program. Ports, waterways, and vessels handle billions of dollars in cargo annually, and an attack on our nation's maritime transportation system could have serious consequences. Maritime workers, including longshoremen, mechanics, truck drivers, and merchant mariners, access secure areas of the nation's estimated 16,400 maritime-related transportation facilities and vessels, such as cargo container and cruise ship terminals, each day while performing their jobs. This statement today highlights the key findings of GAO's May 8, 2013, report on the TWIC program, which addressed the extent to which the results from the TWIC reader pilot were sufficiently complete, accurate, and reliable for informing Congress and the TWIC card reader rule.

The Veterans Benefits Administration (VBA) within VA administers the disability compensation and pension programs, whereby VA claims processing staff assess veterans’ applications for disability compensation and pension benefits. Aside from benefits for veterans, VBA claims processing staff make eligibility determinations for deceased veterans’ spouses, children, and parents. In short, they are responsible for ensuring that the decisions that lead to paying disability compensation and pension benefits are timely, accurate, and consistent. The VA disability claims process involves multiple steps and usually involves more than one claims processor. When a veteran submits a claim to one of VBA’s 57 regional offices, staff in that office are responsible for obtaining evidence to evaluate the claim, such as medical and military service records; determining whether the claimant is eligible for benefits; and assigning a disability rating specifying the severity of each of the veteran’s impairments. These ratings determine the amount of benefits eligible veterans will receive. VA has faced questions about the timeliness, accuracy, and consistency of its disability decisions. GAO designated federal disability programs, including VA and other programs, as a high-risk area in 2003. In particular, our prior work found VA relied on outmoded criteria for determining program eligibility that did not fully reflect advances in medicine and technology or changes in the labor market. As a result, VA’s disability program may not recognize an individual’s full potential to work. In addition, VA has seen processing times for their disability claims increase over the past several years, and inconsistencies in disability decisions across locations have raised questions about fairness and integrity. Some have suggested that VA needs to address its training and guidance related to claims processing in order to improve consistency and that it should conduct periodic evaluations of decisions to ensure the accuracy of ratings across disability categories and regions. VA has reported that some of the inconsistency in its decisions is due to complex claims, such as those involving post-traumatic stress disorder, but it has also acknowledged that the accuracy and consistency of claims decisions needs further improvement. To prepare newly hired staff to perform the tasks associated with processing disability claims, VBA has developed a highly structured, three- phase program designed to deliver standardized training. The first phase is designed to lay the foundation for future training by introducing new staff to topics such as medical terminology and the computer applications used to process and track claims. The second provides an overview of the technical aspects of claims processing, including records management, how to review medical records, and how to interpret a medical exam. The third includes a combination of classroom, on-the-job, and computer- based trainings. The second and third phases in this program are designed to both introduce new material and reinforce material from the previous phase. To help ensure that claims processing staff continually maintain their knowledge after their initial training and keep up with changing policies and procedures, VBA’s Compensation and Pension Service requires all claims processing staff to complete a minimum of 80 hours of technical training annually. This training requirement can be met through a mix of classroom instruction, electronic-based training from sources such as the Training and Performance Support System (TPSS), or guest lecturers. VBA’s regional offices have some flexibility over what courses they provide to their staff to help them meet the training requirement. These courses can cover such topics as establishing veteran status, asbestos claims development, and eye-vision issues. We found that VBA has taken some steps to strategically plan its training for claims processors in accordance with generally accepted training practices identified in our prior work. For example, VBA has taken steps to align training with the agency’s mission and goals. In 2004, VBA established an Employee Training and Learning Board (board) to, among other things, ensure that the agency’s training decisions support its strategic and business plans, goals, and objectives. Also, VBA has identified the skills and competencies needed by its claims processing staff by developing a decision tree and task analysis of the claims process. In addition, VBA has taken steps to determine the appropriate level of investment in training and to prioritize funding. The board’s responsibilities include developing an annual training budget and recommending training initiatives to the Under Secretary of Benefits. Further, we found that VBA’s training program for new claims processing staff appears well-designed, in that it conforms to adult learning principles by carefully defining all pertinent terms and concepts and providing abundant and realistic examples of claims work. However, while VBA has developed a system to collect feedback from new claims processing staff on their training, the agency does not consistently collect feedback on all of the training it provides. For example, none of the regional offices we visited consistently collected feedback on the training they conduct. Without feedback on regional office training, VBA may not be aware of how effective all of its training tools are. Moreover, both new and experienced claims processing staff we interviewed reported some issues with their training. A number of staff told us the TPSS was difficult to use, often out-of-date, and too theoretical. Some claims processing staff with more experience reported that they struggled to meet the annual training requirement because of workload pressures or that training topics were not always relevant for staff with their level of experience. VBA officials reported that they have reviewed the 80-hour training requirement to determine if it is appropriate, but they could not identify the criteria or any analysis that were used to make this determination. Identifying the right amount of training is crucial. An overly burdensome training requirement may needlessly take staff away from essential claims processing duties, while too little training could contribute to processing and quality errors. In addition to lacking a clear process for assessing the appropriateness of the 80-hour training requirement, VBA also has no policy outlining consequences for individual staff who do not complete the requirement. Because it does not hold staff accountable, VBA is missing an opportunity to clearly convey to staff the importance of managing their time to meet training requirements, as well as production and accuracy goals. In fiscal year 2008, VBA implemented a new learning management system that allows it to track the training hours completed by individual staff. Although VBA now has the capacity to monitor staff’s completion of the training requirement, the agency has not indicated any specific consequences for staff who fail to meet the requirement. VA’s performance management system for claims processors is consistent with a number of accepted practices for effective performance management systems in the public sector. For example, the elements used to evaluate individual claims processors—such as quality, productivity, and workload management—appear to be generally aligned with VBA’s organizational performance measures. Aligning individual and organizational performance measures helps staff see the connection between their daily work activities and their organization’s goals and the importance of their roles and responsibilities in helping to achieve these goals. VA also requires supervisors to provide claims processors with regular feedback on their performance, and it has actively involved its employees and other stakeholders in developing its performance management system. However, VA’s system may not be consistent with a key accepted practice—clear differentiation among staff performance levels. We have previously reported that, in order to provide meaningful distinctions in performance for experienced staff, agencies should preferably use rating systems with four or five performance categories. If staff members’ ratings are concentrated in just one or two of multiple categories, the system may not be making meaningful distinctions in performance. Systems that do not make meaningful distinctions in performance fail to give (1) employees the constructive feedback they need to improve and (2) managers the information they need to reward top performers and address performance issues. VA’s performance appraisal system has the potential to clearly differentiate among staff performance levels. Each fiscal year, regional offices give their staff a rating on each individual performance element: exceptional, fully successful, or less than fully successful. For example, a staff member might be rated exceptional on quality, fully successful on productivity, and so forth. Some elements are considered critical elements, and some are considered noncritical. Staff members are then assigned to one of five overall performance categories, ranging from unsatisfactory to outstanding, based on a formula that converts a staff member’s combination of ratings on the individual performance elements into an overall performance category (see fig. 1). However, there is evidence to suggest that the performance management system for claims processing staff may not clearly or accurately differentiate among staff’s performance. Central office officials and managers in two of the four regional offices we visited said that, under the formula for assigning overall performance categories, it is more difficult to place staff in certain overall performance categories than in others—even if staff’s performance truly does fall within that category. These managers said it is especially difficult for staff to be placed in the excellent category. In fact, at least 90 percent of all claims processors in the regional offices we visited ended up in only two of the five performance categories in fiscal year 2007: fully successful and outstanding (see fig. 2). Some managers told us that there are staff whose performance is better than fully successful but not quite outstanding, but that under VA’s formula, it is difficult for these staff to be placed in the excellent category. To be placed in the excellent category, a staff member must be rated exceptional in all the critical elements and fully successful in at least one noncritical element. However, managers told us that virtually all staff who are exceptional in the critical elements are also exceptional in the noncritical elements, and they are appropriately placed in the outstanding category. On the other hand, if a staff member is rated fully successful on just one critical element, even if all other elements are rated as exceptional, the staff member’s overall performance category falls from outstanding to fully successful. Neither VBA nor VA central office officials have examined the distribution of claims processing staff across the five overall performance categories. However, VA has acknowledged that there may be an issue with its formula, and the agency is considering changes to its performance management system designed to allow for greater differentiation in performance. Absent additional examination of the distribution of claims processors among overall performance categories, VA lacks a clear picture of whether its system is working as intended and whether any adjustments are needed. In conclusion, VA appears to have recognized the importance of developing and maintaining high performing claims processors. It needs to devote more attention, however, to ensuring that its training and performance management systems are better aligned to equip both new and experienced staff to handle a burgeoning workload. Specifically, in our May 2008 report, we recommended that VA should collect feedback from staff on training provided in the regional offices in order to assess issues such as the appropriateness of the 80-hour annual training requirement and the usefulness of TPSS. We also recommended that the agency should use information from its new learning management system to hold staff members accountable for meeting the training requirement. In addition, we recommended that VA should assess whether its performance management system is making meaningful distinctions in performance. In its comments on our May 2008 report, VA concurred with our recommendations, but it has not yet reported making any significant progress in implementing them. While hiring, training, and evaluating the performance of staff is essential, commensurate attention should be focused on reviewing and aligning disability benefits and service outcomes to today’s world. In prior work, we have noted that VA and other federal disability programs must adopt a more modern understanding of how technology and labor market changes determine an individual’s eligibility for benefits, as well as the timing and portfolio of support services they are provided. To the extent progress is made in this area, effective training and performance management systems will be of crucial importance. Moreover, the way VA’s larger workforce is distributed and aligned nationwide can also significantly impact the degree to which it succeeds in meeting the agency’s responsibilities to veterans in the future. In short, VA should seize this opportunity to think more strategically about where to best deploy its new staff and how to develop and maintain their skills. Mr. Chairman, this concludes my remarks. I would be happy to answer any questions that you or other members of the subcommittee may have. For further information, please contact Daniel Bertoni at (202) 512-7215 or bertonid@gao.gov. Also contributing to this statement were Clarita Mrena, Lorin Obler, David Forgosh, and Susan Bernstein. Veterans’ Benefits: Improved Management Would Enhance VA’s Pension Program. GAO-08-112. Washington, D.C.: February 14, 2008. Veterans’ Disability Benefits: Claims Processing Challenges Persist, while VA Continues to Take Steps to Address Them. GAO-08-473T. Washington, D.C.: February 14, 2008. Disabled Veterans’ Employment: Additional Planning, Monitoring, and Data Collection Efforts Would Improve Assistance. GAO-07-1020. Washington, D.C.: September 12, 2007. Veterans’ Benefits: Improvements Needed in the Reporting and Use of Data on the Accuracy of Disability Claims Decisions. GAO-03-1045. Washington, D.C.: September 30, 2003. Human Capital: A Guide for Assessing Strategic Training and Development Efforts in the Federal Government. GAO-03-893G. Washington, D.C.: July 2003. Results-Oriented Cultures: Creating a Clear Linkage between Individual Performance and Organizational Success. GAO-03-488. Washington D.C.: March 14, 2003. Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-03-110. Washington, D.C.: January 1, 2003. Veterans’ Benefits: Claims Processing Timeliness Performance Measures Could Be Improved. GAO-03-282. Washington, D.C.: December 19, 2002. Veterans’ Benefits: Quality Assurance for Disability Claims and Appeals Processing Can Be Further Improved. GAO-02-806. Washington, D.C.: August 16, 2002. Veterans’ Benefits: Training for Claims Processors Needs Evaluation. GAO-01-601. Washington, D.C.: May 31, 2001. Veterans Benefits Claims: Further Improvements Needed in Claims- Processing Accuracy. GAO/HEHS-99-35. Washington, D.C.: March 1, 1999. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Veterans Affairs' (VA) disability claims process has long been a subject of concern because of long waits for decisions and large backlogs of claims pending decisions. To address these issues, VA has hired almost 3,000 new claims processors since January 2007. However, adequate training and performance management are essential to developing highly competent disability claims processors and ensuring that experienced staff maintain the skills needed to issue timely, accurate, and consistent decisions. The Subcommittee on Disability Assistance and Memorial Affairs, House Veterans' Affairs Committee asked GAO to present its views on 1) VA's training for its claims processors and 2) VA's performance management of this staff. This statement is based on a May 2008 report on VA's training and performance management (GAO-08-561) and has been updated as appropriate. Training for VA disability claims processors complies with some accepted training practices, but VA does not adequately evaluate its training and may have opportunities to improve training design and implementation. VA has a highly structured, three-phase training program for new staff and an 80-hour annual training requirement for all staff. GAO found that VA has taken steps to plan this training strategically and that its training program for new staff appears well-designed and conforms to adult learning principles. However, while VA collects some feedback on training for new staff, it does not collect feedback on all the training conducted at its regional offices. Moreover, both new and experienced staff reported problems with their training. Some new staff told us a computer-based learning tool is too theoretical and often out of date. More experienced staff said they struggled to meet the annual 80-hour training requirement because of workload pressures or could not always find courses relevant given their experience level. Finally, the agency does not hold claims processors accountable for meeting the annual training requirement. VA's performance management system for claims processing staff generally conforms to accepted practices. For example, individual performance measures, such as quality and productivity, are aligned with the agency's organizational performance measures, and VA provides staff with regular performance feedback. However, the system may not clearly differentiate among staff performance levels. In each of the regional offices we visited, at least 90 percent of claims processors were placed in just two of five overall performance categories. Broad, overlapping performance categories may deprive managers of the information they need to reward top performers and address performance issues, as well as deprive staff of the feedback they need to improve

In 1986, the United States and the FSM and the RMI entered into the Compact of Free Association. This Compact represented a new phase of the unique and special relationship that has existed between the United States and these island areas since World War II. It also represented a continuation of U.S. rights and obligations first embodied in a U.N. trusteeship agreement that made the United States the Administering Authority of the Trust Territory of the Pacific Islands. The Compact provided a framework for the United States to work toward achieving its three main goals—(1) to secure self-government for the FSM and the RMI, (2) to assure certain national security rights for all the parties, and (3) to assist the FSM and the RMI in their efforts to advance economic development and self-sufficiency. The first two goals have been met through the Compact and its related agreements. The third goal, advancing economic development and self-sufficiency, was to be accomplished primarily through U.S. direct financial payments (to be disbursed and monitored by the U.S. Department of the Interior) to the FSM and the RMI. However, economic self-sufficiency has not been achieved. Although total U.S. assistance (Compact direct funding as well as U.S. programs and services) as a percentage of total government revenue has fallen in both countries (particularly in the FSM), the two nations remain highly dependent on U.S. assistance. In 1998, U.S. funding accounted for 54 percent and 68 percent of FSM and RMI total government revenues, respectively, according to our analysis. This assistance has maintained standards of living that are artificially higher than could be achieved in the absence of U.S. support. Another aspect of the special relationship between the FSM and the RMI and the United States involves the unique immigration rights that the Compact grants. Through the Compact, citizens of both nations are allowed to live and work in the United States as “nonimmigrants” and can stay for long periods of time, with few restrictions. Further, the Compact exempts FSM and RMI migrating citizens from meeting U.S. passport, visa, and labor certification requirements. Unlike economic assistance provisions, the Compact’s migration provisions are not scheduled to expire in 2003. In recognition of the potential adverse impacts that Hawaii and nearby U.S. commonwealths and territories could face as a result of an influx in migrants, the Congress authorized Compact impact payments to address the financial impact of migrants on Guam, Hawaii, and the CNMI. Finally, the Compact served as the vehicle to reach a full settlement of all compensation claims related to U.S. nuclear tests conducted on Marshallese atolls between 1946 and 1958. In a Compact-related agreement, the U.S. government agreed to provide $150 million to create a trust fund. While the Compact and its related agreements represented the full settlement of all nuclear claims, it provided the RMI the right to submit a petition of “changed circumstance” to the U.S. Congress requesting additional compensation. The RMI government submitted such a petition in September 2000. Under the most recent (May 2002) U.S. proposals to the FSM and the RMI, new congressional authorizations of approximately $3.4 billion would be required for U.S. assistance over a period of 20 years (fiscal years 2004 through 2023). The share of new authorizations to the FSM would be about $2.3 billion, while the RMI would receive about $1.1 billion (see table 1). This new assistance would be provided to each country in the form of annual grant funds, extended federal services (that have been provided under the original Compact but are due to expire in 2003), and contributions to a trust fund for each country. (Trust fund earnings would become available to the FSM and the RMI in fiscal year 2024 to replace expiring annual grants.) For the RMI, the U.S. proposal also includes funding to extend U.S. access to Kwajalein Atoll for U.S. military use from 2017 through 2023. In addition to new authorized funding, the U.S. government will provide (1) continuing program assistance amounting to an estimated $1.1 billion to the two countries over 20 years and (2) payments previously authorized of about $189 million for U.S. access to Kwajalein Atoll in the RMI through 2016. If new and previous authorizations are combined, the total U.S. cost for all Compact-related assistance under the current U.S. proposals would amount to about $4.7 billion over 20 years, not including costs for administration and oversight that are currently unknown. Under the U.S. proposals, annual grant amounts to each country would be reduced over time, while annual U.S. contributions to the trust funds would increase by the grant reduction amount. Annual grant assistance to the FSM would fall from a real value of $76 million in fiscal year 2004 to a real value of $53.2 million in fiscal year 2023. Annual grant assistance to the RMI would fall from a real value of $33.9 million to a real value of $17.3 million over the same period. This decrease in grant funding, combined with FSM and RMI population growth, would also result in falling per capita grant assistance over the funding period – particularly for the RMI (see fig. 1). The real value of grants per capita to the FSM would decrease from an estimated $684 in fiscal year 2004 to an estimated $396 in fiscal year 2023. The real value of grants per capita to the RMI would fall from an estimated $623 in fiscal year 2004 to an estimated $242 in fiscal year 2023. In addition to grants, however, both countries would receive federal programs and services, and the RMI would receive funding related to U.S. access to Kwajalein Atoll. The U.S. proposals are designed to build trust funds that earn a rate of return such that trust fund yields can replace grant funding in fiscal year 2024 once annual grant assistance expires. The current U.S. proposals do not address whether trust fund earnings should be sufficient to cover expiring federal services or create a surplus to act as a buffer against years with low or negative trust fund returns. At a 6 percent rate of return (the Department of State’s assumed rate) the U.S. proposal to the RMI would meet its goal of creating a trust fund that yields earnings sufficient to replace expiring annual grants, while the U.S. proposal to the FSM would not cover expiring annual grant funding, according to our analysis. Moreover, at 6 percent, the U.S. proposal to the RMI would cover the estimated value of expiring federal services, while the U.S. proposal to the FSM clearly would not. At a 6 percent return, neither proposed trust fund would generate buffer funds. If an 8.2 percent average rate of return were realized, then the RMI trust fund would yield earnings sufficient to create a buffer, while the FSM trust fund would yield earnings sufficient to replace grants and expiring federal services. I now turn my attention to provisions in the current U.S. proposals designed to provide improved accountability over, and effectiveness of, U.S. assistance. This is an area where we have offered several recommendations in the past 2 years. As I discuss key proposed accountability measures, I will note whether our past recommendations have been addressed where relevant. In sum, many of our recommendations regarding future Compact assistance have been addressed with the introduction of strengthened accountability measures in the current U.S. proposals. However, specific details regarding how some key accountability provisions would be carried out will be contained in separate agreements that remain in draft form or have not yet been released. The following summary describes key accountability measures included in the U.S. proposals that address past GAO recommendations: The proposals require that grants would be targeted to priority areas such as health, education, and infrastructure. Further, grant conditions normally applicable to U.S. state and local governments would apply to each grant. Such conditions could address areas such as procurement and financial management standards. U.S. proposals also state that the United States may withhold funds for violation of grant terms and conditions. We recommended in a 2000 report that the U.S. government negotiate provisions that would provide future Compact funding through specific grants with grant requirements attached and allow funds to be withheld for noncompliance with spending and oversight requirements. However, identification of specific grant terms and conditions, as well as procedures for implementing and monitoring grants and grant requirements and withholding funds, will be addressed in a separate agreement that has not yet been released. The U.S. proposals to the FSM and the RMI list numerous items for discussion at the annual consultations between the United States and the two countries. Specifically, the proposals require that consultations address single audits and annual reports; evaluate progress made for each grant; discuss the coming fiscal year’s grant; discuss any management problems associated with each grant; and discuss ways to respond to problems and otherwise increase the effectiveness of future U.S. assistance. In the previously cited report, we recommended that the U.S. government negotiate an expanded agenda for future annual consultations. Further, the proposals give the United States control over the annual review process: The United States would appoint three members to the economic review board, including the chairman, while the FSM or the RMI would appoint two members. Recommendations from our 2000 report are being addressed regarding other issues. The U.S. proposals require U.S. approval before either country can pledge or issue future Compact funds as a source for repaying debt. The proposals also exclude a “full faith and credit” pledge that made it impracticable to withhold funds under the original Compact. In addition, the U.S. proposals provide specific uses for infrastructure projects and require that some funds be used for capital project maintenance. We also recommended that Interior ensure that appropriate resources are dedicated to monitoring future assistance. While the U.S. proposals to the two countries do not address this issue, an official from the Department of the Interior’s Office of Insular Affairs has informed us that his office has tentative plans to post five staff in a new Honolulu office. Further, Interior plans to bring two new staff on board in Washington, D.C., to handle Compact issues, and to post one person to work in the RMI (one staff is already resident in the FSM). A Department of State official stated that the department intends to increase its Washington, D.C., staff and overseas contractor staff but does not have specific plans at this point. Trust fund management is an area where we have made no recommendations, but we have reported that well-designed trust funds can provide a sustainable source of assistance and reduce long-term aid dependence. The U.S. proposals would grant the U.S. government control over trust fund management: The United States would appoint three trustees, including the chairman, to a board of trustees, while the FSM or the RMI would appoint two trustees. The U.S. Compact Negotiator has stated that U.S. control would continue even after grants have expired and trust fund earnings become available to the two countries; in his view, “the only thing that changes in 20 years is the bank,” and U.S. control should continue. He has also noted that it may be possible for the FSM and the RMI to assume control over trust fund management at some as yet undetermined point in the future. Finally, while the departments of State and the Interior have addressed many of our recommendations, they have not implemented our accountability and effectiveness recommendations in some areas. For example, our recommendation that annual consultations include a discussion of the role of U.S. program assistance in economic development is not included in the U.S. proposals. Further, the departments of State and the Interior, in consultation with the relevant government agencies, have not reported on what program assistance should be continued and how the effectiveness and accountability of such assistance could be improved. Finally, U.S. proposals for future assistance do not address our recommendation that consideration should be given to targeting future health and education funds in ways that effectively address specific adverse migration impact problems, such as communicable diseases, identified by Guam, Hawaii, and the CNMI. I would also like to take just a moment to cite proposed U.S. changes to the Compact’s immigration provisions. These provisions are not expiring but have been targeted by the Department of State as requiring changes. I believe it is worth noting these proposed changes because, to the extent that they could decrease migration rates (a shift whose likelihood is unclear at this point), our current per capita grant assistance figures are overstated. This is because our calculations assume migration rates that are similar to past history and so use lower population estimates than would be the case if migration slowed.

The United States entered into the Compact of Free Association with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) In 1986. The Compact has provided U.S. assistance to the FSM and the RMI in the form of direct funding as well as federal services and programs. The Compact allows for migration from both countries to the United States and established U.S. defense rights and obligations in the region. Provisions of the Compact that deal with economic assistance were scheduled to expire in 2001; however, they will remain in effect for up to 2 additional years while the affected provisions are renegotiated. Current U.S. proposals to the FSM and the RMI to renew expiring assistance would require Congress to approve $3.4 billion in new authorizations. The proposals would provide decreasing levels of annual grant assistance over a 20-year term. Simultaneously, the proposals would require building up a trust fund for each country with earnings that would replace grants once those grants expire. The U.S. proposals include strengthened accountability measures, though details of some key measures remain unknown. The proposals have addressed many, but not all, recommendations that GAO made in past reports regarding assistance accountability.

CPP was created to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of preferred shares and subordinated debt. Rather than purchasing troubled mortgage-backed securities and whole loans, as initially envisioned under TARP, Treasury used CPP investments to strengthen the capital levels of financial institutions. Treasury determined that strengthening capital levels was the more effective mechanism to help stabilize financial markets, encourage interbank lending, and increase confidence in the financial system. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion, later reduced to $475 billion, in overall TARP funds for CPP. In March 2009, the allocation was reduced to reflect lower estimated funding needs, as evidenced by actual participation rates. On December 31, 2009, the program was closed to new investments. Under CPP, qualified financial institutions were eligible to receive an investment of 1–3 percent of their risk-weighted assets, up to $25 billion. In exchange for the investment, Treasury generally received preferred shares that would pay dividends. As of the end of 2014, all the institutions with outstanding preferred share investments were required to pay dividends at a rate of 9 percent, rather than the 5 percent rate in place for the previous 5 years. EESA requires that Treasury also receive warrants to purchase shares of common or preferred stock or a senior debt instrument to further protect taxpayers and help ensure returns on the investments. Institutions are allowed to repay CPP investments with the approval of their primary federal bank regulator, and after repayment, institutions are permitted to repurchase warrants on common stock from Treasury. Treasury largely has wound down its CPP investments, and as of February 29, 2016, had received $226.7 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by almost $22 billion. The repayments and income amounts included almost $200 billion in repayments and sales of original CPP investments, as well as about $12 billion in dividends and interest, almost $7 billion in proceeds in excess of costs, and about $8 billion from the sale of warrants (see fig.1). After accounting for write-offs and realized losses from sales totaling about $5 billion, CPP had almost $0.3 billion in outstanding investments as of February 29, 2016. Treasury’s most recent estimate of lifetime income for CPP (as of Nov. 30, 2015) was about $16 billion. As of February 29, 2016, 16 of the 707 institutions that originally participated in CPP remained in the program (see fig. 2). Of the 691 institutions that had exited the program, 261 repurchased their preferred shares or subordinated debentures in full. Another 165 institutions refinanced their shares through other federal programs, 28 through the Community Development Capital Initiative (CDCI) and 137 through the Small Business Lending Fund (SBLF), another Treasury fund that was separate from TARP. An additional 190 institutions had their investments sold through auction, 39 institutions had their investments restructured through non-auction sales, and 32 institutions went into bankruptcy or receivership. The remaining 4 merged with other institutions. As shown in figure 3, as of February 29, 2016, the remaining $257.1 million in outstanding CPP investments was concentrated in half of the remaining 16 institutions. The institutions with the eight highest amounts of outstanding CPP investments accounted for 88 percent ($225.5 million) of the outstanding investments, while one institution accounted for 49 percent ($124.97 million). The remaining $31.6 million (12 percent) was spread among the other eight institutions. Our analysis of financial condition metrics over the past 4 years indicates that among the 16 institutions remaining in CPP as of February 29, 2016, several have continued to face challenges. Although the median return on average assets—a key indicator of a company’s profitability—was higher in the fourth quarter of 2015 than in 2011, 9 of the 16 institutions had negative returns in 2015. Furthermore, 6 of the 16 institutions had a lower return on assets in 2015 than they did at the end of 2011. The remaining institutions also had varying levels of reserves for covering losses, as measured by the ratio of reserves to nonperforming loans. For example, 6 of 15 institutions had lower levels of reserves for covering losses in 2015 compared to 2011, while 9 institutions had higher levels. Treasury officials stated that the remaining CPP institutions generally had weaker capital levels and worse asset quality relative to institutions that had exited the program. They noted that this situation was a function of the lifecycle of the program, because stronger institutions had greater access to new capital and were able to exit, while the weaker institutions had been unable to raise the capital needed to exit the program. Many of the remaining CPP institutions were on the “problem bank list” of the Federal Deposit Insurance Corporation (FDIC) and most have been delinquent on their dividend payments for several years. The problem bank list contains banks with demonstrated financial, operational, or managerial weaknesses that threaten their continued financial viability; the number of problem banks is publicly reported on a quarterly basis. Specifically, as of December 31, 2015, 11 of the then 17 remaining CPP institutions (65 percent) were on FDIC’s problem bank list. The percentage of remaining CPP institutions on the problem bank list is higher than the number we reported for the previous 2 years: 47 of 83 (57 percent) in 2013 and 20 of 34 (59 percent) in 2014. Of the 16 CPP institutions remaining as of February 29, 2016, 1 of the 14 required to pay dividends made the most recent scheduled dividend or interest payment. The 13 institutions that are delinquent have missed an average of 23 quarterly dividend payments, with the fewest missed payments at 16 and the most missed payments at 29. Institutions can elect whether to pay dividends and may choose not to pay for a variety of reasons, including decisions they or their federal or state regulators make to conserve cash and capital. However, investors may view an institution’s ability to pay dividends as an indicator of its financial strength and may see failure to pay as a sign of financial weakness. Treasury officials told us that they regularly monitor and have direct and substantive conversations with the remaining 16 institutions, including discussions about their plans to exit the program. Treasury officials expect most of the remaining CPP institutions to exit through restructurings but do not have a specific end date for exiting all their CPP investments and winding down the CPP program. EESA does not require Treasury to set a specific date on which the program will expire. Although Treasury has not changed its exit strategy, which consists of repayments, restructurings, and auctions, the extent to which each approach has been used has shifted over time. Repayments. Repayments allow financial institutions, with the approval of their regulators, to redeem their preferred shares in full. Institutions have the contractual right to redeem their shares at any time. As of February 29, 2016, 261 institutions had exited CPP through repayments. Institutions must demonstrate that they are financially strong enough to repay the CPP investments to receive regulatory approval to proceed with a repayment exit. Restructurings. Restructurings allow troubled financial institutions to negotiate new terms or discounted redemptions for their investments. Raising new capital from outside investors (or a merger) is a prerequisite for a restructuring. With this option, Treasury receives cash or other securities that generally can be sold more easily than preferred stock, but the restructured investments are sometimes sold at a discount to par value. According to Treasury officials, Treasury facilitated restructurings as an exit from CPP in those cases in which new capital investment and redemption of the CPP investment by the institutions otherwise was not possible. Treasury officials said that they approved the restructurings only if the terms represented a fair and equitable financial outcome for taxpayers. Treasury completed 39 such restructurings through February 29, 2016. Auctions. Treasury conducted the first auction of CPP investments in March 2012, and has continued to use this strategy to sell its investments. As of February 29, 2016, Treasury had conducted a total of 28 auctions of stock from 190 CPP institutions. Through these transactions, Treasury received about $3 billion in proceeds, which was about 80 percent of the investment’s face amount. As we previously reported, Treasury has sold investments individually to date, but noted that combining smaller investments—into pooled auctions—remained an option. Whether Treasury sells stock individually or in pools, the outcome of this option will depend largely on investor demand for these securities and the quality of the underlying financial institutions. The method by which institutions have exited the program has varied over time. As shown in figure 4, from 2009 through 2011, the majority of institutions exiting CPP did so through repayment or refinancing their shares through CDCI and SBLF. From 2012 to 2014, auctions were the predominant exit strategy. During that same period, restructurings also increased. For example, in 2012, 4 percent of exits (7 of 159) were restructurings. In 2014, 15 percent (8 of 52) used restructuring as an exit strategy. In 2015, restructurings remained a common strategy, representing 35 percent (6 of 17) of exits, while auctions dropped from 44 percent (23 of 52) in 2014 to 29 percent (5 of 17) in 2015. Treasury officials told us they expected restructurings to be the primary exit strategy in the future, but as noted earlier, auctions remain a possible exit strategy. Treasury expects to rely on restructurings and auctions because the overall financial condition of the remaining institutions makes full repayment unlikely. At this time, Treasury does not have any plans to fully write off any investments. Treasury officials anticipate that the current strategy to restructure or auction the remaining investments will result in a better return for taxpayers. According to officials, any savings achieved by writing off the remaining CPP assets and eliminating costs associated with maintaining CPP would be limited, because much of the TARP infrastructure will remain intact for several years to manage other TARP programs. Treasury officials also noted that writing off the remaining assets could be seen as diminishing the equitable treatment of institutions across the program. That is, writing off the remaining assets, (and thereby not requiring repayment from the remaining institutions) would be unfair to the institutions that already had repaid their investment and exited the program. We provided Treasury with a draft copy of this report for review and comment. Treasury provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees. This report will be available at no charge on our website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. In addition to the contact named above, Karen Tremba (Assistant Director), Anne Akin (Analyst-in-Charge), Bethany Benitez, William R. Chatlos, Lynda Downing, Risto Laboski, Marc Molino, Barbara Roesmann, Christopher Ross, and Max Sawicky have made significant contributions to this report.

CPP was established as the primary means of restoring stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, Treasury invested almost $205 billion in 707 eligible financial institutions between October 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. The Emergency Economic Stabilization Act of 2008 includes a provision that GAO report at least every 60 days on TARP activities. This report examines (1) the status of CPP, (2) the financial condition of institutions remaining in the program, and (3) Treasury's strategy for winding down the program. To assess the program's status, GAO reviewed Treasury reports on the status of CPP. In addition, GAO used financial and regulatory data to assess the financial condition of institutions remaining in CPP. Finally, GAO interviewed Treasury officials to examine the agency's exit strategy for the program. GAO provided a draft of this report to Treasury for its review and comment. Treasury provided technical comments that GAO incorporated as appropriate. The Capital Purchase Program (CPP) largely has wound down and the Department of the Treasury's (Treasury) returns on CPP investments surpassed the original amount disbursed. As of February 29, 2016, Treasury had received $226.7 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by almost $22 billion. As of the same date, 16 of the 707 institutions remained in the program. Treasury's most recent estimate of lifetime income for CPP (as of Nov. 30, 2015) was about $16 billion. Most of the remaining CPP institutions have continued to exhibit signs of financial weakness. Specifically, 9 of the 16 institutions had negative returns on average assets (a common measure of profitability) in 2015. Also, 6 institutions had a lower return on assets in 2015 than they did at the end of 2011. Treasury officials stated that the remaining CPP firms generally had weaker capital levels and worse asset quality than firms that had exited the program. Also, nearly all the firms that are required to pay dividends have continued to miss payments. Treasury expects most remaining CPP institutions to exit through restructurings but has not set time frames for winding down the program. Over the past 6 years, repayment of Treasury's investment and Treasury's auction of CPP securities to interested investors were the primary means by which institutions exited CPP. Restructurings—the expected exit method for the remaining firms—allow institutions to negotiate terms for their investments and require institutions to raise new capital or merge with another institution. With this option, Treasury agrees to receive cash or other securities, typically at a discount. Treasury officials expect to rely primarily on restructurings because the overall financial condition of the remaining institutions makes full repayment unlikely.

In 2003, the Department of Homeland Security was created and tasked with integrating numerous agencies and offices with varying missions from the General Services Administration; the Federal Bureau of Investigation; and the Departments of Agriculture, Defense, Energy, Health and Human Services, Justice, Transportation, and Treasury; as well as the Coast Guard and the Secret Service. Eight DHS components have internal procurement offices with a Head of Contracting Activity (HCA) who reports directly to the component head and is accountable to the CPO. The Office of Procurement Operations (OPO) also has an HCA who provides contracting support to all other components and reports directly to the CPO. The HCA for each component has overall responsibility for the day-to-day management of the component’s acquisition function. Figure 1 shows the organizational relationship between the HCAs and the CPO. We reported in September 2006 that DHS planned to fully implement its acquisition oversight program during fiscal year 2007. The plan is composed of four recurring reviews: self-assessment, operational status, on-site, and acquisition planning. The CPO has issued an acquisition oversight program guidebook, provided training on self-assessment and operational status reviews, and began implementation of the four reviews in the plan (see table 1). The acquisition oversight plan generally incorporates basic principles of an effective and accountable acquisition function and includes mechanisms to monitor acquisition performance. Specifically, the plan incorporates DHS policy, internal controls, and elements of an effective acquisition function: organizational alignment and leadership, policies and processes, human capital, knowledge and information management, and financial accountability. While it is too early to assess the plan’s overall effectiveness in improving acquisition performance, initial implementation of the first self-assessment has helped most components prioritize actions to address identified weaknesses. In addition, the CPO has helped several components implement organizational and process changes that may improve acquisition performance over time. For example, one component, with the assistance of the CPO, elevated its acquisition office to a level equivalent to its financial office. However, the acquisition planning reviews are not sufficient to determine if components’ adequately plan their acquisitions. Federal acquisition regulations and DHS directives require agencies to perform acquisition planning in part to ensure good value, including cost and quality. Component HCAs are responsible to ensure that acquisition plans are completed in a timely manner, include an efficient and effective acquisition strategy and the resulting contract action or actions support the component’s mission. Inadequate procurement planning can lead to higher costs, schedule delays, and systems that do not meet mission objectives. Several recent reviews have identified problems in DHS’s acquisition planning. In 2006, we reported that DHS often opted for speed and convenience in lieu of planning and analysis when selecting a contracting method and may not have obtained a good value for millions of dollars in spending. As part of a 2006 special review of Federal Emergency Management Agency’s (FEMA) contracts, DHS’s CPO found significant problems with the requirements process and acquisition strategy and recommended in part that FEMA better plan acquisitions. For example, the CPO reported that FEMA’s total cost for its temporary housing program could have been significantly reduced if FEMA had appropriately planned to acquire temporary homes before the fiscal year 2005 hurricane season. A 2006 internal review of the Office of Procurement Operation’s contracts similarly found little evidence that acquisition planning occurred in compliance with regulations. While a key goal of the oversight program is to improve acquisition planning, we found potential problems with each of the three elements of the acquisition planning reviews, as shown in table 2. DHS faces two challenges in achieving the goals of its acquisition oversight plan. First, the CPO has had limited resources to implement the plan reviews. When implementation of the plan began in 2006, only two personnel were assigned acquisition oversight as their primary duty. The CPO received funding for eight additional oversight positions. However, officials told us that they have struggled to find qualified individuals. As of June 2007, seven positions had been filled. As part of the Department’s fiscal year 2008 appropriation request, the CPO is seeking two additional staff, for a total of 12 oversight positions. The CPO will also continue to rely on resources from components to implement the plan, such as providing staff for on-site reviews. Second, while the CPO can make recommendations based on oversight reviews, the component head ultimately determines what, if any, action will be taken. DHS’s organization relies on cooperation and collaboration between the CPO and components to accomplish departmentwide acquisition goals. However, to the extent that the CPO and components disagree on needed actions, the CPO lacks the authority to require compliance with recommendations. We have previously reported that the DHS system of dual accountability results in unclear working relationships between the CPO and component heads. DHS policy also leaves unclear what enforcement authority the CPO has to ensure that acquisition initiatives are carried out. In turn, we recommended that the Secretary of Homeland Security provide the CPO with sufficient enforcement authority to effectively oversee the Department’s acquisitions—a recommendation that has yet to be implemented. CPO officials believe that there are other mechanisms to influence component actions, such as providing input into HCA hiring decisions and performance appraisals. Making the most of opportunities to strengthen its acquisition oversight program—along with overcoming implementation challenges—could position the agency to achieve better acquisition outcomes. We identified two such opportunities: periodic external assessments of the oversight program and sharing knowledge gained from the oversight plan reviews across the department. Federal internal control standards call for periodic external assessments of programs to help ensure their effectiveness. An independent evaluation of DHS’s acquisition oversight program by the Inspector General or an external auditor could help strengthen the oversight conducted through the plan and better ensure that the program is fully implemented and maintaining its effectiveness over time. In particular, an external assessment with results communicated to appropriate officials can help maintain the strength of the oversight program by alerting DHS to acquisition concerns that require oversight, as well as monitoring the plan’s implementation. For example, the plan initially called for components to complete the self-assessment by surveying their acquisition staff; however, the level of staff input for the first self-assessments was left to the discretion of the HCAs. Specifically, CPO officials advised HCAs to complete the questions themselves, delegate the completion to one or more staff members, or select a few key people from outside their organization to participate. While evolution of the plan and its implementation is to be expected and can result in improvements, periodic external assessments of the plan could provide a mechanism for monitoring changes to ensure they do not diminish oversight. Federal internal control standards also call for effective communication to enable managers to carry out their responsibilities and better achieve components’ missions. The CPO has been assigned responsibility for ensuring the integrity of the oversight process—in part by providing lessons learned for acquisition program management and execution. While the CPO intends to share knowledge with components by posting lessons learned from operational status reviews to DHS’s intranet, according to CPO officials, the Web site is currently limited to providing guidance and training materials and does not include a formal mechanism to share lessons learned among components. In addition to the Web site, other opportunities may exist for sharing knowledge. For example, CPO officials indicated that the CPO meets monthly with component HCAs to discuss acquisition issues. The monthly meetings could provide an opportunity to share and discuss lessons learned from oversight reviews. Finally, knowledge could be regularly shared with component acquisition staff through internal memorandums or reports on the results of oversight reviews. Integrating 22 federal agencies while implementing acquisition processes needed to support DHS’s national security mission is a herculean effort. The CPO’s oversight plan generally incorporates basic principles of an effective acquisition function, but absent clear authority, the CPO’s recommendations for improved acquisition performance are, in effect, advisory. Additional actions are needed to achieve the plan’s objectives and opportunities exist to strengthen oversight through enhanced internal controls. Until DHS improves its approach for overseeing acquisition planning, the department will continue to be at risk of failing to identify and address recurring problems that have led to poor acquisition outcomes. To improve oversight of component acquisition planning processes and the overall effectiveness of the acquisition oversight plan, we recommend that the Secretary of Homeland Security direct the Chief Procurement Officer to take the following three actions: Reevaluate the approach to oversight of acquisition planning reviews and determine whether the mechanisms under the plan are sufficient to monitor component actions and improve component acquisition planning efforts. Request a periodic external assessment of the oversight plan implementation and ensure findings are communicated to and addressed by appropriate officials. Develop additional opportunities to share lessons learned from oversight reviews with DHS components. We provided a draft of this report to DHS for review and comment. In written comments, DHS generally agreed with our facts and conclusions and concurred with all of our recommendations and provided information on what actions would be taken to address them. Regarding the recommendation on acquisition planning, DHS stated that during on-site reviews they will verify that CPO comments on acquisition plans have been sufficiently addressed. DHS is also developing training for component HCAs and other personnel to emphasize that CPO comments related to compliance with applicable laws and regulations must be incorporated into acquisition plans. The CPO will also annually require an acquisition planning review as part of the oversight plan’s operational status reviews. Additionally, DHS intends to change the advanced acquisition planning database so that historical data are available for review. With regard to the recommendation for periodic external assessment of the oversight plan, DHS stated they plan to explore opportunities to establish a periodic external review of the oversight program. However, the first priority of the acquisition oversight office is to complete initial component on-site reviews. For the recommendation to develop additional opportunities to share lessons learned from oversight reviews, DHS stated it intends to share consolidated information from operational status and on-site reviews in regular meetings with component HCA staff. In addition, the CPO plans to explore further opportunities for sharing oversight results with the entire DHS acquisition community. DHS also responded to a 2005 GAO recommendation on the issue of the CPO lacking authority over the component HCAs. DHS commented that it is in the process of modifying its acquisition lines of business management directive to ensure that no DHS contracting organization is exempt. In addition, DHS stated that the Under Secretary for Management has authority as the Chief Acquisition Officer to monitor acquisition performance, establish clear lines of authority for making acquisition decisions, and manage the direction of acquisition policy for the department, and that these authorities also devolve to the CPO. Modifying the management directive to ensure no DHS contracting organization is exempt is a positive step. However, until DHS formally designates the Chief Acquisition Officer, and modifies applicable management directives to support this designation, DHS’s existing policy of dual accountability between the component heads and the CPO leaves unclear the CPO’s authority to enforce corrective actions to achieve the department’s acquisition goals, which was the basis of our earlier recommendation. DHS’s letter is reprinted in appendix II. DHS also provided technical comments which were incorporated as appropriate. We are sending copies of this report to interested congressional committees and the Secretary of Homeland Security. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have questions regarding this report, please contact me at (202) 512-4841 or huttonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Principal contributors to this report were Amelia Shachoy, Assistant Director; William Russell; Tatiana Winger; Heddi Nieuwsma; Lily Chin; Karen Sloan; and Sylvia Schatz. To determine actions taken by DHS to implement the acquisition oversight plan and challenges DHS faces, we reviewed prior GAO and DHS Office of the Inspector General reports pertaining to acquisition oversight as well as relevant DHS documents, such as the oversight plan, documents of completed reviews and guidance to components, including training materials. We interviewed officials in the CPO’s office and the nine DHS components with acquisition offices. We compared efforts undertaken to implement the plan by DHS officials against established program policies, the fiscal year 2007 implementation schedule, and other guidance materials. We reviewed four component self-assessments that were provided to us and also reviewed areas in which the CPO provided assistance to components based on self-assessment results. We also reviewed Standards for Internal Control in the Federal Government. We conducted our work from February 2007 to June 2007 in accordance with generally accepted government auditing standards.

The Department of Homeland Security (DHS), the third largest department in federal procurement spending in fiscal year 2006, has faced ongoing cost, schedule, and performance problems with major acquisitions and procurement of services. In December 2005, DHS established an acquisition oversight program to provide insight into and improve components' acquisition programs. In 2006, GAO reported that DHS faced challenges in implementing its program. Congress mandated that DHS develop an oversight plan and tasked GAO with analyzing the plan. GAO (1) evaluated actions DHS and its components have taken to implement the acquisition oversight plan and (2) identified implementation challenges. GAO also identified opportunities for strengthening oversight conducted through the plan. GAO reviewed relevant DHS documents and GAO and DHS Inspector General reports and interviewed officials in the office of the Chief Procurement Officer (CPO) and nine DHS components. The CPO has taken several actions to implement DHS's acquisition oversight plan--which generally incorporates basic principles of an effective and accountable acquisition function. The plan monitors acquisition performance through four recurring reviews: self-assessment, operational status, on-site, and acquisition planning. Each component has completed the first self-assessment, which has helped components identify and prioritize acquisition weaknesses. In addition, each component has submitted an initial operational status report to the CPO and on-site reviews are being conducted. Despite this progress, the acquisition planning reviews are not sufficient to determine if components adequately plan their acquisitions--in part because a required review has not been implemented and the CPO lacks visibility into components' planning activities. DHS faces two key challenges in implementing its acquisition oversight plan. First, the CPO has had limited oversight resources to implement plan reviews. However, recent increases in staff have begun to address this challenge. Second, the CPO lacks sufficient authority to ensure components comply with the plan--despite being held accountable for departmentwide management and oversight of the acquisition function. GAO has previously recommended that DHS provide the CPO with sufficient enforcement authority to enable effective acquisition oversight. In addition to these challenges, GAO identified two opportunities to strengthen internal controls for overseeing the plan's implementation and for increasing knowledge sharing. Specifically, independent evaluations of DHS's oversight program could help ensure that the plan maintains its effectiveness over time. Sharing knowledge and lessons learned could provide DHS's acquisition workforce with the information needed to improve their acquisition processes and better achieve DHS's mission.

During the 1970s, the poor accounting practices of state and local governments put into question the security of federal funds provided to those governments. The 1975 New York City financial crisis focused increased attention on this problem. It was found that New York City consistently overestimated its revenues, underestimated its expenses, never knew how much cash it had on hand, and borrowed repeatedly to finance its deficit spending. Compounding the poor accountability practices prevalent at that time, for the most part, state and local governments were not receiving independent financial statement audits. In the early 1980s, the Congress became increasingly concerned about a basic lack of accountability for federal assistance provided to state and local governments. The assistance grew from 132 programs costing $7 billion in 1960 to over 500 programs costing nearly $95 billion by 1981. In 1984, when the Single Audit Act was signed into law, federal assistance to state and local governments had risen to $97 billion, more than doubling what it was a decade before. Before passage of the act, the federal government relied on audits of individual grants to help gain assurance that state and local governments and nonprofit organizations were properly spending federal assistance. These audits focused on whether the transactions of specific grants complied with their program requirements. The audits usually did not address financial controls and were, therefore, unlikely to find systemic problems with an entity’s management of its funds. Further, grant audits were conducted on a haphazard schedule, which resulted in large portions of federal funds being unaudited each year. The auditors conducting grant audits did not coordinate their work with the auditors of other programs. As a result, some entities were subject to numerous grant audits each year while others were not audited for long periods. As a solution, the concept of the single audit was created to replace multiple grant audits with one audit of an entity as a whole. Rather than being a detailed review of individual grants or programs, the single audit is an organizationwide audit that focuses on accounting and administrative controls. The single audit was meant to advise federal oversight officials and program managers on whether an entity’s financial statements are fairly presented and to provide reasonable assurance that federal assistance programs are managed in accordance with applicable laws and regulations. At the time the Single Audit Act was enacted, it received strong bi-partisan support in the Congress and from state and local governments. The objectives of the Single Audit Act are to improve the financial management of state and local governments receiving federal financial assistance; establish uniform requirements for audits of federal financial assistance provided to state and local governments; promote the efficient and effective use of audit resources; and ensure that federal departments and agencies, to the extent practicable, rely upon and use audit work done pursuant to the act. The act requires each state and local entity that receives $100,000 or more in federal financial assistance (either directly from a federal agency or indirectly through another state or local entity) in any fiscal year to undergo a comprehensive, single audit of its financial operations. The audit must be conducted by an independent auditor on an annual basis, except under specific circumstances where a biennial audit is allowed.The act also requires entities receiving between $25,000 and $100,000 in federal financial assistance to have either a single audit or a financial audit required by the programs that provided the federal funds. Further, where state and local entities provide $25,000 or more in federal financial assistance to other organizations (“subrecipients” of federal funds) they are required by the act to monitor those subrecipients’ use of the funds. This monitoring can consist of reviewing the results of each subrecipient’s audit and ensuring that corrective action is taken on instances of material noncompliance with applicable laws and regulations. Over the past 12 years, single audits have clearly proved their worth as important accountability tools over the hundreds of billions of dollars that the federal government provides to state and local governments and nonprofit organizations each year. As discussed in our June 1994 report, the Single Audit Act has encouraged recipients of federal funds to review and revise their financial management practices. This has resulted in the state and local governments institutionalizing fundamental reforms, such as (1) preparing annual financial statements in accordance with generally accepted accounting principles, (2) obtaining annual independent comprehensive audits, (3) strengthening internal controls over federal funds and compliance with laws and regulations, (4) installing new accounting systems or enhancing old ones, (5) implementing subrecipient monitoring systems that have greatly improved oversight of entities to whom they have distributed federal funds, (6) improving systems for tracking federal funds, and (7) resolving audit findings. The single audit process has proven to be an effective way of promoting accountability over federal assistance because it provides a structured approach to achieve audit coverage over the thousands of state and local governments and nonprofit organizations that receive federal assistance. Moreover, particularly in the case of block grants—where the federal financial role diminishes and management and outcomes of federal assistance programs depend heavily on the overall state or local government controls—the single audit process provides accountability by focusing the auditor on the controls affecting the integrated federal and state funding streams. At the same time, areas of improvement in the single audit process have been identified through the thousands of single audits conducted annually and a consensus has been developed on the needed solutions. I would now like to highlight these areas and strongly support the proposed amendments you are considering which would strengthen the single audit process. Last December we testified before the Senate Governmental Affairs Committee in support of changing the Single Audit Act. Those changes are reflected in S.1579, the Single Audit Act Amendments of 1996—a bill which is identical to the amendments you are now considering. Today, I will focus on the two main areas of improvement: ensuring adequate coverage of federal funds without placing an undue administrative burden on entities receiving smaller amounts of federal funds; and making single audits more useful to the federal government. The criteria for determining which entities are to be audited is based solely on dollar amounts, which have not changed since the Act’s passage in 1984. The initial dollar thresholds were designed to ensure adequate audit coverage of federal funds without placing an undue administrative burden on entities receiving smaller amounts of federal assistance. In 1984, the dollar threshold criteria for entities ensured audit coverage for 95 percent of all direct federal assistance to local governments. Today, the same criteria cover 99 percent of all federal assistance to local governments. As a result, some local governments that receive comparatively small amounts of federal assistance are required to have financial audits. If the thresholds were raised, as is proposed in the amendments, audit coverage of 95 percent of federal funds to local governments could be maintained while roughly 4,000 local governments that now have single audits would be exempt in the future. More than 80 percent of the federal program managers we interviewed in preparing our 1994 report favored raising the thresholds to at least the levels proposed in the amendments. We strongly support the proposed change and believe it strikes the proper balance between cost-effective accountability and risk. Entities that fall below the audit threshold would still be required to maintain and provide access to records of the use of federal assistance. Also, those entities would continue to be subject to monitoring activities which could be accomplished through site visits, limited scope audits, or other means. Further, federal agencies could conduct or arrange for audits of the entities. The act’s current criteria for selecting programs to be covered as part of a single audit focuses solely on dollars expended and does not consider all risk factors. In our 1994 report, we noted that less than 20 percent of the programs in our sample met the selection criteria regardless of whether they would be considered high risk. However, those few programs provided 90 percent of the entities’ federal expenditures. At the same time, programs that could be considered risky because of their complexities, changed program requirements, or previously identified problems would not have to be covered. The proposed amendments would require OMB to develop a risk-based approach to target audit resources at the higher risk programs as well as focusing on the dollars expended. We strongly support this change and note that the overwhelming majority of federal managers we interviewed agreed with this proposal. The proposed amendments include two primary changes to enhance the content and timeliness of single audit reports. First, single audit reports contain a series of as many as seven or more separate reports, and significant information is scattered throughout the separate reports. Presently, there is no requirement for a summary although several state auditors (for example, California’s state auditor) prepare summary reports. In this regard, as discussed in our 1994 report, 95 percent of the federal program managers we interviewed were very supportive of summary reports. Managers said that a summary report would save them time and enable them to more quickly focus on the most important problems the auditors found. The proposed amendments address this need by requiring auditors to provide a summary of their determinations concerning the audited entity’s financial statements, internal controls, and compliance with federal laws and regulations. We support their enactment. Second, entities now have 13 months from the end of the fiscal year to submit their single audit reports to the federal government. The proposed amendments would shorten this to 9 months. The amendments would require OMB to establish a transition period of at least 2 years for entities to comply with the shorter time frame. After the transition period, federal agencies could authorize an entity to report later than 9 months, consistent with criteria issued by OMB. We strongly support these provisions. Of the officials we surveyed, 84 percent of the federal program managers and 64 percent of the state program managers believe the 13-month time frame is excessive. Moreover, in fiscal year 1991, 44 percent of state and local governments were able to submit their reports within 9 months after the end of their fiscal years. Over time, I hope that it will be the rule, rather than the exception, for the audit reports to be submitted in less than 9 months. The proposed amendments would also expand the Single Audit Act to include nonprofit organizations, thereby placing all entities receiving federal funds under the same ground rules. Presently, the Single Audit Act applies only to state and local governments while nonprofit organizations are administratively required to have single audits under OMB Circular A-133, “Audits of Institutions of Higher Education and Other Nonprofit Organizations.” OMB is in the final stages of revising Circular A-133 to parallel the requirements of the proposed amendments to the Single Audit Act. The proposed amendments would provide a statutory basis for consistent, common requirements for state and local governments and nonprofit organizations. We strongly support this change. The proposed amendments would also reinforce one of the goals of the act to use single audits as the foundation for other audits. Combined with summary reporting, the ability of federal agencies to review single audit working papers, and make necessary copies, can provide valuable information in their oversight of federal assistance programs. In closing, a number of organizations have worked for some time in gaining consensus on how to make the single audit process as efficient and effective as possible. The proposed amendments you are now considering represent that consensus and have broad support among stakeholder groups, including the National State Auditors Association and the President’s Council on Integrity & Efficiency which represents the federal inspectors general. The Single Audit Act has been very successful. The amendments build on that success based on lessons learned and changed conditions over the past 12 years. We encourage the enactment of the proposed amendments and commend the Subcommittee for focusing on this important issue. Mr. Chairman, we would be pleased to work with the Subcommittee as it considers the amendments to the Single Audit Act. I would be happy to answer any questions that you or members may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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GAO discussed proposed amendments to the Single Audit Act of 1984 and the act's importance. GAO noted that: (1) Congress enacted the act in response to state and local governments' poor accounting practices and lack of accountability for federal funds; (2) audits were not uniform and some grantees were subjected to multiple annual audits while others were not audited for long periods of time; (3) state and local governments have greatly improved their accountability and financial management under the act; (4) proposed amendments would reduce administrative burdens on grantees who receive comparatively small amounts by raising audit thresholds so that audit coverage returns to the 95-percent level; (5) grantees below the thresholds would still have to maintain records and be subject to monitoring; (6) the amendments require the Office of Management and Budget to develop a risk-based approach to targeting audit resources at higher-risk programs; (7) the amendments' required summary reports would increase audit timeliness and usefulness; (8) shortening the audits' due date to 9 months from the fiscal year's close would also improve the audits' timeliness; (9) bringing nonprofit organizations under the act would subject all grantees to uniform requirements; and (10) the proposed amendments would make the single audits the basis for other audits.

NARA is the successor agency to the National Archives Establishment, which was created in 1934, then incorporated into the General Services Administration in 1949 and renamed the National Archives and Records Service. NARA became an independent executive branch agency in 1985 in a move designed to give the Archivist greater autonomy to focus resources on the primary mission of preserving the country’s documentary heritage. NARA’s mission is to make the permanently valuable records of the government – in all media – available to the public, the President, Congress, and the courts for reference and research. The Federal Records Act defines a record as all books, papers, maps, photographs, machine readable materials, or other documentary materials, regardless of physical form, made or received by an agency in connection with the transaction of public business as evidence of the organization, functions, policies, decisions, procedures, operations, or other activities of the government.As a result, NARA preserves billions of pages of textual documents and numerous maps, photographs, videos, and computer records. Under the Federal Records Act, both NARA and federal agencies have responsibilities for records management. NARA must provide guidance and assistance to federal agencies on the creation, maintenance, use, and disposition of government records. Federal agencies are then responsible for ensuring that their records are created and preserved in accordance with the act. NARA and agency staff work together to identify and inventory an agency’s records to appraise the value of the records and determine how long they should be kept and under what conditions. We found that NARA and federal agencies are confronted with many ERM challenges, particularly technological issues. NARA must be able to receive electronic records from agencies, store them, and retrieve them when needed. Agencies must be able to create electronic records, store them, properly dispose of them when appropriate, and send valuable electronic records to NARA for archival storage. All of this must be done in the context of the rapidly changing technological environment. data files. However, now NARA estimates that some federal agencies, such as the Department of State and Department of the Treasury, are individually generating 10 times that many electronic records annually just in E-mail – and many of those records may need to be preserved by NARA. In addition to increasing volume, NARA must address some definitional problems, such as what constitutes an electronic record. In addition, because agencies follow no uniform hardware or software standards, NARA must be capable of accepting various formats from agencies and maintaining a continued capability of reading those records. The long- term preservation and retention of those electronic records is a challenge because of the difficulty in providing continued access to archived records over many generations of systems, because the average life of a typical software product is 2 to 5 years. NARA is also concerned about the authenticity and reliability of records transferred to NARA. NARA is not alone in facing ERM challenges, the agencies also must meet Federal Records Act responsibilities. Records management is the initial responsibility of the staff member who creates the record, whether the record is paper or electronic. Preservation of and access to that record then also becomes the responsibility of agency managers and agency records officers. Agencies must incorporate NARA’s guidance into their own recordkeeping systems. Agencies’ responsibilities are complicated by the decentralized nature of electronic records creation and control. For example, agencies’ employees send huge volumes of E-mail, and any of those messages deemed to be an official record must be preserved. Agencies must assign records management responsibilities, control multiple versions, and archive the messages. Agencies’ reactions to the challenges I just mentioned are varied. On the basis of our discussions with NARA and some agency officials, we learned that some agencies are waiting for more specific guidance from NARA while others are moving forward by looking for ways to better manage their electronic records. However, there has been no recent governmentwide survey to determine the extent of agencies’ ERM programs and capabilities or their compliance with the Federal Records Act. for several years to develop DOD’s ERM software standard, which is intended to help DOD employees determine what are records and how to properly preserve them. NARA endorsed the DOD standard in November 1998 as a tool that other agencies could use as a model until a final policy is issued by NARA. NARA, however, did not mandate that agencies use the DOD standard. The DOD standard (1) sets forth baseline functional requirements for records management application software; (2) defines required system interfaces and search criteria; and (3) describes the minimum records management requirements that must be met, according to current NARA regulations. A number of companies have records management application products that have been certified by DOD for meeting this standard. Other agencies have also been testing ERM software applications for their electronic records. For example, the National Aeronautics and Space Administration (NASA) and the Department of the Treasury’s Office of Thrift Supervision (OTS) have both tested ERM software with mixed results. Even though NARA is aware of what some agencies are doing – such as DOD, NASA, OTS, and some others -- it does not have governmentwide data on the records management capabilities and programs of federal agencies. NARA had planned to do a baseline assessment survey to collect such data on all agencies by the end of fiscal year 2000. The survey would have identified best practices at agencies and collected data on (1) program management and records management infrastructure, (2) guidance and training, (3) scheduling and implementation, and (4) electronic recordkeeping. NARA had planned to determine how well agencies were complying with requirements for retention, maintenance, disposal, retrieval/accessibility, and inventorying of electronic records. The Archivist decided, however, to temporarily postpone doing this baseline survey because he accorded higher priority to such activities as reengineering NARA’s business processes. NARA’s BPR will address its internal processes as well as guidance and interactions with agencies. scheduled to take 18 to 24 months -- is completed. Conducting the baseline survey now could provide valuable information for the BPR effort while also accomplishing the survey’s intended purpose of providing baseline data on where agencies are with regards to records management programs. NARA would also be in a better position in later years to assess the impacts of its BPR effort. In response to our draft report and in a September 17, 1999, letter to the Comptroller General, the Archivist said that much of this baseline data would not be relevant to BPR and therefore NARA would not collect it at this time. However, NARA does have plans to collect limited information from a sample of agencies after starting BPR. We continue to believe that the baseline data is necessary to give NARA the proper starting point for proceeding with its BPR. Because agencies vary in their implementation of ERM programs, the baseline survey would provide much richer data than the limited information collection effort now planned by NARA. Even though NARA lacks governmentwide data on how agencies are implementing ERM, NARA has already begun revising its guidance to agencies. Historically, NARA’s ERM guidance has been geared toward mainframes and databases, not personal computers. NARA’s electronic records guidance to agencies, which establishes the basic requirements for creation, maintenance, use, and disposition of electronic records, is found in the Code of Federal Regulations. In 1972, before the widespread use of personal computers in the government workplace, NARA issued guidance – General Records Schedule (GRS) 20 – on the preservation of electronic records. Several revisions occurred prior to a 1995 version which provided that after electronic records were placed in any recordkeeping system, the records could be deleted. In December 1996, a public interest group filed a complaint in federal district court challenging the 1995 guidance. disposed of under a general schedule. Thus, the court ruled GRS 20 “null and void.” Following the court’s ruling, NARA established an Electronic Records Working Group in March 1998 with a specific time frame to propose alternatives to GRS 20. In a subsequent ruling, the court ordered the NARA working group to have an implementation plan to the Archivist by September 30, 1998. In response to the working group’s recommendations, NARA agreed in September 1998 to take several actions: It issued a revision in the general records schedules on December 21, 1998, to authorize agencies’ disposal of certain administrative records (such as personnel, travel, and procurement) regardless of physical format, after creation of an official recordkeeping copy. It initiated a follow-on study group (made up of NARA staff, agency officials, and consultants) in January 1999 – Fast Track Development Project – intended to answer the immediate questions of agencies about ERM that can be solved relatively quickly. It issued NARA Bulletin 99-04 on March 25, 1999, to guide agencies on scheduling how long to keep electronic records of their program activities and certain administrative functions formerly covered under GRS 20. It drafted a new general records schedule for certain administrative records to document the management of information technology. NARA has received comments from agencies on the draft, and the draft is still under review by NARA and the Office of Management and Budget. NARA hopes to have this guidance issued by the end of 1999. On August 6, 1999, the U.S. Court of Appeals reversed the lower court’s decision and held that GRS 20 is valid. That reversal was not appealed by the public interest group. In response to the court of appeals decision, the Archivist said that NARA would continue in an orderly way to develop practical, workable strategies and methods for managing and preserving records in the electronic age and ensuring access to them. He said that NARA remains committed to working aggressively toward that goal. Our review of the ERM activities in four states and three foreign governments showed that approaches to ERM differ. These entities often did things differently from each other and/or NARA. longer needed by the individual agencies but are of archival value. Two of the states also emphasized the use of the Internet as a mechanism that allows both the archivist and the general public to determine where records may be found. State officials indicated that state law and administrative rules that they issue guide their records management requirements, but they also interact with NARA and other states to assist in determining their states’ policies. Our review of public documents from three foreign governments (Australia, Canada, and the United Kingdom) showed that although these countries share common challenges, they each have taken somewhat different approaches to ERM decisions. For example, Australia has strong central authority and decentralized custody of records, and it maintains a governmentwide locator system. Canada issues “vision statements” rather than specific policies, and individual agencies maintain their own electronic records until they have no more operational need for them. The United Kingdom established broad guidelines, which are put into practice by its individual agencies in partnership arrangement with its national archives. Realizing the common problems faced by all countries, NARA is part of international initiatives that are to study and make recommendations regarding ERM. In conclusion, it is obvious that NARA and federal agencies are being challenged to effectively and efficiently manage electronic records in an environment of rapidly changing technology and increasing volume of electronic records. It is certainly not an easy task. Much remains for NARA and the agencies to do as they tackle the issues I have discussed. We believe that NARA is moving in the right direction. However, because of the variance of ERM programs and activities across the government, we continue to believe that the Archivist should conduct the baseline assessment survey as we recommended in our July 1999 report. This survey would produce valuable information for NARA’s use during its critical BPR effort. A well-planned and successful BPR should be a stepping-stone for NARA as it moves into the next phase of its management of all records, particularly electronic. As you know, Mr. Chairman, NARA has not had concerted congressional oversight as an independent agency. Such oversight is essential to help NARA ensure that the official records of our country are properly maintained and preserved. I commend the efforts of this Subcommittee for holding this hearing and bringing the issues surrounding government records into the spotlight. I look forward to future hearings in this area. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. Contacts and Acknowledgement For further information regarding this testimony, please contact L. Nye Stevens or Michael Jarvis at (202) 512-8676. Alan Stapleton, Warren Smith, and James Rebbe also made key contributions to this testimony. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch- tone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the challenges that face the National Archives and Records Administration (NARA) and federal agencies in their efforts to manage the rapidly increasing volume of electronic records. GAO noted that: (1) NARA and federal agencies are confronted with many electronic records management (ERM) challenges, particularly technological issues; (2) NARA must be able to receive electronic records from agencies, store them, and retrieve them when needed; (3) agencies must be able to create electronic records, store them, properly dispose of them when appropriate, and send valuable electronic records to NARA for archival storage; (4) NARA officials told GAO that NARA needs to expand its capacity to accept the increasing volume of electronic records from agencies; (5) in addition to increasing volume, NARA must address some definitional problems, such as what constitutes an electronic record; (6) in addition, because agencies follow no uniform hardware or software standards, NARA must be capable of accepting various formats from agencies and maintaining a continued capability of reading those records; (7) NARA is not alone in facing ERM challenges, the agencies also must meet Federal Records Act responsibilities; (8) agencies must incorporate NARA's guidance into their own recordkeeping systems; (9) agencies' reactions to ERM challenges are varied; (10) on the basis of GAO's discussions with NARA and some agency officials, GAO learned that some agencies are waiting for more specific guidance from NARA while others are moving forward by looking for ways to better manage their electronic records; (11) even though NARA is aware of what some agencies are doing, it does not have governmentwide data on records management capabilities and programs of federal agencies; (12) NARA had planned to do a baseline survey to collect such data on all agencies by the end of fiscal year 2000; (13) the Archivist decided, however, to temporarily postpone doing this baseline survey because he accorded higher priority to such activities as reengineering NARA's business processes; (14) GAO recommended that NARA do the baseline survey as part of its reengineering process; (15) the Archivist stated that the baseline data would not be relevant to its reengineering efforts and therefore NARA would not collect it at this time; (16) even though NARA lacks governmentwide data on how agencies are implementing ERM, NARA has already begun revising its guidance to agencies; (17) GAO's review of the ERM activities in four states and three foreign governments showed that approaches to ERM differ; and (18) these entities often did things differently from each other and NARA.

Having nearly 28,000 potentially contaminated sites, the Department of Defense manages one of the world’s largest environmental cleanup programs. Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, contractors and other private parties may share liability for the cleanup costs at these sites. Two major types of sites that may involve such liability are government-owned, contractor-operated facilities (whose operators may be liable) and formerly used Defense sites (whose current and past owners and operators may be liable). The Defense Environmental Restoration Program Annual Report to the Congress is the primary reporting vehicle for the status of cleanup at the many sites for which DOD is either solely or partly responsible for the contamination. The report contains information on the status of cleanup at the sites, such as the amounts spent to date; future costs; and the stage of completion, among other data. In 1992, 1994, and 1997, we reported that the Department had inconsistent policies and practices for cleanup cost reimbursements to and/or recovery of cleanup costs from non-DOD parties responsible for contamination. We recommended that the Secretary of Defense provide guidance to resolve the inconsistencies. The guidance issued by the Department requires the components to pursue the recovery of cleanup costs of $50,000 or more and to include in the annual report to the Congress each site’s name and location, the recovery status, the amount recovered, and the cost of pursuing the recovery. Under the guidance, if a component determines that it is not in the best interests of the government to pursue a cost recovery, it must inform the Deputy Under Secretary of Defense for Environmental Security (now, the Deputy Under Secretary for Installations and Environment), who is responsible for compiling the annual report to Congress. The guidance does not define “cost recovery” or “cost sharing,” and does not address (1) how the costs of pursuing recovery should be determined; (2) whether data on cost recoveries should be reported by fiscal year, cumulatively, or both; and (3) what the procedures are for ensuring that the data are accurate, consistent, and complete. Because the Department’s management guidance is silent or unclear on key aspects of reporting necessary to collect, verify, and report data on cleanup cost recoveries, its report to Congress for fiscal year 1999 does not provide accurate, consistent, or complete data. Sound management practices require that organizations have clear and specific guidance regarding what data are to be collected and how they are to be reported, and the controls to ensure the accuracy and completeness of the reports. The reports should be useful to managers for controlling operations and to auditors and others for analyzing operations. While we note that the data reported in fiscal year 1999 were more extensive than those reported in 1998, the guidance issued by DOD does not provide sufficient detail to ensure the effective collection, verification, and reporting of data on cost recoveries. From fiscal year 1998 through fiscal year 1999, DOD reported that cost recoveries increased from $125.3 million to $421.5 million. (See table 1.) The reported increase in recoveries is incorrect because $250.4 million, over half of the $421.5 million reported as cost recoveries in 1999, was not the amount DOD recovered but the amount it spent on environmental cleanups conducted by other parties. For example, the Army Corps of Engineers reported that at Weldon Spring, Missouri, it had recovered $180.6 million. Supporting records, however, show the amount as the Corps’ share of costs for cleanup the Department of Energy is performing at the site. Corps officials told us they reported only the Corps’ share of cleanup costs at these sites because the guidance did not define “cost sharing.” In addition, these officials said they did not know what others spend on cleanup at the sites. (This is further discussed in the section on the data’s completeness.) The Corps of Engineers also incorrectly reported recoveries totaling about $70 million at other sites that were also its share of cleanup costs rather than recovered amounts. Additionally, there were other reporting inaccuracies. For example, two sites with ongoing recoveries—the Rocky Mountain Arsenal and the Massachusetts Military Reservation—that should have been reported by the Army in the fiscal year 1998 report were not reported until the following year. The reported recoveries at these two sites were $17.3 million and $28.2 million, respectively, and were not reported because the Army did not report cost sharing arrangements in fiscal year 1998. DOD’s guidance did not specify how to calculate the costs of pursuing recovery or whether components should report fiscal year data, cumulative data, or both. Consequently, the components’ reported data for both cost recoveries and the costs of pursuing recoveries were not consistent. Calculating the costs of pursuing recoveries has been particularly problematic. For example, although some costs, such as certain legal costs, are obviously related to efforts to recover costs, other legal costs, such as those incurred in defense against charges brought by states or counties, are not. Reported costs to pursue recovery for fiscal years 1998 and 1999 were $6.2 million and $37.3 million, respectively. In the absence of sufficient guidance, Defense components have varied in their reporting of cost recoveries and the costs to pursue recoveries: The Air Force estimated the costs of pursuing recoveries at one site and applied these same costs to other sites. It was also the only component that reported cost sharing arrangements with other federal agencies. The Navy said it did not keep records to allow it to capture the costs of pursuing recoveries in fiscal year 1998 and reported “unknown” or “to be determined” in fiscal year 1999. The Defense Logistics Agency reported $3.6 million in costs to pursue recoveries and $1.1 million in recovered amounts. Officials later determined that some of the reported costs, such as contract costs for investigating and cleaning up the site, should not have been included. Reporting entities have also been inconsistent in reporting data by fiscal year and cumulatively. For example, in the 1998 report, the Army used fiscal year data for cost recoveries and cumulative data for costs to pursue recoveries. The following year, it used fiscal year data for both. The Air Force and Defense Logistics Agency used cumulative data for recoveries and costs to pursue recoveries. The Navy used cumulative data for recoveries. Each of the methods for presenting data—cumulatively or by fiscal year— has certain drawbacks. Showing data cumulatively shows the long term progress that DOD has made in recovering costs, but it can also obscure instances in which no recoveries occurred in a given fiscal year. Conversely, data for the fiscal year do not show total recoveries at a given site. The environmental cleanup cost recovery data reported to Congress for fiscal year 1999 were more extensive than that reported in the previous fiscal year’s report primarily because the Corps of Engineers reported on cost sharing arrangements at 86 sites that it did not report in fiscal year 1998. The Army also reported on two additional sites in the report for fiscal year 1999. The Navy reported on one additional site, and the Air Force added one site but eliminated another. Despite the improvement, the Department still did not report all cost recoveries in the cost recovery appendix. In the absence of sufficient guidance, the Defense components have not reported all cost recoveries or costs to pursue recoveries: The body of the Department’s report includes a field for additional program information pertaining to each site. This field includes information such as progress in conducting investigations and contracts awarded for cleanup. Comments in the additional information field and other sections of the report indicated that cost recovery activities were occurring at sites that were not included in the cost recovery appendix. We identified 138 sites where cleanup costs exceeded the Department’s threshold for pursuing recoveries, and where there were indications that either cost recovery was being considered or that non-DOD parties were involved in cleanup. None of these sites were reported in the cost recovery appendix. Fifty-five of these sites were from the fiscal years 1998 and 1999 reports. For example, the groundwater cleanup at Bethpage Naval Weapons Industrial Reserve Plant, New York, involved Northrop/Grumman and the Occidental Chemical Company. Also, comments listed under the Army Tarheel Missile Plant, North Carolina, indicated that cost recovery would be requested from Lucent Technologies, a caretaker contractor at the installation. Neither, however, was included in the report’s cost recovery appendix. Failure to include these and other sites at which components may be recovering costs requires decisionmakers and others to search through over 800 pages of reported cleanup data to obtain a complete picture of cost recovery activities. The Defense components are required to report both the costs shared with non-DOD parties at the time of cleanup and the costs that they recovered from non-DOD parties after cleanup. However, the components did not report the amounts for some recoveries because they did not know how much money the non-DOD parties had contributed to cleanups resulting from cost sharing arrangements. The Department’s guidance does not include directions for obtaining, calculating, or estimating these amounts; and the components do not have adequate procedures to gather this information. As a result, for 88 sites listed in the fiscal year 1999 report, the amounts spent by non- DOD parties under cost sharing arrangements were not shown. (See table 1.) Although it is required, none of the DOD components provided the reasons for deciding not to pursue cost recoveries. According to DOD officials, some reasons for not pursuing recoveries include circumstances where there is insufficient evidence that non-DOD parties caused the problems at the site, where the other responsible party is no longer in business, or where pursuit of the recovery would cost more than the expected amounts recovered. The pursuit of recovery actions is a complex and lengthy process, and decisions to pursue cost recovery at some locations may take a long time. The cost recovery data in the Department’s annual environmental cleanup report for fiscal year 1999 are not useful to the Congress or the Department for management or oversight because they are inaccurate, inconsistent, and incomplete. The lack of sufficient guidance resulted in the Department’s overstating reported cost recoveries by $250 million, inconsistent reporting among the Defense components, and the failure to include all recoveries in the cost recovery appendix of the report. These problems limit the ability of the Congress and the Department to determine the extent to which recoveries may offset environmental cleanup costs. To ensure that the Congress and the Department of Defense have accurate, consistent, and complete information on cost recovery efforts, we recommend that the Secretary of Defense direct the Deputy Under Secretary of Defense for Installations and Environment to modify existing guidance in areas where it is silent or unclear and provide specific guidance for (1) defining the types of cost sharing arrangements that should be reported, (2) calculating the costs of pursuing recovery, (3) reporting both cumulative and fiscal year data, and (4) capturing and reporting amounts spent by non-DOD parties under cost sharing arrangements. The guidance should include control procedures for ensuring that the data reported by the Department’s components are accurate, consistent, and complete; identify all responsible parties; and include reasons for not pursuing recoveries. In official oral comments on a draft of this report from the Office of the Deputy Under Secretary of Defense (Installations and Environment), the Department concurred with our recommendations and plans to develop more accurate, consistent, and complete information on cost recovery data. In September 2001, after our report was submitted to the Department for comments, DOD issued revised management guidance that cited a number of actions that address our recommendations. If effectively implemented, the guidance should improve overall reporting of cost recovery data. The Department also noted that it was unable to verify the numbers in our report because we had obtained data that were not included in the fiscal year 1999 annual report. As noted in our report, we visited or obtained data directly from selected sites in order to validate the annual report data and found the data to be inaccurate, inconsistent, and incomplete. Accordingly, the noted discrepancies are part of the basis for our recommendations. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the appropriate congressional committees; the Secretaries of Defense, the Army, the Air Force, and the Navy; the Director of the Defense Logistics Agency; and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please contact me on (202) 512-4412 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. To determine whether the Department of Defense’s reporting of cost sharing and recovery data was accurate, consistent, and complete, we examined the relevant sections of the Department’s annual reports to Congress for fiscal years 1998 (Appendix F) and 1999 (Appendix E) and documentation on the Department’s and components’ reporting criteria and other policies. We compared reported data with data from other sources, including, for example, comments in other sections of DOD’s annual reports, supporting documents from selected locations, and our previous reports. We selectively reviewed supporting information for 100 of the 130 sites listed in DOD’s cost recovery report for fiscal year 1999. We selected the sites because reported recoveries exceeded $1 million, because we had identified cost recovery at those sites during earlier work and/or because our prior work revealed potential problems with data for these sites. We discussed the data with headquarters officials at the Departments of Defense, the Army, the Navy, and the Air Force and with the Defense Logistics Agency. In addition, we visited and/or obtained information directly from the following 12 cleanup sites: Rocky Mountain Arsenal, Colorado. Twin Cities Army Ammunition Plant, Arden Hills, Minnesota. Former Weldon Spring Ordnance Works, Weldon Spring, Missouri. Former Fort Devens, Massachusetts. Air Force Materiel Command and Wright-Patterson Air Force Base, Ohio. Naval Air Station, Whidbey Island, Washington. Navy Facilities Engineering Command, Poulsbo, Washington. Defense Supply Centers, Richmond, Virginia, and Philadelphia, Pennsylvania. Army Corps of Engineers, Kansas City, Missouri, and Omaha, Nebraska, Districts. To identify indications of possible responsible parties or cost recovery agreements, we reviewed the “additional program information” columns in printed annual reports for several fiscal years, including fiscal years 1998 and 1999. We used the latest available cost data from these reports to determine which sites had past and/or estimated costs of $50,000, the threshold level for DOD’s cost recovery requirements, and determined whether they had been reported in the cost recovery appendixes in fiscal years 1998 and 1999. There were 55 comments in other parts of the reports for fiscal years 1998 and 1999 that indicated the presence of potential responsible parties or that cost recovery was being considered or pursued. We conducted our review from August 2000 to August 2001 in accordance with generally accepted government auditing standards. In addition to those above, Robert Ackley, Arturo Holguin, and Tony Padilla made key contributions to this report.

The cleanup of contaminated Department of Defense (DOD) sites could cost billions of dollars. Private contractors or lessees that may have contributed to such contamination may also be responsible for cleanup costs. DOD and other responsible parties either agree to a cost sharing arrangement with the responsible parties conducting the cleanup or DOD conducts the cleanup and attempts to recover the other parties' share after the cleanup. On the basis of a GAO study, DOD issued guidance requiring its components to identify, investigate, and pursue cost recoveries and to report on them in the Defense Environmental Restoration Program Annual Report to Congress. The data on cost recoveries from non-Defense parties included in the Department's report for fiscal year 1999 were inaccurate, inconsistent, and incomplete. As a result, neither Congress nor DOD can determine the extent of progress made in recovering costs or the extent to which cost recoveries may offset cleanup costs. Data on cost recoveries included throughout the annual report were also missing from the appendix. Thus, DOD may not know whether all potential cost recoveries have been actively pursued and reported.

Historically, tribes have been granted federal recognition through treaties, by the Congress, or through administrative decisions within the executive branch— principally by the Department of the Interior. In a 1977 report to the Congress, the American Indian Policy Review Commission criticized the criteria used by the department to assess whether a group should be recognized as a tribe. Specifically, the report stated that the criteria were not very clear and concluded that a large part of the department’s tribal recognition policy depended on which official responded to the group’s inquiries. Until the 1960s, the limited number of requests by groups to be federally recognized gave the department the flexibility to assess a group’s status on a case-by-case basis without formal guidelines. However, in response to an increase in the number of requests for federal recognition, the department determined that it needed a uniform and objective approach to evaluate these requests. In 1978, it established a regulatory process for recognizing tribes whose relationship with the United States had either lapsed or never been established—although tribes may seek recognition through other avenues, such as legislation or Department of the Interior administrative decisions unconnected to the regulatory process. In addition, not all tribes are eligible for the regulatory process. For example, tribes whose political relationship with the United States has been terminated by Congress, or tribes whose members are officially part of an already recognized tribe, are ineligible to be recognized through the regulatory process and must seek recognition through other avenues. The regulations lay out seven criteria that a group must meet before it can become a federally recognized tribe. Essentially, these criteria require the petitioner to show that it is a distinct community that has continuously existed as a political entity since a time when the federal government broadly acknowledged a political relationship with all Indian tribes. The burden of proof is on petitioners to provide documentation to satisfy the seven criteria. A technical staff within BIA, consisting of historians, anthropologists, and genealogists, reviews the submitted documentation and makes its recommendations on a proposed finding either for or against recognition. Staff recommendations are subject to review by the department’s Office of the Solicitor and senior officials within BIA. The Assistant Secretary-Indian Affairs makes the final decision regarding the proposed finding, which is then published in the Federal Register and a period of public comment, document submission, and response is allowed. The technical staff reviews the comments, documentation, and responses and makes recommendations on a final determination that are subject to the same levels of review as a proposed finding. The process culminates in a final determination by the Assistant Secretary who, depending on the nature of further evidence submitted, may or may not rule the same as the proposed finding. Petitioners and others may file requests for reconsideration with the Interior Board of Indian Appeals. While we found general agreement on the seven criteria that groups must meet to be granted recognition, there is great potential for disagreement when the question before the BIA is whether the level of available evidence is high enough to demonstrate that a petitioner meets the criteria. The need for clearer guidance on criteria and evidence used in recognition decisions became evident in a number of recent cases when the previous Assistant Secretary approved either proposed or final decisions to recognize tribes when the staff had recommended against recognition. Much of the current controversy surrounding the regulatory process stems from these cases. For example, concerns over what constitutes continuous existence have centered on the allowable gap in time during which there is limited or no evidence that a petitioner has met one or more of the criteria. In one case, the technical staff recommended that a petitioner not be recognized because there was a 70-year period for which there was no evidence that the petitioner satisfied the criteria for continuous existence as a distinct community exhibiting political authority. The technical staff concluded that a 70-year evidentiary gap was too long to support a finding of continuous existence. The staff based its conclusion on precedent established through previous decisions in which the absence of evidence for shorter periods of time had served as grounds for finding that petitioners did not meet these criteria. However, in this case, the previous Assistant Secretary determined that the gap was not critical and issued a proposed finding to recognize the petitioner, concluding that continuous existence could be presumed despite the lack of specific evidence for a 70- year period. The regulations state that lack of evidence is cause for denial but note that historical situations and inherent limitations in the availability of evidence must be considered. The regulations specifically decline to define a permissible interval during which a group could be presumed to have continued to exist if the group could demonstrate its existence before and after the interval. They further state that establishing a specific interval would be inappropriate because the significance of the interval must be considered in light of the character of the group, its history, and the nature of the available evidence. Finally, the regulations also note that experience has shown that historical evidence of tribal existence is often not available in clear, unambiguous packets relating to particular points in time. The department grappled with the issue of how much evidence is enough when it updated the regulations in 1994 and intentionally left key aspects of the criteria open to interpretation to accommodate the unique characteristics of individual petitions. Leaving key aspects open to interpretation increases the risk that the criteria may be applied inconsistently to different petitioners. To mitigate this risk, BIA uses precedents established in past decisions to provide guidance in interpreting key aspects in the criteria. However, the regulations and accompanying guidelines are silent regarding the role of precedent in making decisions or the circumstances that may cause deviation from precedent. Thus, petitioners, third parties, and future decisionmakers, who may want to consider precedents in past decisions, have difficulty understanding the basis for some decisions. Ultimately, BIA and the Assistant Secretary will still have to make difficult decisions about petitions when it is unclear whether a precedent applies or even exists. Because these circumstances require judgment on the part of the decisionmaker, public confidence in the BIA and the Assistant Secretary as key decisionmakers is extremely important. A lack of clear and transparent explanations for their decisions could cast doubt on the objectivity of the decisionmakers, making it difficult for parties on all sides to understand and accept decisions, regardless of the merit or direction of the decisions reached. Accordingly, in our November report, we recommend that the Secretary of the Interior direct the BIA to provide a clearer understanding of the basis used in recognition decisions by developing and using transparent guidelines that help interpret key aspects of the criteria and supporting evidence used in federal recognition decisions. The department, in commenting on a draft of this report, generally agreed with this recommendation. Because of limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties, the length of time needed to rule on petitions is substantial. The workload of the BIA staff assigned to evaluate recognition decisions has increased while resources have declined. There was a large influx of completed petitions ready to be reviewed in the mid-1990s. Of the 55 completed petitions that BIA has received since the inception of the regulatory process in 1978, 23 (or 42 percent) were submitted between 1993 and 1997 (see fig. 1). The chief of the branch responsible for evaluating petitions told us that, based solely on the historic rate at which BIA has issued final determinations, it could take 15 years to resolve all the currently completed petitions. In contrast, the regulations outline a process for evaluating a completed petition that should take about 2 years. Compounding the backlog of petitions awaiting evaluation is the increased burden of related administrative responsibilities that reduce the time available for BIA’s technical staff to evaluate petitions. Although they could not provide precise data, members of the staff told us that this burden has increased substantially over the years and estimate that they now spend up to 40 percent of their time fulfilling administrative responsibilities. In particular, there are substantial numbers of Freedom of Information Act (FOIA) requests related to petitions. Also, petitioners and third parties frequently file requests for reconsideration of recognition decisions that need to be reviewed by the Interior Board of Indian Appeals, requiring the staff to prepare the record and response to issues referred to the Board. Finally, the regulatory process has been subject to an increasing number of lawsuits from dissatisfied parties, filed by petitioners who have completed the process and been denied recognition, as well as current petitioners who are dissatisfied with the amount of time it is taking to process their petitions. Staff represents the vast majority of resources used by BIA to evaluate petitions and perform related administrative duties. Despite the increased workload faced by the BIA’s technical staff, the available staff resources to complete the workload have decreased. The number of BIA staff members assigned to evaluate petitions peaked in 1993 at 17. However, in the last 5 years, the number of staff members has averaged less than 11, a decrease of more than 35 percent. In addition to the resources not keeping pace with workload, the recognition process also lacks effective procedures for addressing the workload in a timely manner. Although the regulations establish timelines for processing petitions that, if met, would result in a final decision in approximately 2 years, these timelines are routinely extended, either because of BIA resource constraints or at the request of petitioners and third parties (upon showing good cause). As a result, only 12 of the 32 petitions that BIA has finished reviewing were completed within 2 years or less, and all but 2 of the 13 petitions currently under review have already been under review for more than 2 years. While BIA may extend timelines for many reasons, it has no mechanism that balances the need for a thorough review of a petition with the need to complete the decision process. The decision process lacks effective time frames that create a sense of urgency to offset the desire to consider all information from all interested parties in the process. BIA recently dropped one mechanism for creating a sense of urgency. In fiscal year 2000, BIA dropped its long-term goal of reducing the number of petitions actively being considered from its annual performance plan because the addition of new petitions would make this goal impossible to achieve. The BIA has not replaced it with another more realistic goal, such as reducing the number of petitions on ready status or reducing the average time needed to process a petition once it is placed on active status. As third parties become more active in the recognition process—for example, initiating inquiries and providing information—the procedures for responding to their increased interest have not kept pace. Third parties told us that they wanted more detailed information earlier in the process so they could fully understand a petition and effectively comment on its merits. However, there are no procedures for regularly providing third parties with more detailed information. For example, while third parties are allowed to comment on the merits of a petition prior to a proposed finding, there is no mechanism to provide any information to third parties prior to the proposed finding. In contrast, petitioners are provided an opportunity to respond to any substantive comment received prior to the proposed finding. As a result, third parties are making FOIA requests for information on petitions much earlier in the process and often more than once in an attempt to obtain the latest documentation submitted. Since BIA has no procedures for efficiently responding to FOIA requests, staff members hired as historians, genealogists, and anthropologists are pressed into service to copy the voluminous records needed to respond to FOIA requests. In light of these problems, we recommended in our November report that the Secretary of the Interior direct the BIA to develop a strategy that identifies how to improve the responsiveness of the process for federal recognition. Such a strategy should include a systematic assessment of the resources available and needed that leads to development of a budget commensurate with workload. The department also generally agreed with this recommendation. In conclusion, the BIA’s recognition process was never intended to be the only way groups could receive federal recognition. Nevertheless, it was intended to provide the Department of the Interior with an objective and uniform approach by establishing specific criteria and a process for evaluating groups seeking federal recognition. It is also the only avenue to federal recognition that has established criteria and a public process for determining whether groups meet the criteria. However, weaknesses in the process have created uncertainty about the basis for recognition decisions, calling into question the objectivity of the process. Additionally, the amount of time it takes to make those decisions continues to frustrate petitioners and third parties, who have a great deal at stake in resolving tribal recognition cases. Without improvements that focus on fixing these problems, parties involved in tribal recognition may look outside of the regulatory process to the Congress or courts to resolve recognition issues, preventing the process from achieving its potential to provide a more uniform approach to tribal recognition. The result could be that the resolution of tribal recognition cases will have less to do with the attributes and qualities of a group as an independent political entity deserving a government-to-government relationship with the United States, and more to do with the resources that petitioners and third parties can marshal to develop successful political and legal strategies. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information, please contact Barry Hill on (202) 512-3841. Individuals making key contributions to this testimony and the report on which it was based are Robert Crystal, Charles Egan, Mark Gaffigan, Jeffery Malcolm, and John Yakaitis.

In 1978, the Bureau of Indian Affairs (BIA) established a regulatory process for recognizing tribes. The process requires tribes that are petitioning for recognition to submit evidence that they have continuously existed as an Indian tribe since historic times. Recognition establishes a formal government-to-government relationship between the United States and a tribe. The quasi-sovereign status created by this relationship exempts some tribal lands from most state and local laws and regulations, including those that regulate gambling. GAO found that the basis for BIA's tribal recognition decisions is not always clear. Although petitioning tribes must meet set criteria to be granted recognition, no guidance exists to clearly explain how to interpret key aspects of the criteria. This lack of guidance creates controversy and uncertainty for all parties about the basis for decisions. The recognition process is also hampered by limited resources; a lack of time; and ineffective procedures for providing information to interested third parties, such as local municipalities and other Indian tribes. As a result, the number of completed petitions waiting to be considered is growing. BIA estimates that it may take up to 15 years before all currently completed petitions are resolved; the process for evaluating a petition was supposed to take about two years. This testimony summarizes a November report (GAO-02-49).

The purpose of the current redress system, which grew out of the Civil Service Reform Act of 1978 (CSRA) and related legal and regulatory decisions that have occurred over the past 16 years, is to uphold the merit system by ensuring that federal employees are protected against arbitrary agency actions and prohibited personnel practices, such as discrimination or retaliation for whistleblowing. While one of the purposes of CSRA was to streamline the previous redress system, the scheme that has emerged is far from simple. Today, four independent adjudicatory agencies can handle employee complaints or appeals: the Merit Systems Protection Board (MSPB), the Equal Employment Opportunity Commission (EEOC), the Office of Special Counsel (OSC), and the Federal Labor Relations Authority (FLRA). While these agencies’ boundaries may appear to have been neatly drawn, in practice the redress system forms a tangled scheme. To begin with, a given case may be brought before more than one of these agencies—a circumstance that adds time-consuming steps to the redress process and may result in the adjudicatory agencies reviewing each other’s decisions. Moreover, each of the adjudicatory agencies has its own procedures and its own body of case law. Each varies from the next in its authority to order corrective actions and enforce its decisions. Further, the law provides for additional review of the adjudicatory agencies’ decisions—or, in the case of discrimination claims, even de novotrials—in the federal courts. Beginning in the employing agency, proceeding through one or more of the adjudicatory bodies, and then carried to its conclusion in court, a single case can take years. Even the typical case can take a long time to resolve—especially if it involves a claim of discrimination. Among discrimination cases closed during fiscal year 1994 for which there was a hearing before an EEOC administrative judge and an appeal of an agency final decision to the Commission itself, the average time from the filing of the complaint with the employing agency to the Commission’s decision on the appeal was over 800 days. legal fees, and court costs. All these costs either go unreported or are impossible to clearly define and measure. Moreover, many of the real implications of this system cannot be measured in dollars. The redress system’s protracted processes and requirements can also divert federal managers from more productive activities and inhibit some of them from taking legitimate actions in response to performance or conduct problems. It is also important to observe that under this system, federal workers have substantially greater employment protections than do private sector employees. Federal employees file workplace discrimination complaints at roughly 6 times the per capita rate of private sector workers. And while some 47 percent of discrimination complaints in the private sector involve the most serious adverse action—termination—only 18 percent of discrimination complaints among federal workers are related to firings. The most frequently cited example of jurisdictional overlap in the redress system is the so-called “mixed case,” under which a career employee who has experienced an adverse action appealable to MSPB, and who feels that the action was based on discrimination, can essentially appeal to both MSPB and EEOC. The employee would first appeal to MSPB, with hearing results further appealable to MSPB’s three-member Board. If the appellant is still unsatisfied, he or she can then appeal MSPB’s decision to EEOC. If EEOC finds discrimination where MSPB did not, the two agencies try to reach an accommodation. If they cannot do so—an event that has occurred only three times in 16 years—a three-member Special Panel is convened to reach a determination. At this point, the employee who is still unsatisfied with the outcome can file a civil action in U.S. district court, where the case can begin again with a de novo trial. The proposed legislation would eliminate the mixed case scenario. This would appear to make good sense, especially in light of the record regarding mixed cases. First, few mixed cases coming before MSPB result in a finding of discrimination. In fiscal year 1994, for example, MSPB decided roughly 2,000 mixed case appeals. It found that discrimination had occurred in just eight. Second, when EEOC reviews MSPB’s decisions in mixed cases, it almost always agrees with them. Again during 1994, EEOC ruled on appellants’ appeals of MSPB’s findings of nondiscrimination in 200 cases. EEOC disagreed with MSPB’s findings in just three. In each instance, MSPB adopted EEOC’s determination. Under the mixed case scenario, an appellant can—at no additional risk to his or her case—have two agencies review the appeal rather than one. MSPB and EEOC rarely differ in their determinations, but an employee has little to lose in asking both agencies to review the issue. Eliminating the possibility of mixed cases would eliminate both the jurisdictional overlap and the inefficiency that accompanies it. When a private sector worker complains of discrimination to EEOC, EEOC investigates the complaint and, if it finds that it has merit, will argue the case on behalf of the complainant in U.S. district court. This treatment is less comprehensive than the treatment afforded executive branch federal workers. The fundamental difference is in EEOC’s role. First, under EEOC’s authority to mandate agency discrimination complaint procedures, the federal employee’s agency must investigate the employee’s assertion. Second, the complainant is entitled to have EEOC adjudicate the case. A federal employee who is unsatisfied with the outcome is still entitled to seek a trial in U.S. district court. The proposed legislation, which would bring discrimination complaint processes more in line with the private sector model, would fundamentally change EEOC’s role. Today, cases involving both an adverse action appealable to MSPB and a claim of discrimination become “mixed cases” in which MSPB’s determination can be opposed by EEOC, and even brought before the Special Panel at EEOC’s insistence. Under the proposed legislation, EEOC would not review MSPB decisions. Instead, it would have the authority to petition the Court of Appeals for the Federal Circuit to review MSPB decisions in which EEOC believed that MSPB misinterpreted EEO case law. EEOC’s role, then, would essentially shift from adjudicator to watchdog. Similarly, in cases involving only a claim of discrimination, EEOC’s role would also change. Today, EEOC mandates that agencies perform investigations of their employee’s discrimination claims, while EEOC itself adjudicates formal complaints. Under the proposed legislation, EEOC would no longer mandate agencies’ discrimination complaint procedures. EEOC would investigate complaints itself, and then determine if the cases had sufficient merit to prosecute before MSPB. EEOC’s role, therefore, would change from adjudicator to investigator and prosecutor. MSPB’s role would also change. For the first time, it would adjudicate discrimination complaints that were not necessarily associated with adverse actions. The redress rights of federal employees would also change dramatically. The most significant changes would involve complainants’ access to formal adjudication, both by an adjudicatory agency and in court. Today, no gatekeeper exists to determine which discrimination cases go to an adjudicatory agency. Under the proposed legislation, EEOC would become that gatekeeper, investigating and determining the merits of individual EEOC complaints and deciding whether to argue these cases before the new adjudicator of EEO matters, MSPB. Today, discrimination complainants who remain unsatisfied after exhausting their administrative redress opportunities at EEOC can initiate an entirely new case in U.S. district court. Under the proposed legislation, any administrative redress opportunities would have been exhausted at MSPB, with recourse only to the U.S. Court of Appeals for the Federal Circuit. That would mean a review in court of the administrative process, not a de novo trial on the merits of the case itself. The proposed legislation would give federal employee discrimination complainants the same opportunity as private-sector employees to take their case to U.S. district court. But it would deny them the right to first pursue formal adjudication within the federal redress apparatus, and then, if still dissatisfied, to start a new case from scratch. The intention of the proposed legislation would be to eliminate what is commonly called the “two bites of the apple.” One significant effect of these proposed changes might be to dampen the number of discrimination complaints reaching the formal adjudicative stage. In earlier testimony, we pointed out that one reason it takes so long to adjudicate discrimination cases is that there are so many of them. From fiscal years 1991 to 1994, for example, the number of discrimination complaints filed increased by 39 percent; the number of requests for a hearing before an EEOC administrative judge increased by about 86 percent; and the number of appeals to EEOC of agency final decisions increased by 42 percent. Meanwhile, the backlog of requests for EEOC hearings increased by 65 percent, and the inventory of appeals to EEOC of agency final decisions tripled. certainly a worthwhile goal. However, any major change in the roles of EEOC or MSPB—or in other aspects of the discrimination complaint process—will have broad implications and require careful examination. For example, changes in the adjudicatory responsibilities of EEOC and MSPB would require major organizational change in both agencies. Further, the staffing requirements and skill mix at both agencies would change with their new responsibilities; EEOC, for instance, might need more investigators and fewer administrative judges than it does today. In addition, a basic change in adjudicatory redress procedures would have repercussions in the individual federal agencies, which would likely need to develop new processes to handle discrimination complaints. Moreover, cases already in process would need to be accommodated; a transition period to ensure an orderly changeover from the old system to the new would need to be provided and carefully planned. All these issues would need Congress’s close attention if fundamental redress system reform were to be successful. One way of avoiding formal adjudicative procedures is through the use of alternative dispute resolution (ADR). Many private sector firms have adopted ADR as a means of avoiding the time and expense of employee litigation. A number of federal agencies have explored ADR as well, and for the similar purpose of avoiding the costly and time-consuming formalities of the employee redress system. At your request, Mr. Chairman, we have been examining the extent to which federal agencies have been using ADR to settle workplace disputes, as well as the variety of ADR methods they have tried. The particular approaches vary, but include the use of mediation, dispute resolution boards, and ombudsmen. The use of ADR methods was called for under CSRA and underscored by the Administrative Dispute Resolution Act of 1990, the Civil Rights Act of 1991, and regulatory changes made at EEOC. Based not only on the fact that Congress has endorsed ADR in the past, but also that individual agencies have taken ADR initiatives and that MSPB and EEOC have explored their own initiatives, it is clear that the need for finding effective ADR methods is widely recognized in government. Our preliminary study of government ADR efforts, however, indicates that ADR is not yet widely practiced and that the ADR programs in place are, by and large, in their early stages. Most of these involve mediation, particularly to resolve allegations of discrimination before formal complaints are filed. Because ADR programs generally have not been around very long, the results of these efforts are sketchy; however, some agencies claim that these programs have saved time and reduced costs. One example is the Walter Reed Army Medical Center’s Early Dispute Resolution Program, which provides mediation services. From fiscal year 1993 to fiscal year 1995, the number of discrimination complaints at the medical center dropped from 50 to 22—a decrease that Walter Reed officials attribute to the Early Dispute Resolution Program. Moreover, data from the medical center show that, since the program began in October 1994, 63 percent of the cases submitted for mediation have been resolved. Walter Reed officials said that the costs of investigating and adjudicating complaints have been lessened, as well as the amount of productive time lost on the part of complainants and others involved in the cases. This example is an encouraging one, and at your request, Mr. Chairman, we are continuing to study ADR usage in both private and public sector workplaces, to identify lessons that can be applied more widely in the federal government. Based on work we have done so far in the ADR area, we feel that support for ADR is justified. The strength of ADR, some agencies have told us, is in getting beyond charges and countercharges among the parties involved and getting at the underlying personal interests—many of which may have nothing to do with discrimination—that are often the real cause of conflicts in the workplace. But we would caution that, at this point, ADR is in its preliminary stages of development, that good data on its effectiveness are hard to come by, and that the factors necessary for its success have yet to be fully identified. The redress system for federal employees is an area with great promise for change—and not just for improving efficiency, saving money, and improving the timeliness of redress. We feel that effective improvements in the redress system would also improve the fairness and accessibility of the system to employees, and make it easier for managers to manage effectively. Of course, any sweeping change in the redress system would need to be closely examined to ensure that the legitimate rights of federal employees were still protected. Where the balance should be struck is a critical matter for Congress to decide. This concludes my prepared statement, Mr. Chairman. I would be pleased to take any questions that you or other Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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GAO discussed the implications of the Omnibus Civil Service Reform Act of 1996 on the redress system for federal employees. GAO noted that: (1) the proposed legislation would eliminate jurisdictional overlap between the Merit Systems Protection Board (MSPB) and the Equal Employment Opportunity Commission (EEOC); (2) EEOC would be in charge of investigating the merits of individual EEOC complaints and deciding whether to argue these complaints before MSPB; (3) MSPB would adjudicate discrimination complaints that are not associated with adverse actions; (4) the proposed legislation would give complainants' the opportunity to take their case before the U.S. district court, but it would deny them the right to pursue formal adjudication within the federal redress system; (5) the number of discrimination complaints reaching the formal adjudicative stage would be lessened; (6) changes in EEOC and MSPB adjudicatory responsibilities would require major organizational changes in both agencies; (7) basic changes in the adjudicatory redress system would have repercussions for individual federal agencies; (8) a transition period would be needed to ensure an orderly changeover from the old redress system to the new system; and (9) alternative dispute resolution is a good way to avoid the time and expense of employee litigation, but this procedure is in its preliminary stages of development.

While the 14 selected initiatives varied in terms of their purpose, sector, and partners involved, the boards and their partners cited common factors that facilitated and sustained collaboration. These were (1) a focus on urgent, common needs; (2) leadership; (3) the use of leveraged resources; (4) employer-responsive services; (5) minimizing administrative burden; and (6) results that motivated the partners to continue their collaboration. With regards to focusing on urgent, common needs, almost all of the collaborations grew out of efforts to address urgent workforce needs of multiple employers in a specific sector, such as health care, manufacturing, or agriculture, rather than focusing on individual employers (see table 1). The urgent needs ranged from a shortage of critical skills in health care and manufacturing to the threat of layoffs and business closures. In San Bernardino, California, for example, some companies were at risk of layoffs and closures because of declining sales and other conditions, unless they received services that included retraining for their workers. In one case, employers in Gainesville, Florida, joined with the board and others to tackle the need to create additional jobs by embarking on an initiative to develop entrepreneurial skills. According to those we interviewed, by focusing on common employer needs across a sector, the boards and their partners produced innovative labor force solutions that, in several cases, had evaded employers who were trying to address their needs individually. In several cases, employers cited the recruitment costs they incurred by competing against each other for the same workers. By working together to develop the local labor pool they needed, the employers were able to reduce recruitment costs in some cases. Boards also facilitated collaboration by securing leaders who had the authority or the ability, or both, to persuade others of the merits of a particular initiative, as well as leaders whose perceived neutrality could help build trust. Officials from many initiatives emphasized the importance of having the right leadership to launch and sustain the initiative. For example, in Northern Virginia, a community college president personally marshaled support from area hospital chief executive officers and local leaders to address common needs for health care workers. Another factor that facilitated collaboration was the use of leveraged resources. All of the boards and their partners we spoke with launched or sustained their initiatives by leveraging resources in addition to or in lieu of WIA funds. In some cases, partners were able to use initial support, such as discretionary grants, to attract additional resources. For example, in Golden, Colorado, the board leveraged a Labor discretionary grant of slightly more than $285,000 to generate an additional $441,000 from other partners. In addition to public funds, in all cases that we reviewed, employers demonstrated their support by contributing cash or in-kind contributions. In all cases, boards and their partners provided employer-responsive services to actively involve employers and keep them engaged in the collaborative process. Some boards and their partners employed staff with industry-specific knowledge to better understand and communicate with employers. In other initiatives, boards and partners gained employers’ confidence in the collaboration by tailoring services such as jobseeker assessment and screening services to address specific employers’ needs. For example, a sector-based center in Chicago, Illinois, worked closely with employers to review and validate employers’ own assessment tools, or develop new ones, and administer them on behalf of the employers, which saved employers time in the hiring process. Boards and their partners also strengthened collaborative ties with employers by making training services more relevant and useful to them. In some cases, employers provided direct input into training curricula. For example, in Wichita, Kansas, employers from the aviation industry worked closely with education partners to develop a training curriculum that met industry needs and integrated new research findings on composite materials. Another way that some initiatives met employers’ training needs was to provide instruction that led to industry-recognized credentials. For example, in San Bernardino, a training provider integrated an industry-recognized credential in metalworking into its training program to make it more relevant for employers. Boards also made efforts to minimize administrative burden for employers and other partners. In some cases, boards and their partners streamlined data collection or developed shared data systems to enhance efficiency. For example, in Cincinnati, Ohio, the partners developed a shared data system to more efficiently track participants, services received, and outcomes achieved across multiple workforce providers in the region. Finally, partners remained engaged in these collaborative efforts because they continued to produce a range of results for employers, jobseekers and workers, and the workforce system and other partners, such as education and training providers. For employers, the partnerships produced diverse results that generally addressed their need for critical skills in various ways. In some cases, employers said the initiatives helped reduce their recruitment and retention costs. For example, in Cincinnati, according to an independent study, employers who participated in the health care initiative realized about $4,900 in cost savings per worker hired. For jobseekers and workers, the partnerships produced results that mainly reflected job placement and skill attainment. For example, in Wichita, of the 1,195 workers who were trained in the use of composite materials in aircraft manufacturing, 1,008 had found jobs in this field. For the workforce system, the partnerships led to various results, such as increased participation by employers in the workforce system, greater efficiencies, and models of collaboration that could be replicated. Specifically, officials with several initiatives said they had generated repeat employer business or that the number and quality of employers’ job listings had increased, allowing the workforce system to better serve jobseekers. While these boards were successful in their efforts, they cited some challenges to collaboration that they needed to overcome. Some boards were challenged to develop comprehensive strategies to address diverse employer needs with WIA funds. WIA prioritizes funding for intensive services and training for low-income individuals when funding for adult employment and training activities is limited. The director of one board said that pursuing comprehensive strategies for an entire economic sector can be challenging, because WIA funds are typically used for lower-skilled workers, and employers in the region wanted to attract a mix of lower- and higher-skilled workers. To address this challenge, the director noted that the board used a combination of WIA and other funds to address employers’ needs for a range of workers. Additionally, some boards’ staff said that while their initiatives sought to meet employer needs for skill upgrades among their existing workers, WIA funds can be used to train current workers only in limited circumstances, and the boards used other funding sources to do so. Among the initiatives that served such workers, the most common funding sources were employer contributions and state funds. In addition, staff from most, but not all, boards also said that WIA performance measures do not directly reflect their efforts to engage employers. Many of these boards used their own measures to assess their services to employers, such as the number of new employers served each year, the hiring rate for jobseekers they refer to employers, the interview-to-hire ratio from initiative jobseeker referrals, the retention rate of initiative-referred hires, the number of businesses returning for services, and employer satisfaction. In order to support local collaborations like these, Labor has conducted webinars and issued guidance on pertinent topics, and has also collaborated with other federal agencies in efforts that could help support local collaboration. For example, Labor is working with the Department of Education and other federal agencies to identify existing industry- recognized credentials and relevant research projects, and has issued guidance to help boards increase credential attainment among workforce program participants. In addition, Labor has recently worked with Commerce and the Small Business Administration to fund a new discretionary $37 million grant program called the Jobs and Innovation Accelerator Challenge to encourage collaboration and leveraging funds. Specifically, this program encourages the development of industry clusters, which are networks of interconnected firms and supporting institutions that can help a region create jobs. A total of 16 federal agencies will provide technical resources to help leverage existing agency funding, including the 3 funding agencies listed above. While Labor has taken some steps to support local collaborations, it has not made information it has collected on effective practices for leveraging resources easily accessible, even though many of the boards we reviewed cited leveraging resources as a key to facilitating collaboration. For example, Labor maintains a website for sharing innovative state and local workforce practices called Workforce3One, which has some examples of leveraging funding at the local level. However, the website does not group these examples together in an easy to find location, as it does for other categories such as examples of innovative employer services or sector-based strategies. Moreover, although certain evaluations and other research reports have included information on leveraging resources,disseminated in one location. this information has not been compiled and In conclusion, at a time when the nation continues to face high unemployment, it is particularly important to consider ways to better connect the workforce investment system with employers to meet local labor market needs. The 14 local initiatives that we reviewed illustrate how workforce boards collaborated with partners to help employers meet their needs and yielded results: critical skill needs were met, individuals obtained or upgraded their skills, and the local system of workforce programs was reinvigorated by increased employer participation. Labor has taken several important steps that support local initiatives like the ones we reviewed through guidance and technical assistance, and through collaborative efforts with other federal agencies. However, while Labor has also collected relevant information on effective strategies that local boards and partners have used to leverage resources, it has not compiled this information or made it readily accessible. As the workforce system and its partners face increasingly constrained resources, it will be important for local boards to have at their disposal information on how boards have effectively leveraged funding sources. In our report, we recommended that Labor compile information on workforce boards that effectively leverage WIA funds with other funding sources and disseminate this information in a readily accessible manner. In its comments on our draft report, Labor agreed with our recommendation and noted its plans to implement it. This concludes my prepared statement. I would be happy to answer any questions that you or others members of the subcommittee may have. For further information regarding this testimony, please contact Andrew Sherrill (202-512-7215 or sherrilla@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include Laura Heald (Assistant Director), Chris Morehouse, Jessica Botsford, Jean McSween, and David Chrisinger. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses collaboration between workforce boards, employers, and others. As the United States continues to face high unemployment in the wake of the recent recession, federally funded workforce programs can play an important role in bridging gaps between the skills present in the workforce and the skills needed for available jobs. However, there is growing recognition that these programs need to better collaborate with employers to align services and training with employers’ needs. The Workforce Investment Act of 1998 (WIA) envisioned such collaboration by focusing on employers as well as jobseekers, establishing a “dual customer” approach. To create a single, comprehensive workforce investment system, WIA required that 16 programs administered by four federal agencies—the Departments of Labor (Labor), Education, Health and Human Services, and Housing and Urban Development—provide access to their services through local one-stop centers, where jobseekers, workers, and employers can find assistance at a single location. In addition, WIA sought to align federally funded workforce programs more closely with local labor market needs by establishing local workforce investment boards to develop policy and oversee service delivery for local areas within a state and required that local business representatives constitute the majority membership on these boards. Today, about 600 local workforce boards oversee the service delivery efforts of about 1,800 one-stop centers that provide access to all required programs. Despite the vision of collaboration between local employers and the workforce investment system, we and others have found that collaboration can be challenging. For example, in previous reports, we found that some employers have limited interaction with or knowledge of this system and that employers who do use the one-stop centers mainly do so to fill their needs for low-skilled workers. This testimony is based on our report, which was released yesterday, entitled Workforce Investment Act: Innovative Collaborations between Workforce Boards and Employers Helped Meet Local Needs. Workforce board officials and their partners in the 14 initiatives cited a range of factors that facilitated building innovative collaborations. Almost all of the collaborations grew out of efforts to address urgent workforce needs of multiple employers in a specific sector, rather than focusing on individual employers. The partners in these initiatives made extra effort to engage employers so they could tailor services such as jobseeker assessment, screening, and training to address specific employer needs. In all the initiatives, partners remained engaged in these collaborations because they continued to produce a wide range of reported results, such as an increased supply of skilled labor, job placements, reduced employer recruitment and turnover costs, and averted layoffs. While these boards were successful in their efforts, they cited some challenges to collaboration that they needed to overcome. Some boards were challenged to develop comprehensive strategies to address diverse employer needs with WIA funds. For example, some boards’ staff said that while their initiatives sought to meet employer needs for higher-skilled workers through skill upgrades, WIA funds can be used to train current workers only in limited circumstances, and the boards used other funding sources to do so. Staff from most, but not all, boards also said that WIA performance measures do not reflect their efforts to engage employers, and many boards used their own measures to assess their services to employers. Labor has taken various steps to support local collaborations, such as conducting webinars and issuing guidance on pertinent topics, and contributing to a new federal grant program to facilitate innovative regional collaborations. Yet, while many boards cited leveraging resources as a key to facilitating collaboration, Labor has not compiled pertinent information on effective practices for leveraging resources and made it easy to access.

Managed by DHS’s Customs and Border Protection (CBP), SBInet is to strengthen CBP’s ability to detect, identify, classify, track, and respond to illegal breaches at and between ports of entry. CBP’s SBI Program Office is responsible for managing key acquisition functions associated with SBInet, including tracking and overseeing the prime contractor. In September 2006, CBP awarded a 3-year contract to the Boeing Company for SBInet, with three additional 1-year options. As the prime contractor, Boeing is responsible for designing, producing, testing, deploying, and sustaining the system. In September 2009, CBP extended its contract with Boeing for the first option year. CBP is acquiring SBInet incrementally in a series of discrete units of capabilities, referred to as “blocks.” Each block is to deliver one or more system capabilities from a subset of the total system requirements. In August 2008, the DHS Acquisition Review Board decided to delay the initial deployment of Block 1 of SBInet so that fiscal year 2008 funding could be reallocated to complete physical infrastructure projects. In addition, the board directed the SBInet System Program Office (SPO) to deliver a range of program documentation, including an updated Test and Evaluation Master Plan (TEMP), detailed test plans, and a detailed schedule for deploying Block 1 to two initial sites in the Tucson Sector of the southwest border. This resulted in a revised timeline for deploying Block 1, first to the Tucson Border Patrol Station (TUS-1) in April 2009, and then to the Ajo Border Patrol Station (AJO-1) in June 2009. Together, these two deployments are to cover 53 miles of the 1,989-mile-long southern border. However, the SBI Executive Director told us in December 2009 that these and other SBInet scheduled milestones were being reevaluated. As of January 2010, the TUS-1 system is scheduled for government acceptance in September 2010, with AJO-1 acceptance in November 2010. However, this schedule has yet to be approved by CBP. Testing is essential to knowing whether the system meets defined requirements and performs as intended. Effective test management involves, among other things, developing well-defined test plans and procedures to guide test execution. It is intended to identify and resolve system quality and performance problems as early as possible in the system development life cycle. DHS has not effectively managed key aspects of SBInet testing, which has in turn increased the risk that the system will not perform as expected and will take longer and cost more than necessary. While the department’s testing approach appropriately consists of a series of progressively expansive test events, some of which have yet to be completed, test plans and test cases for recently executed test events were not defined in accordance with relevant guidance. For example, none of the plans for tests of system components addressed testing risks and mitigation strategies. Further, SBInet test procedures were generally not executed as written. Specifically, about 70 percent of the procedures for key test events were rewritten extemporaneously during execution because persons conducting the tests determined that the approved procedures were not sufficient or accurate. Moreover, changes to these procedures were not made according to a documented quality assurance process but were instead made based on an undocumented understanding that program officials said they established with the contractor. While some of these changes were relatively minor, others were significant, such as adding requirements or completely rewriting verification steps. The volume and nature of the changes made to the test procedures, in conjunction with the lack of a documented quality assurance process, increases the risk that system problems may not be discovered until later in the sequence of testing. This concern is underscored by a program office letter to the prime contractor stating that changes made to system qualification test procedures appeared to be designed to pass the test instead of being designed to qualify the system. These limitations are due, among other things, to a lack of detailed guidance in the TEMP, the program’s aggressive milestones, schedule, and ambiguities in requirements. Collectively, these limitations increase the likelihood that testing will not discover system issues or demonstrate the system’s ability to perform as intended. The number of new SBInet defects that have been discovered during testing has increased faster than the number that has been fixed. (See figure 1 for the trend in the number of open defects from March 2008 to July 2009.) As we previously reported such an upward trend is indicative of an immature system. Some of the defects found during testing have been significant, prompting the DHS Acquisition Review Board in February 2009 to postpone deployment of Block 1 capabilities to TUS-1 and AJO-1. These defects included the radar circuit breaker frequently tripping when the radar dish rotated beyond its intended limits, COP workstations crashing, and blurry camera images, among others. While program officials have characterized the defects and problems found during development and testing as not being “show stoppers,” they have nevertheless caused delays, extended testing, and required time and effort to fix. Moreover, the SPO and its contractor have continued to find problems that further impact the program’s schedule. For example, the radar problems mentioned previously were addressed by installing a workaround that included a remote ability to reactivate the circuit breaker via software, which alleviated the need to send maintenance workers out to the tower to manually reset the circuit. However, this workaround did not fully resolve the problem, and program officials said that root cause analysis continues on related radar power spikes and unintended acceleration of the radar dish that occasionally render the system inoperable. One factor that has contributed to the time and resources needed to resolve this radar problem, and potentially other problems, is the ability of the prime contractor to effectively determine root causes for defects. According to program officials, including the SBI Executive Director, the contractor’s initial efforts to isolate the cause of the radar problems were flawed and inadequate. Program officials added, however, that they have seen improvements in the contractor’s efforts to resolve technical issues. Along with defects revealed by system testing, Border Patrol operators participating in an April 2009 user assessment identified a number of concerns. During the assessment, operators compared the performance of Block 1 capabilities to those of existing technologies. While Border Patrol agents noted that Block 1 offered functionality above existing technologies, it was not adequate for optimal effectiveness in detecting items of interest along the border. Users also raised concerns about the accuracy of Block 1’s radar, the range of its cameras, and the quality of its video. Officials attributed some of the identified problems to users’ insufficient familiarity with Block 1; however, Border Patrol officials reported that the participating agents had experience with the existing technologies and had received 2 days of training prior to the assessment. The Border Patrol thus maintained that the concerns generated should be considered operationally relevant. Effectively managing identified defects requires a defined process for, among other things, assigning priorities to each defect and ensuring that more severe ones are given priority attention. However, the SPO does not have such a documented approach but instead relies on the prime contractor for doing so. Under this approach, defects were not consistently assigned priorities. Specifically, about 60 percent (or 801 of 1,333) of Block 1 defects identified from March 2008 to July 2009 were not assigned a priority. This is partly attributable to the SPO’s lack of a defined process for prioritizing and managing defects. Officials acknowledge this and stated that they intend to have the contractor prioritize all defects in advance of future test readiness reviews. Until defects are managed on a priority basis, the program office cannot fully understand Block 1’s maturity or its exposure to related risks, nor can it make informed decisions about allocating limited resources to address defects. The SPO does not have its own process for testing the relevance to SBInet of technologies that are maturing or otherwise available from industry or other government entities. Instead, it relies on DHS’s Science and Technology Directorate (S&T), whose mission is to provide technology solutions that assist DHS programs in achieving their missions. To leverage S&T, CBP signed a multiyear Interagency Agreement with the directorate in August 2007. According to this agreement, S&T is to research, develop, assess, test, and report on available and emerging technologies that could be incorporated into the SBInet system. To date, S&T has focused on potential technologies to fill known performance gaps or improve upon already-made technology choices, such as gaps in the radar system’s ability to distinguish true radar hits from false alarms. S&T officials told us that they interact with Department of Defense (DOD) components and research entities to identify DOD systems for SBInet to leverage. In this regard, SPO officials stated that the current SBInet system makes use of DOD technologies, such as common operating picture software and radar systems. Nevertheless, S&T officials added that defense-related technologies are not always a good fit with SBInet, due to operational differences. To improve the planning and execution of future test events and the resolution and disclosure of system problems, we are making the following four recommendations to DHS: ● Revise the SBInet Test and Evaluation Master Plan to include explicit criteria for assessing the quality of test documentation and for analyzing, prioritizing, and resolving defects. ● Ensure that test schedules, plans, cases, and procedures are adequately reviewed and approved consistent with the Test and Evaluation Master Plan. ● Ensure that sufficient time is provided for reviewing and approving test documentation prior to beginning a given test event. ● Triage the full inventory of unresolved problems, including identified user concerns, and periodically report the status of the highest priority defects to Customs and Border Protection and Department of Homeland Security leadership. In written comments on a draft of our report, DHS stated that the report was factually sound, and it agreed with our last three recommendations and agreed with all but one aspect of the first one. DHS also described actions under way or planned to address the recommendations. In closing, I would like to stress how integral effective testing and problem resolution are to successfully acquiring and deploying a large-scale, complex system, like SBInet Block 1. As such, it is important that each phase of Block 1 testing be managed with rigor and discipline. To do less increases the risk that a deployed version of the system will not perform as intended, and will ultimately require costly and time-consuming rework to fix problems found later rather than sooner. Compounding this risk is the unfavorable trend in the number of unresolved system problems, and the lack of visibility into the true magnitude of these problems’ severity. Given that major test events remain to be planned and conducted, which in turn are likely to identify additional system problems, it is important to correct these testing and problem resolution weaknesses. This concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittees may have. For questions about this statement, please contact Randolph C. Hite at (202) 512-3439 or hiter@gao.gov. Individuals making key contributions to this testimony include Deborah Davis, Assistant Director; Carl Barden, James Crimmer, Neil Doherty, Lauren Giroux, Nancy Glover, Dan Gordon, Lee McCracken, Sushmita Srikanth, and Jennifer Stavros-Turner. SBInet’s Commitment, Progress, and Acquisition Management. Our objectives are to determine the extent to which DHS has (1) defined the scope of its proposed system solution, (2) developed a reliable schedule for delivering this solution, (3) demonstrated the cost effectiveness of this solution, (4) acquired this solution in accordance with key life cycle management processes, and (5) addressed our recent recommendations. We plan to report our results in April 2010. SBInet’s Contractor Management and Oversight. Our objectives are to determine the extent to which DHS (1) has established and implemented effective controls for managing and overseeing the SBInet prime contractor and (2) is effectively monitoring the prime contractor's progress in meeting cost and schedule expectations. We plan to report our results during the summer of 2010. Security Border Initiative Financial Management Controls Over Contractor Oversight. Our objectives are to determine the extent to which DHS has (1) developed internal control procedures over SBInet contractor invoice processing and contractor compliance with selected key contract terms and conditions and (2) implemented internal control procedures to ensure payments to SBInet’s prime contractor are proper and in compliance with selected key contract terms and conditions. We plan to report our results during the summer of 2010. (310665) This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony is based on our report "Secure Border Initiative: DHS Needs to Address Testing and Performance Limitations That Place Key Technology Program at Risk." In September 2008, we reported to Congress that important aspects of SBInet were ambiguous and in a continuous state of flux, making it unclear and uncertain what technology capabilities were to be delivered when. In addition, the program did not have an approved integrated master schedule to guide the program's execution, and key milestones continued to slip. This schedule-related risk was exacerbated by the continuous change in and the absence of a clear definition of the approach used to define, develop, acquire, test, and deploy SBInet. Furthermore, different levels of SBInet requirements were not properly aligned, and all requirements had not been properly defined and validated. Also, the program office had not tested the individual system components to be deployed to initial locations, even though the contractor had initiated integration testing of these components with other system components and subsystems, and its test management strategy did not contain, among other things, a clear definition of testing roles and responsibilities; or sufficient detail to effectively guide planning for specific test events, such as milestones and metrics. Accordingly, we made recommendations to address these weaknesses which DHS largely agreed to implement. In light of SBInet's important mission, high cost, and risks, you asked us to conduct a series of four SBInet reviews. This statement and report being released today provide the results for the first of these reviews. Specifically, they address (1) the extent to which SBInet testing has been effectively managed, including identifying the types of tests performed and whether they were well planned and executed; (2) what the results of testing show; and (3) what processes are being used to test and incorporate maturing technologies into SBInet. SBInet testing has not been adequately managed, as illustrated by poorly defined test plans and numerous and extensive last-minute changes to test procedures. Further, testing that has been performed identified a growing number of system performance and quality problems--a trend that is not indicative of a maturing system that is ready for deployment anytime soon. Further, while some of these problems have been significant, the collective magnitude of the problems is not clear because they have not been prioritized, user reactions to the system continue to raise concerns, and key test events remain to be conducted. Collectively, these limitations increase the risk that the system will ultimately not perform as expected and will take longer and cost more than necessary to implement. For DHS to increase its chances of delivering a version of SBInet for operational use, we are recommending that DHS improve the planning and execution of future test events and the resolution and disclosure of system problems. DHS agreed with our recommendations.

The Military Health Services System (MHSS), with an annual cost of over $15 billion, has the dual mission of providing medical care to the military forces during war or conflict and to military dependents and retirees. The MHSS consists of over 90 deployable combat hospitals that are solely devoted to the wartime mission. In addition, over 600 medical treatment facilities, such as medical centers, community hospitals, and clinics, are available worldwide to care for wartime casualties, but also provide peacetime care to active duty dependents and retirees. The system employs over 184,000 military personnel and civilians with an additional 91,000 medical personnel in the National Guard and Selected Reserves. In the post-Cold War era, personnel downsizing and constrained budgets focused attention on DOD’s need to determine the appropriate size and mix of its medical force. In 1991, the Congress required DOD to reassess its medical personnel requirements based on a post-Cold War scenario. Specifically, section 733 of the National Defense Authorization Act for Fiscal Years 1992 and 1993 (P. L. 102-190, December 5, 1991) required, among other things, that DOD determine the size and composition of the military medical system needed to support U.S. forces during a war or other conflict and identify ways of improving the cost-effectiveness of medical care delivered during peacetime. In April 1994, DOD completed the required study, known as the “733 study.” Although the study included all types of medical personnel, it used physicians to illustrate key points. It estimated that about 50 percent of the 12,600 active duty physicians projected for fiscal year 1999 were needed to treat casualties emanating from two nearly simultaneous major regional conflicts (MRC). When reserve forces were included, the study showed that the 19,100 physicians projected for fiscal year 1999 could be reduced by 24 percent. In March 1995, we testified that the 733 study results were credible and that its methodology was reasonable. However, we noted that the study’s results differed from the war plans prepared by the commanders in chief (CINC) for the two anticipated conflicts, due mainly to different warfighting and casualty assumptions. Following the 733 study, each service used its own model to determine wartime medical personnel requirements. Using these models, the services estimated that their wartime medical personnel requirements were almost as much as those projected for fiscal year 1999—offsetting most of the reductions suggested in the 733 study. Over the past several years, the services have maintained essentially the same number of active duty physicians, even though active duty end strengths have dropped considerably. The Navy developed a model known as the Total Health Care Support Readiness Requirement to correct what it viewed as inaccuracies in the 733 study. The Air Force also developed a model patterned closely after the Navy’s. In their models, the Navy and the Air Force used the medical personnel levels from the 733 study as their wartime baseline and then identified adjustments which, in their view, were needed to more accurately represent personnel required to treat combat casualties and to maintain operational readiness and training. Using these models, the Navy and the Air Force, in the summer of 1995, identified wartime active duty medical personnel requirements that supported 99 percent and 86 percent, respectively, of their fiscal year 1999 projections. The Army also developed a model called Total Army Medical Department Personnel Structure Model (TAPSM) to determine medical personnel required to meet the medical demands of the two-MRC strategy. TAPSM differed from the Navy’s and the Air Force’s models in that the Army continued using its Total Army Analysis (TAA) process to estimate the baseline wartime requirements, whereas the Navy and the Air Force used the 733 estimates as their baseline. Building on the baseline obtained from TAA, the Army used TAPSM to determine additional medical personnel needed for medical readiness, such as rotation and training. In the summer of 1995, the Army’s process identified wartime active duty medical personnel requirements that were 104 percent of the Army’s fiscal year 1999 projections. Major differences between the results of the service models and the 733 study occurred because the services made different assumptions about the personnel needed for medical readiness. These readiness requirements are intended to ensure that, at any point in time, DOD has enough personnel to care for deployed forces. Specifically, these readiness-related requirements support continuous training of medical personnel and a medical cadre in the United States that can replace or relieve deployed personnel as needed. While the 733 study made some provision for such requirements, the services’ estimates assume that a much higher number of medical personnel are needed for such training and rotation. The services’ estimates of wartime requirements support a medical force projection that does not decrease nearly as much as the active duty force. Responding to changes in the national military strategy, DOD projects that by 1999 the active duty force will be reduced by one-third from the 1987 levels. At the same time, the services are projecting reductions of 16 percent in total active duty medical personnel and 4 percent in active duty physicians. The services’ modeling techniques for estimating medical personnel requirements appear reasonable. While we found some differences between the models, each determined requirements for similar categories of personnel. However, the models’ results depend largely on the values of the input data and assumptions. We assessed the services’ modeling techniques by comparing the attributes of each model to the methodology used in the 733 study, which we had previously concluded was reasonable. We found that the services’ modeling techniques were consistent with the 733 study in that they used (1) current defense planning guidance for two MRCs, (2) DOD-approved policies for evacuating casualties from the theater, and (3) casualty projections. Also like the 733 study, the services’ techniques included active duty and reserve personnel working in hospital and nonhospital functions, those working in graduate medical education programs, and those needed for rotation to overseas installations. However, as described previously, the services assumed more medical personnel would be needed for training and rotation associated with medical readiness. These assumptions, not the modeling techniques, accounted for a major difference between the results of the 733 study and the services’ models. The 733 study concluded that about 50 percent of the active duty physicians projected for fiscal year 1999 were not needed to meet wartime medical readiness requirements, while the services’ models supported a need for 96 percent of the fiscal year 1999 active duty physicians. DOD’s current study of wartime medical personnel requirements, when completed, will present another analysis to compare with the services’ modeling techniques. This analysis could reveal methodological or other differences not currently identified. In the services’ medical personnel requirements processes, the demand for care emanating from the two-MRC strategy is translated into the number of hospital beds required. This demand is based on the number of anticipated casualties without regard to whether the beds will be staffed by active duty or reserve component medical personnel. The allocation between active and reserve components is made by analyzing when casualties are projected to occur during the conflicts and comparing that requirement to information on how soon active and reserve medical units can arrive in the theater. If high numbers of casualties in a theater are anticipated to occur early in a conflict, more active duty medical personnel will likely be required to provide medical care because active duty medical units generally can deploy more quickly than reserve units. Conversely, if high numbers of casualties do not occur until later in the conflict, the need for active duty medical personnel diminishes and more requirements can be met by reserve forces. DOD’s current study of medical requirements will examine the appropriateness of the mix between active duty and reserve medical forces. The outcome of this study will have important ramifications for sizing the medical components of each service and the number of medical personnel to remain on active duty status. If, for example, the study assumes that medical forces will be needed sooner than assumed in the 733 study, most, if not all, of the reductions in active duty medical personnel estimated in the original study could be nullified. On the other hand, if medical forces are assumed to deploy later, more reductions in active duty medical personnel could be made. DOD is currently updating its 733 study using a process intended to replace the individual service models for determining wartime medical personnel requirements. The update was directed by the Deputy Secretary of Defense, in August 1995, to respond to the continuing debate over the estimates for wartime medical personnel. The update is being led by the Director of DOD’s Office of Program Analysis and Evaluation, which also conducted the original 733 study, under the general direction of a steering group of representatives from several offices. The update will result in a new estimate of wartime medical demands derived from updated planning scenarios and force deployment projections. In an effort to arrive at one set of DOD requirements, the 733 update working groups have been attempting to reach agreement on the underlying assumptions with the key parties within DOD. However, the March 1996 completion has been delayed because of disagreements over some assumptions, such as the population-at-risk and casualty rates. DOD officials have not provided a firm date for completing the study, but they believe they are making progress in reaching agreement on input assumptions. They also believe such an agreement will establish a unified process for determining DOD-wide wartime medical demands. After the wartime demand is established, the 733 update is expected to use a model to estimate medical personnel needed to meet the demand. DOD officials believe that, in the future, this model—the DOD Medical Sizing Model—will be used to determine total wartime medical personnel levels. According to DOD officials, if agreement is reached on the model and the assumptions to be used, wartime medical requirements will no longer be determined by the individual service models. We reviewed documents, reports, and legislation relevant to military medical staffing trends; each service’s medical staffing model; the DOD Medical Sizing Model; and the 733 update study. We interviewed officials from the Office of the Assistant Secretary of Defense for Health Affairs; DOD’s Office of Program Analysis and Evaluation; the Joint Staff; the Offices of the Surgeons General of the Army, the Navy, and the Air Force; the Office of Reserve Affairs; and the U.S. Army Concepts Analysis Agency in the Washington, D.C., area. We also interviewed officials from the U.S. Central Command, Tampa, Florida; the U.S. Transportation Command, Scott Air Force Base, Illinois; and the Army Medical Command, San Antonio, Texas. In assessing the reasonableness of the services’ modeling techniques, we compared the attributes of each model with the 733 study. We obtained information from each service on the model formats, the underlying assumptions, and the types and sources of information used in developing the models. We met with the service representatives responsible for developing and using the models to gain an understanding of how each model worked. We did not attempt an in-depth validation of the accuracy of each model, rather, we reviewed the models to see if their methodologies were generally consistent with the 733 study. We initially concentrated on looking at how each model developed the active duty medical personnel requirements from the total wartime bed requirements. We also compared the services’ modeling techniques with each other. We intended to compare each service’s input values (rates) for such factors as wounded-in-action, conflict intensities, conflict durations, and disease and non-battle injuries with similar rates depicted in the CINC war plans and with the updated casualty rates being developed subsequent to the 733 study. However, before we started this phase, DOD decided to develop, as part of the 733 update, a single DOD-wide model for determining medical staffing requirements. Since the update is still ongoing, we are at this time unable to fully assess the reasonableness of the data inputs and assumptions, the appropriateness of the active/reserve component split, and the degree to which DOD integrates the medical requirements of the three services. We conducted our review from June 1995 to June 1996 in accordance with generally accepted government auditing standards. In oral comments, DOD fully concurred with this report’s findings and conclusions. We are sending copies of this report to other interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant, U.S. Marine Corps; and the Director, Office of Management and Budget. We will also send copies to others on request. If you or your staff have any questions about this report, please call me on (202) 512-5140. Major contributors to this report are listed in appendix I. Jeffrey A. Kans Cary B. Russell The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a legislative requirement, GAO studied the reasonableness of the models each military service uses to determine appropriate wartime medical personnel force levels, focusing on the models' results, their methodologies, and their inclusion of active duty and reserve medical personnel. GAO found that: (1) in 1995, each service used its own model to determine wartime medical personnel requirements instead of adopting the results of the Department of Defense's (DOD) "733 study," which, among other things, sought to determine the size and composition of the military medical system needed to support U.S. forces during a war or other conflict; (2) taken together, the services' models offset nearly all of the reductions estimated in the 733 study, supporting instead, a need for about 96 percent of the active duty physicians projected for fiscal year (FY) 1999; (3) much of this difference resulted because the services assumed that significantly more people were needed for training and maintaining personnel to relieve deployed medical forces; (4) given these results, DOD has not planned significant reductions in future medical forces; (5) by comparison, the overall DOD active duty end strengths are expected to decline by twice the rate of decline in medical forces from FY 1987 to FY 1999; (6) the modeling techniques the services used to determine medical requirements appear reasonable; (7) however, the results of the models depend largely on the values of the input data and assumptions used; (8) although their techniques differed in some ways, the services appropriately considered factors, such as current defense planning guidance, DOD policies for evacuating patients from the theater, and casualty projections; (9) the service models also included requirements for both active duty and reserve medical personnel; (10) at the time of GAO's review, the services had done more detailed analyses of the active duty requirements than the reserve portion; (11) given the dichotomy between the results of the service models and the 733 study, in August 1995, the Deputy Secretary of Defense directed that the 733 study be updated and improved; (12) this ongoing study is intended to form the basis for a single DOD position on wartime medical demands and associated personnel; (13) as such, it is to resolve differences in the key assumptions that drive medical force requirements; (14) while the study was to be completed by March 1996, DOD has encountered difficulty in reaching agreement over some assumptions, such as the population-at-risk and casualty rates, and thus, the study has been delayed; and (15) the 733 update is using a unified DOD sizing model, which will supplant individual service models.

Within DOD, the commitment to make significant investments in developing a new product typically takes place at a decision review known as Milestone B, which authorizes military service officials to enter the engineering and manufacturing development phase of the DOD acquisition process, select a development contractor, and sign a development contract. The process of identifying and understanding requirements typically begins when a sponsor, usually a military service, submits an Initial Capabilities Document that identifies the existence of a capability gap, the operational risks associated with the gap, and a recommended solution or preferred set of solutions for filling the gap. Potential solutions are then assessed in an Analysis of Alternatives prior to the start of the technology maturation and risk reduction phase of DOD’s acquisition process. According to DOD guidance, an Analysis of Alternatives assesses the costs and benefits of potential materiel solutions that could fill the capability gaps documented in an Initial Capabilities Document and supports a decision on the most cost effective solution. Operational requirements for that preferred solution are then defined in a draft Capability Development Document that goes through several stages of military service- and DOD-level review and validation. Our work on product-development best practices has found that clearly understood and stable program requirements are critical to establishing a sound, executable business case for any product development program. Figure 1 shows the phases of DOD’s acquisition process. In a March 2016 report, we found that after completing a review of its airborne intelligence, surveillance, and reconnaissance (ISR) portfolio, OSD directed the Navy in January 2016 to focus on developing and fielding an unmanned Carrier Based Aerial Refueling System, which represented a significant shift in requirements. The program was subsequently designated the MQ-25. Previously the Navy had been largely focused on developing and fielding a system that could provide ISR and air-to ground strike capabilities, with the potential to add aerial refueling capability in the future. That system, referred to as the Unmanned Carrier Launched Airborne Surveillance and Strike (UCLASS) system was to have the potential to operate in highly contested environments. Under the MQ-25 program, the Navy is now focused on developing and fielding an unmanned tanker capable of operating from the carrier, in a permissive environment, to refuel other naval aircraft and provide only limited ISR capability. The overall system is expected to extend the range of the carrier air wing’s mission effectiveness and increase the number of F/A-18E/Fs available for strike fighter missions, among other things. The MQ-25 system will consist of three segments: an aircraft segment; a control system and connectivity segment (CS&C); and an aircraft carrier segment (see figure 2). The aircraft segment is to develop a carrier- suitable unmanned vehicle and associated support systems. The CS&C segment is to interface with existing command and control systems, and the tasking, processing, exploitation, and dissemination system. The aircraft carrier segment is to make modifications to upgrade the existing carrier infrastructure to support unmanned aircraft systems. These three segments will be managed and integrated by the Navy’s Unmanned Carrier Aviation program office, acting as a Lead Systems Integrator. Between fiscal years 2017 and 2022, the Navy has budgeted almost $2.5 billion to continue development of the MQ-25 carrier and control segments and to begin development of the aircraft segment. Over that period, the annual funding requirements for the overall MQ-25 system will increase from $89.0 million in 2017 to $554.6 million in 2022 (see figure 3). In the first quarter of fiscal year 2018, the Navy plans to request MQ-25 aircraft proposals from four competing contractors. Then, in the summer of 2018, the Navy expects to hold a Milestone B review to assess whether the Navy is ready to enter the engineering and manufacturing development phase of the acquisition process for the aircraft segment and downselect to one of the four contractors. In July 2017, the Joint Requirements Oversight Council (JROC) validated system requirements for the MQ-25. The Navy has two primary requirements, known as key performance parameters. Those requirements are: (1) carrier suitability and (2) air refueling. Carrier suitability is defined by the Navy as the ability of the aircraft to effectively operate on and from all current and planned aircraft carriers and to integrate into carrier air wing operations. Air refueling indicates the ability of the aircraft to be equipped as a sea-based tanker to refuel other carrier-based aircraft—a mission currently performed by Navy’s F/A- 18E/F Super Hornets. The MQ-25 requirements have evolved intermittently over the past 16 years instead of following the more sequential processes described in DOD requirements and acquisition guidance. The MQ-25 requirements are not traced back to a single, standalone Initial Capabilities Document (ICD). Instead they address capability gaps identified in two different such documents that were developed more than 4 years apart. Over time, the Navy conducted various analyses, each focused on different aspects of those capability gaps. Our assessment of the content of the Navy’s underlying documentation and analyses, when taken together, is that they provide a basis for the current set of MQ-25 requirements. Figure 4 illustrates the iterative evolution of the MQ-25 requirements. As noted in the figure, after receiving direction from OSD in January 2016 to pursue a carrier based airborne tanking system, the Navy began the process of defining more specific MQ-25 aircraft requirements and reducing technology and design risks. In September and October 2016, the Navy awarded cost-plus-fixed-fee contracts to each of the four competing contractors to conduct risk reduction activities, including concept refinement and requirements trade analysis. The total combined value of the contracts, including options, is approximately $250 million. The Navy expects the contractors to provide concepts for an unmanned aircraft that could meet the tanking requirements of the F/A-18E/F in the mid-2020s, while also providing some ISR capabilities. Our comparison of the Navy’s final requirements document—the Carrier Based Unmanned Aircraft System Capability Development Document— with earlier draft versions found that the Navy reduced the total number of key performance parameters from seven to two—carrier suitability and air refueling—and made adjustments to both. The Navy refined the carrier suitability requirement to focus more clearly on the MQ-25’s basic ability to operate on and from the aircraft carrier. For air refueling, the Navy adjusted the mission focus and the required refueling capacity at a specific distance from the ship. Our work in product-development best practices has found that as detailed requirements are identified, decision makers can make informed trades between the requirements and available resources, potentially achieving a match and establishing a sound basis for a program business case before entering the product development phase of the defense acquisition system. The Navy’s MQ-25 acquisition strategy, approved by Navy leadership in April 2017, reflects key aspects of an evolutionary, knowledge-based acquisition approach. While the Navy is still developing, refining, and finalizing most of the acquisition documentation that will make up its program business case, our review of its acquisition strategy and other available documentation showed that they reflect key aspects of a knowledge-based approach and generally align with what we have found to be product-development best practices: Using open systems standards and an evolutionary approach: The Navy is planning to use open systems standards and an evolutionary development approach to develop, fly, and deploy the MQ-25 over time. The Navy expects to provide primarily aerial refueling and ISR capabilities first, while using open systems standards to support incremental capability upgrades in the future like adding the capability to receive fuel, weapons and improving radars. In July 2013, we concluded that the adoption of open systems standards in defense acquisitions can provide significant cost and schedule savings. In addition, we have previously reported that adopting a more evolutionary, incremental approach can enable the capture of design and manufacturing knowledge and increase the likelihood of success in providing timely and affordable capabilities. Using knowledge-based criteria to assess progress and inform key decisions: The Navy has established knowledge-based criteria for seven key points during MQ-25 aircraft development. Those points include the development contract award, the system design review, the low-rate production contract award, and the start of initial operational testing. At each point, the Navy plans to assess program progress against the established criteria and provide briefings to key leadership stakeholders before moving into the next phase of development. If implemented, this knowledge-based approach would align with best practices that we identified in our body of work related to product-development. Specifically, we have found that achieving positive program outcomes requires the use of a knowledge-based approach to product development that demonstrates high levels of knowledge attained at key junctures. Constraining development schedule: According to the Navy’s acquisition strategy, the MQ-25 aircraft is expected to take 6 to 8 years from the start of product development (i.e., Milestone B) to the fielding of an initial operational capability. Based on our work in product development best practices, constraining the development phase of a program to 5 or 6 years is preferred because, among other things, it aligns with DOD’s budget planning process and fosters the negotiation of trade-offs in requirements and technologies. Limiting technology risk: The Navy expects to significantly reduce technology risk during development by mandating that technologies, or subsystems, for the MQ-25 aircraft must be demonstrated in a relevant environment to be included in the design. If a technology is identified that does not meet this criteria, the Navy plans to push that technology into the future and include it only when it reaches the specified level of maturity. Federal statute and product development best practices illustrate the critical importance of demonstrating high levels of technology maturity prior to entering the product development phase of the defense acquisition system. As we reported in March 2017, failure to fully mature technologies prior to developing the system design can lead to redesign and cost and schedule growth if later discoveries during development lead to revisions. Limiting design risk: While the Navy does not plan to hold a MQ-25 system level preliminary design review prior to the start of development, as best practices recommend, it is tailoring its previous UCLASS aircraft requirements which may allow the contractors to leverage the preliminary design knowledge gained under that program. In addition, the Navy is leveraging knowledge gained under the four recent risk reduction contracts, as well as various levels of prototyping done by each of the contractors and the Navy. Our work in product-development best practices emphasizes the importance of gaining early design knowledge to reduce design risk before beginning a product development. In June 2017, we reported that prototyping helped programs better understand design requirements, the feasibility of proposed solutions, and cost—key elements of a program business case. Developing an independent cost estimate: Cost analysts within the Cost Analysis and Program Evaluation office of the Office of the Secretary of Defense are in the process of developing an independent cost estimate for the MQ-25 aircraft. Federal statute, DOD acquisition guidance, and product-development best practices illustrate the importance of having an independent cost estimate to inform the business case for a new product development program. Cost Analysis and Program Evaluation officials explained that they had not yet completed their estimate, but they plan to have it done in time to support the Navy’s MQ-25 Milestone B review in the summer 2018. Given the early focus on defining requirements and reducing risk prior to the start of product development, the Navy plans to award a fixed-price incentive, firm target contract for MQ-25 aircraft development. This type of contract is designed to provide a profit incentive for the contractor to control costs. It specifies target cost, target profit, and ceiling price amounts, with the latter being the maximum amount that may be paid to the contractor. The Navy plans to issue a request for proposals to the four competing contractors in October 2017 and award the contract to one of those four contractors the following year. With the Milestone B review scheduled in the summer of 2018, the ultimate success of the MQ- 25 program largely depends on the Navy’s ability to present an executable business case and then effectively implement its planned approach. We are not making recommendations in this report. We provided DOD with a copy of this report and they returned technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense and the Secretary of the Navy. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or sullivanm@gao.gov. GAO staff who made key contributions to this report are listed in the appendix. In addition to the contact named above, key contributors to this report were Travis Masters, Assistant Director; Marvin E. Bonner; Laura Greifner; Kristine Hassinger; and Roxanna Sun.

The Navy expects to invest almost $2.5 billion through fiscal year 2022 in the development of an unmanned aerial refueling system referred to as the MQ-25 . The MQ-25 is the result of a restructure of the former Unmanned Carrier-Launched Airborne Surveillance and Strike system. The program is expected to deliver an unmanned aircraft system that operates from aircraft carriers and provides aerial refueling to other Navy aircraft and intelligence, surveillance, and reconnaissance capabilities. The Navy plans to release a request for proposals for air system development by October 2017 and award a development contract one year later. A House Armed Services Committee report on a bill for the National Defense Authorization Act for Fiscal Year 2017 contained a provision for GAO to review the status of the MQ-25 program. This report assesses the extent to which the MQ-25's acquisition strategy is (1) rooted in validated requirements and (2) structured to follow a knowledge-based acquisition process. To do this work, GAO reviewed the Navy's requirements documentation, acquisition strategy, and other relevant documents and compared them with acquisition statutes, Department of Defense acquisition policy, and previous GAO reports and best practices. GAO also discussed the MQ-25 requirements and acquisition strategy with the Navy program office and other cognizant officials. The MQ-25 requirements have been validated by DOD's Joint Requirements Oversight Council. The Navy has identified two primary requirements: carrier suitability, which means the ability to operate on and from the Navy's aircraft carriers; and air refueling, which is the ability to provide fuel to other carrier-based assets while in flight. While the MQ-25 system is also expected to possess intelligence, surveillance and reconnaissance capabilities; those capabilities are not considered primary requirements. According to the program's acquisition strategy, the MQ-25 system will consist of three segments: the Air segment; a control and connectivity segment, which will interface with existing command and control systems; and an aircraft carrier segment, which will make modifications to upgrade existing carrier infrastructure. These three segments will be managed and integrated by the Navy's Unmanned Carrier Aviation program office, acting as a Lead Systems Integrator (see figure below). The Navy has established a knowledge-based approach for acquiring the MQ-25 aircraft. For example, the Navy plans to take an incremental approach to develop and evolve the MQ-25 over time. Further, the Navy expects to use knowledge-based criteria to assess progress at key decision points during development, and to use only technologies with high levels of maturity. With the Milestone B review scheduled in the summer of 2018—signaling the beginning of development—the ultimate success of the MQ-25 program depends heavily on the Navy's ability to present an executable business case and then effectively implement its planned approach. GAO is not making recommendations. DOD's technical comments are incorporated in this report.

Our March 2015 report found that FCC has made progress implementing reform efforts contained in the Order. In particular, FCC has implemented eight reforms, including the one-subscription-per-household rule, uniform eligibility criteria, non-usage requirements, payments based on actual claims, and the audit requirements. Furthermore, FCC eliminated Link-up on non-Tribal lands and support for toll limitation service, and the National Lifeline Accountability Database (NLAD) is operational in 46 states and the District of Columbia. In May 2015, FCC reported the results of the broadband pilot program. However, FCC has not fully implemented three reform efforts: Flat-rate reimbursement: To simplify administration of the Lifeline program, FCC established a uniform, interim flat rate of $9.25 per month for non-Tribal subscribers. FCC sought comment on the interim rate, but has not issued a final rule with a permanent reimbursement rate. Initial eligibility verification and annual recertification procedures: To reduce the number of ineligible consumers receiving program benefits, the Order required that Lifeline providers verify an applicant’s eligibility at enrollment and annually through recertification; these requirements have gone into effect. In addition, to reduce the burden on consumers and Lifeline providers, the Order called for an automated means for determining Lifeline eligibility by the end of 2013. FCC has not met this timeframe or revised any timeframes for how or when this automated means would be available. Performance goals and measures: FCC established three outcome- based goals: (1) to ensure the availability of voice service for low- income Americans, (2) to ensure the availability of broadband for low- income Americans, and (3) to minimize the Universal Service Fund contribution burden on consumers and businesses. FCC identified performance measures it will use to evaluate progress towards these goals, but it has not yet fully defined these measures. FCC officials noted they are working on defining them using the Census Bureau’s American Community Survey data, which were made available in late 2014. In our March 2015 report, we found that FCC has not evaluated the effectiveness of the Lifeline program, which could hinder its ability to efficiently achieve program goals. Once adopted, performance measures can help FCC track the Lifeline Program’s progress toward its goals. However, performance measures alone will not fully explain the contribution of the Lifeline program toward reaching program goals, because performance measurement does not assess what would have occurred in the absence of the program. According to FCC, Lifeline has been instrumental in narrowing the penetration gap (the percentage of households with telephone service) between low-income and non-low- income households. In particular, FCC noted that since the inception of Lifeline, the gap between telephone penetration rates for low-income and non-low-income households has narrowed from about 12 percent in 1984 to 4 percent in 2011. Although FCC attributes the penetration rate improvement to Lifeline, several factors could play a role. For example, changes to income levels and prices have increased the affordability of telephone service, and technological improvements, such as mobility of service, have increased the value of telephone service to households. FCC officials stated that the structure of the program has made it difficult for the commission to determine causal connections between the program and the penetration rate. However, FCC officials noted that two academic studies have assessed the program. These studies suggest that household demand for telephone service—even among low-income households—is relatively insensitive to changes in the price of the service and household income. This suggests that many low-income households would choose to subscribe to telephone service in the absence of the Lifeline subsidy. For example, one study found that many households would choose to subscribe to telephone service in the absence of the subsidy. As a result, we concluded that the Lifeline program, as currently structured, may be a rather inefficient and costly mechanism to increase telephone subscribership among low-income households, because several households receive the subsidy for every additional household that subscribes to telephone service due to the subsidy. FCC officials said that this view does not take into account the Lifeline program’s purpose of making telephone service affordable for low-income households. However, in the Order, the commission did not adopt affordability as one of the program’s performance goals; rather, it adopted availability of voice service for low-income Americans, measured by the penetration rate. These research findings raise questions about the design of Lifeline and FCC’s actions to expand the pool of eligible households. We estimated approximately 40 million households were eligible for Lifeline in 2012. The Order established minimum Lifeline eligibility, including households with incomes at or below 135 percent of the federal poverty guidelines, which expanded eligibility in some states that had more limited eligibility criteria. Further, FCC proposed adding qualifying programs, such as the Special Supplemental Nutrition Program of Women, Infants, and Children (WIC) program, and increasing income eligibility to 150 percent of the federal poverty guidelines. We estimated that over 2 million additional households would have been eligible for Lifeline in 2012 if WIC were included in the list of qualifying programs. These proposed changes would add households with higher income levels than current Lifeline- eligible households. Given that the telephone penetration rate increases with income, making additional households with higher incomes eligible for Lifeline may increase telephone penetration somewhat, but at a high cost, since a majority of these households likely already purchase telephone service. This raises questions about expanding eligibility and the balance between Lifeline’s goals of increasing penetration rates while minimizing the burden on consumers and businesses that fund the program. In our March 2015 report, we recommended that FCC conduct a program evaluation to determine the extent to which the Lifeline program is efficiently and effectively reaching its performance goals of ensuring the availability of voice service for low-income Americans while minimizing program costs. Our prior work on federal agencies that have used program evaluation for decision making has shown that it can allow agencies to understand whether a program is addressing the problem it is intended to and assess the value or effectiveness of the program. The results of an evaluation could be used to clarify FCC’s and others’ understanding of how the Lifeline program does or does not address the problem of interest—subscription to telephone service among low-income households—and to assist FCC in making changes to improve program design or management. We believe that without such an evaluation, it will be difficult for FCC to determine whether the Lifeline program is increasing the telephone penetration rate among low-income customers, while minimizing the burden on those that contribute to the Universal Service Fund. FCC agreed that it should evaluate the extent to which the Lifeline program is efficiently and effectively reaching its performance goals and said that it would address our recommendation. In our March 2015 report we also found that FCC’s broadband pilot program includes 14 projects that test an array of options and will generate information that FCC intends to use to decide whether and how to incorporate broadband into Lifeline. According to FCC, the pilot projects are expected to provide high-quality data on how the Lifeline program could be structured to promote broadband adoption by low- income households. FCC noted the diversity of the 14 projects, which differed by geography (e.g., urban, rural, Tribal), types of technologies (e.g., fixed and mobile), and discount amounts. FCC selected projects that were designed as field experiments and offered randomized variation to consumers. For example, one project we reviewed offered customers three different discount levels and a choice of four different broadband speeds, thereby testing 12 different program options. FCC officials said they aimed to test and reveal “causal effects” of variables. FCC officials said this approach would, for example, test how effective a $20 monthly subsidy was relative to a $10 subsidy, which would help FCC evaluate the relative costs and benefits of different subsidy amounts. However, FCC officials noted that there was a lack of FCC or third party oversight of the program, meaning that pilot projects themselves were largely responsible for administration of the program. We found that FCC did not conduct a needs assessment or develop implementation and evaluation plans for the broadband pilot program, as we had previously recommended in October 2010. At that time, we recommended that if FCC conducted a broadband pilot program, it should conduct a needs assessment and develop implementation and evaluation plans, which we noted are critical elements for the proper development of pilot programs. We noted that a needs assessment could provide information on the telecommunications needs of low-income households and the most cost-effective means to meet those needs. Although FCC did not publish a needs assessment, FCC officials said they consulted with stakeholders and reviewed research on low-income broadband adoption when designing the program. Well-developed plans for implementing and evaluating pilot programs include key features such as clear and measurable objectives, clearly articulated methodology, benchmarks to assess success, and detailed evaluation time frames. FCC officials said they did not set out with an evaluation plan because they did not want to prejudge the results by setting benchmark targets ahead of time. FCC officials said they are optimistic that the information gathered from the pilot projects will enable FCC to make recommendations regarding how broadband could be incorporated into Lifeline. FCC officials noted that the pilot program is one of many factors it will consider when deciding whether and how to incorporate broadband into Lifeline, and to the extent the pilot program had flaws, those flaws will be taken into consideration. Since our report was issued, FCC released a report on the broadband pilot program, which discusses data collected from the 14 projects. We also found that the broadband pilot projects experienced challenges, such as lower-than-anticipated enrollment. The pilot projects enrolled approximately 12 percent of the 74,000 low-income consumers that FCC indicated would receive broadband through the pilot projects. According to FCC’s May 2015 report, 8,634 consumers received service for any period of time during the pilot. FCC officials said that the 74,000 consumers was an estimate and was not a reliable number and should not be interpreted as a program goal. FCC officials said they calculated this figure by adding together the enrollment estimates provided by projects, which varied in their methodologies. For example, some projects estimated serving all eligible consumers, while others predicted that only a fraction of those eligible would enroll. FCC officials told us they do not view the pilot’s low enrollment as a problem, as the program sought variation. Due to the low enrollment in the pilot program, a small fraction of the total money FCC authorized for the program was spent. Specifically, FCC officials reported that about $1.7 million of the $13.8 million authorized was disbursed to projects. FCC and pilot project officials we spoke to noted that a preliminary finding from the pilot was that service offered at deeply discounted or free monthly rates had high participation. FCC officials and representatives from the four pilot projects we interviewed noted that broadband offered at no or the lowest cost per month resulted in the highest participation. For example, we found one project that offered service at no monthly cost to the consumer reported 100 percent of its 709 enrollees were enrolled in plans with no monthly cost as of October 2013, with no customers enrolled in its plans with a $20 monthly fee. This information raises questions about the feasibility of including broadband service in the Lifeline program, since on a nationwide scale, offering broadband service at no monthly cost would require significant resources and may conflict with FCC’s goal to minimize the contribution burden. Chairman Wicker, Ranking Member Schatz, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Michael Clements, Acting Director, Physical Infrastructure Issues at (202) 512-2834 or clementsm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Antoine Clark and Emily Larson. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Through FCC's Lifeline program, companies provide discounts to eligible low-income households for telephone service. Lifeline supports these companies through the Universal Service Fund (USF); in 2014, Lifeline’s disbursements totaled approximately $1.7 billion. Companies generally pass their USF contribution obligation on to their customers, typically in the form of a line item on their telephone bills. In 2012, FCC adopted reforms to improve the program’s internal controls and to explore adding broadband through a pilot program. This testimony summarizes the findings from GAO’s March 2015 report (GAO-15-335) and provides information on (1) the status of Lifeline reform efforts, (2) the extent to which FCC has evaluated the effectiveness of the program, and (3) how FCC plans to evaluate the broadband pilot program. GAO reviewed FCC orders and other relevant documentation; analyzed 2008-2012 Census Bureau data; and interviewed FCC officials, officials at four pilot projects selected based on features such as technology, and officials from 12 Lifeline providers and four states selected based on factors such as disbursements and participation. The Federal Communications Commission (FCC) has made progress implementing reforms to the Lifeline Program (Lifeline), which reduces the cost of telephone service for eligible low-income households. In 2012, FCC adopted a Reform Order with 11 key reforms that aimed to increase accountability and strengthen internal controls, among other things. FCC has made progress implementing eight of the reforms, including the National Lifeline Accountability Database, which provides a mechanism to verify an applicant’s identify and whether the applicant already receives Lifeline service. FCC has partially implemented three of the reforms. For example, FCC established performance goals for the program, but it has not fully defined performance measures. FCC has not evaluated the extent to which Lifeline is efficiently and effectively reaching its performance goals—to ensure the availability of voice service for low-income Americans and minimize the burden on consumers and businesses that fund the program. FCC attributes improvements in the level of low-income households' subscribing to telephone service over the past 30 years to Lifeline, but other factors, such as lower prices, may play a role. FCC officials stated that Lifeline's structure makes evaluation difficult, but referred GAO to two academic studies that have evaluated the program. These studies suggest that household demand for telephone service—even among low-income households—is relatively insensitive to changes in the price of service and household income; therefore, several households may receive the Lifeline subsidy for every additional household that subscribes to telephone service due to the subsidy. GAO has found that program evaluation can help agencies understand whether a program is addressing an intended problem. Without a program evaluation, FCC does not know whether Lifeline is effectively ensuring the availability of telephone service for low-income households while minimizing program costs. The usefulness of the broadband pilot program may be limited by FCC’s lack of an evaluation plan and other challenges. The pilot program included 14 projects to test an array of options and provide data on how Lifeline could be structured to promote broadband. Although GAO recommended in 2010 that FCC develop a needs assessment and implementation and evaluation plans for the pilot, FCC did not do so. A needs assessment, for example, could provide information on the telecommunications needs of low-income households and the most cost-effective means to meet those needs. In addition, the 14 projects enrolled about 12 percent of the 74,000 customers anticipated. FCC officials said they do not view the pilot’s low enrollment as a problem, as the program sought variation. FCC officials noted that the pilot program is one of many factors it will consider when deciding whether and how to incorporate broadband into Lifeline, and to the extent the pilot program had flaws, those flaws will be taken into consideration. In May 2015, FCC released a report which discusses data collected from the pilots. In its March 2015 report, GAO recommended that FCC conduct a program evaluation to determine the extent to which the Lifeline program is efficiently and effectively reaching its performance goals. FCC agreed that it should evaluate the extent to which the program is efficiently and effectively reaching its performance goals and said that it will address GAO's recommendation.

BPCA was enacted on January 4, 2002, to encourage drug sponsors to conduct pediatric drug studies. BPCA allows FDA to grant drug sponsors pediatric exclusivity—6 months of additional market exclusivity—in exchange for conducting and reporting on pediatric drug studies. BPCA also provides mechanisms for pediatric drug studies that drug sponsors decline to conduct. The process for initiating pediatric drug studies under BPCA formally begins when FDA issues a written request to a drug sponsor to conduct pediatric drug studies for a particular drug. When a drug sponsor accepts the written request and completes the pediatric drug studies, it submits to FDA reports describing the studies and the study results. BPCA specifies that FDA generally has 90 days to review the study reports to determine whether the pediatric drug studies met the conditions outlined in the written request. If FDA determines that the pediatric drug studies conducted by the drug sponsor were responsive to the written request, it will grant a drug pediatric exclusivity regardless of the study findings. Figure 1 illustrates the process under BPCA. BPCA includes two provisions to further the study of drugs when drug sponsors decline written requests. FDA cannot extend pediatric exclusivity in response to written requests for any drugs for which the drug sponsors declined to conduct the requested pediatric drug studies. First, when drug sponsors decline written requests for studies of on-patent drugs, BPCA provides for FDA to refer the study of those drugs to FNIH for funding. FNIH, which is a nonprofit corporation and independent of NIH, supports the mission of NIH and advances research by linking private sector donors and partners to NIH programs. FNIH and NIH collaborate to fund certain projects. As of December 2005, FNIH had raised $4.13 million to fund pediatric drug studies under BPCA. Second, to further the study of off-patent drugs, NIH—in consultation with FDA and experts in pediatric research—develops a list of drugs, including off-patent drugs, which the agency believes need to be studied in children. NIH lists these drugs annually in the Federal Register. FDA may issue written requests for those drugs on the list that it determines to be most in need of study. If the drug sponsor declines or fails to respond to the written request, NIH can contract for, and fund, the pediatric drug studies. Drug sponsors generally decline written requests for off-patent drugs because the financial incentives are considerably limited. Pediatric drug studies often reveal new information about the safety or effectiveness of a drug, which could indicate the need for a change to its labeling. Generally, the labeling includes important information for health care providers, including proper uses of the drug, proper dosing, and possible adverse events that could result from taking the drug. FDA may determine that the drug is not approved for use by children, which would then be reflected in any labeling changes. The agency refers to its review to determine the need for labeling changes as its scientific review. BPCA specifies that study results submitted as a supplemental new drug application—which, according to FDA officials, most are—are subject to FDA’s general performance goals for a scientific review, which in this case is 180 days. FDA’s process for reviewing study results submitted under BPCA for consideration of labeling changes is not unique to BPCA. FDA’s action can include approving the application, determining that the application is approvable, or determining that the application is not approvable. A determination that an application is approvable may require that drug sponsors conduct additional analyses. Each time FDA takes action on the application, a review cycle is ended. Most of the on-patent drugs for which FDA requested pediatric drug studies under BPCA were being studied, but no studies have resulted when the requests were declined by drug sponsors. From January 2002 through December 2005, FDA issued 214 written requests for on-patent drugs to be studied under BPCA, and drug sponsors agreed to conduct pediatric drug studies for 173 (81 percent) of those. The remaining 41 written requests were declined. Of these 41, FDA referred 9 written requests to FNIH for funding and FNIH had not funded any of those studies as of December 2005. Drug sponsors completed pediatric drug studies for 59 of the 173 accepted written requests—studies for the remaining 114 written requests were ongoing—and FDA made pediatric exclusivity determinations for 55 of those through December 2005. Of those 55 written requests, 52 (95 percent) resulted in FDA granting pediatric exclusivity. Figure 2 shows the status of written requests issued under BPCA for the study of on- patent drugs, from January 2002 through December 2005. Drugs were studied under BPCA for their safety and effectiveness in treating children for a wide range of diseases, including some that are common—such as asthma and allergies— and serious or life threatening in children—such as cancer, HIV, and hypertension. We found that the drugs studied under BPCA represented more than 17 broad categories of disease. The category that had the most drugs studied under BPCA was cancer, with 28 drugs. In addition, there were 26 drugs studied for neurological and psychiatric disorders, 19 for endocrine and metabolic disorders, 18 related to cardiovascular disease—including drugs related to hypertension—and 17 related to viral infections. Analyses of two national databases shows that about half of the 10 most frequently prescribed drugs for children were studied under BPCA. Through December 2005, drug sponsors declined written requests issued under BPCA for 41 on-patent drugs. FDA referred 9 of these 41 written requests (22 percent) to FNIH for funding, but as of December 2005, FNIH had not funded the study of any of these drugs. NIH has estimated that the cost of studying these 9 drugs would exceed $43 million, but FNIH had raised only $4.13 million for pediatric drug studies under BPCA. Few off-patent drugs identified by NIH as in need of study for pediatric use have been studied. By 2005, NIH had identified 40 off-patent drugs that it believed should be studied for pediatric use. Through 2005, FDA issued written requests for 16 of these drugs. All but 1 of these written requests were declined by drug sponsors. NIH funded pediatric drug studies for 7 of the remaining 15 written requests declined by drug sponsors through December 2005. NIH provided several reasons why it has not pursued the study of some off-patent drugs that drug sponsors declined to study. Concerns about the incidence of the disease that the drugs were developed to treat, the feasibility of study design, drug safety, and changes in the drugs’ patent status have caused the agency to reconsider the merit of studying some of the drugs it identified as important for study in children. For example, in one case NIH issued a request for proposals to study a drug but received no responses. In other cases, NIH is awaiting consultation with pediatric experts to determine the potential for study. Further, NIH has not received appropriations specifically for funding pediatric drug studies under BPCA. NIH anticipates spending an estimated $52.5 million for pediatric drug studies associated with 7 written requests issued by FDA from January 2002 through December 2005. Most drugs that have been granted pediatric exclusivity under BPCA— about 87 percent—have had labeling changes as a result of the pediatric drug studies conducted under BPCA. Pediatric drug studies conducted under BPCA showed that children may have been exposed to ineffective drugs, ineffective dosing, overdosing, or side effects that were previously unknown. However, the process for reviewing study results and completing labeling changes was sometimes lengthy, particularly when FDA required additional information from drug sponsors to support the changes. Of the 52 drugs studied and granted pediatric exclusivity under BPCA from January 2002 through December 2005, 45 (about 87 percent) had labeling changes as a result of the pediatric drug studies. In addition, 3 other drugs had labeling changes prior to FDA making a decision on granting pediatric exclusivity. FDA officials said that the pediatric drug studies conducted up to that time provided important safety information that should be reflected in the labeling without waiting until the full study results were submitted or pediatric exclusivity determined. Pediatric drug studies conducted under BPCA have shown that the way that some drugs were being administered to children potentially exposed them to an ineffective therapy, ineffective dosing, overdosing, or previously unknown side effects—including some that affect growth and development. The labeling for these drugs was changed to reflect these study results. For example, studies of the drug Sumatriptan, which is used to treat migraines, showed that there was no benefit derived from this drug when it was used in children. There were also certain serious adverse events associated with its use in children, such as vision loss and stroke, so the labeling was changed to reflect that the drug is not recommended for children under 18 years old. Other drugs have had labeling changes indicating that the drugs may be used safely and effectively by children in certain dosages or forms. Typically, this resulted in the drug labeling being changed to indicate that the drug was approved for use by children younger than those for whom it had previously been approved. In other cases, the changes reflected a new formulation of a drug, such as a syrup that was developed for pediatric use, or new directions for preparing the drug for pediatric use were identified in the pediatric drug studies conducted under BPCA. Although FDA generally completed its first scientific review of study results—including consideration of labeling changes—within its 180-day goal, the process for completing the review, including obtaining sufficient information to support and approve labeling changes, sometimes took longer. For the 45 drugs granted pediatric exclusivity that had labeling changes, it took an average of almost 9 months after study results were first submitted to FDA for the sponsor to submit and the agency to review all of the information it required and approve labeling changes. For 13 drugs (about 29 percent), FDA completed this scientific review process and approved labeling changes within 180 days. It took from 181 to 187 days for the scientific review process to be completed and labeling changes to be approved for 14 drugs (about 31 percent). For the remaining 18 drugs (about 40 percent), FDA took from 238 to 1,055 days to complete the scientific review process and approve labeling changes. For 7 of those drugs, it took more than a year to complete the scientific review process and approve labeling changes. While the first scientific reviews were generally completed within 180 days, it took 238 days or more for 18 drugs. For those 18 drugs, FDA determined that it needed additional information from the drug sponsors in order to be able to approve the drugs for pediatric use. This often required that the drug sponsor conduct additional analyses or pediatric drug studies. FDA officials said they could not approve any changes to drug labeling until the drug sponsor provided this information. Drug sponsors sometimes took as long as 1 year to gather the additional necessary data and respond to FDA’s request. Mr. Chairman, this concludes my prepared remarks. I would be pleased to respond to any questions that you or other members of the Subcommittee may have. For further information regarding this testimony, please contact Marcia Crosse at (202) 512-7119 or crossem@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Thomas Conahan, Assistant Director; Carolyn Feis Korman; and Cathleen Hamann made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

About two-thirds of drugs that are prescribed for children have not been studied and labeled for pediatric use, placing children at risk of being exposed to ineffective treatment or incorrect dosing. The Best Pharmaceuticals for Children Act (BPCA), enacted in 2002, encourages the manufacturers, or sponsors, of drugs that still have marketing exclusivity--that is, are on-patent--to conduct pediatric drug studies, as requested by the Food and Drug Administration (FDA). If they do so, FDA may extend for 6 months the period during which no equivalent generic drugs can be marketed. This is referred to as pediatric exclusivity. BPCA also provides for the study of off-patent drugs. GAO was asked to testify on the study and labeling of drugs for pediatric use under BPCA. This testimony is based on Pediatric Drug Research: Studies Conducted under Best Pharmaceuticals for Children Act, GAO-07-557 (Mar. 22, 2007). GAO assessed (1) the extent to which pediatric drug studies were being conducted under BPCA for on-patent drugs, (2) the extent to which pediatric drug studies were being conducted under BPCA for off-patent drugs, and (3) the impact of BPCA on the labeling of drugs for pediatric use and the process by which the labeling was changed. GAO examined data about the drugs for which FDA requested studies under BPCA from 2002 through 2005 and interviewed relevant federal officials. Drug sponsors have initiated pediatric drug studies for most of the on-patent drugs for which FDA has requested such studies under BPCA, but no drugs were studied when sponsors declined these requests. Sponsors agreed to 173 of the 214 written requests for pediatric studies of on-patent drugs. In cases where drug sponsors decline to study the drugs, BPCA provides for FDA to refer the study of these drugs to the Foundation for the National Institutes of Health (FNIH), a nonprofit corporation. FNIH had not funded studies for any of the nine drugs that FDA referred as of December 2005. Few off-patent drugs identified by the National Institutes of Health (NIH) that need to be studied for pediatric use have been studied. BPCA provides for NIH to fund studies when drug sponsors decline written requests for off-patent drugs. While 40 such off-patent drugs were identified by 2005, FDA had issued written requests for 16. One written request was accepted by the drug sponsor. Of the remaining 15, NIH funded studies for 7 through December 2005. Most drugs granted pediatric exclusivity under BPCA (about 87 percent) had labeling changes--often because the pediatric drug studies found that children may have been exposed to ineffective drugs, ineffective dosing, overdosing, or previously unknown side effects. However, the process for approving labeling changes was often lengthy. For 18 drugs that required labeling changes (about 40 percent), it took from 238 to 1,055 days for information to be reviewed and labeling changes to be approved.

The transportation of large amounts of spent fuel to an interim storage or permanent disposal location is inherently complex and the planning and implementation may take decades to accomplish. The actual time it would take depends on a number of variables including distance, quantity of material, mode of transport, rate of shipment, level of security, and coordination with state and local authorities. For example, according to officials from a state regional organization we interviewed and the Blue Ribbon Commission report, transportation planning could take about 10 years, in part because routes have to be agreed upon, first responders have to be trained, and critical elements of infrastructure and equipment need to be designed and deployed. As we previously reported, DOE does not have clear legislative authority for either consolidated interim storage or for permanent disposal at a site other than Yucca Mountain and, as such, there is no facility to which DOE can transport commercial spent nuclear fuel. Without clear authority, DOE cannot make the transportation decisions necessary regarding commercial spent nuclear fuel. Specifically, as we reported in November 2009, August 2012, and October 2014, provisions in NWPA that authorize DOE to arrange for consolidated interim storage have either expired or are unusable because they are tied to milestones in the development of a repository at Yucca Mountain that have not been met. DOE officials and experts from industry we interviewed in October 2014 agreed with this assessment, and noted that the federal government’s ability to site, license, construct, and operate a consolidated interim storage facility not tied to Yucca Mountain depends on new legislative authority. For permanent disposal, we reported in April 2011, that developing a permanent repository other than Yucca Mountain will restart the likely time-consuming and costly process of siting, licensing, and developing such a repository and it is uncertain what legislative changes might be needed, if any, to develop a new repository. In part, this is because NWPA, as amended, directs DOE to terminate all site specific activities at candidate sites other than Yucca Mountain. GAO-11-229. As we reported in October 2014, experts identified technical challenges that could affect the transportation of spent nuclear fuel and these challenges could be resolved with sufficient time. The three technical challenges the experts described were (1) uncertainties related to the safety of high burn-up fuel during transportation,nuclear fuel to be transported under current guidelines, and (3) sufficiency of the infrastructure to support transportation. (2) readiness of spent Before 2000, most fuel discharged from U.S. nuclear power reactors was considered low burn-up fuel and, consequently, the industry has had decades of experience in transporting it. As we reported in October 2014, various reports from DOE, NRC, the Electric Power Research Institute, and the Nuclear Waste Technical Review Board, as well as experts we interviewed, agreed that uncertainties exist on how long high burn-up fuel—used for about 10 years— can be stored and then still be safely transported. Once sealed in a canister, the spent fuel cannot easily be inspected for degradation. We reported that as of August 2014, NRC officials told us that they had analyzed laboratory tests and models developed to predict the changes that occur during dry storage and that the results indicate that high burn-up fuel will maintain its integrity over very long periods of storage and can eventually be safely transported. However, NRC officials said they continued to seek additional evidence to confirm their position that long-term storage and transportation of high burn-up spent nuclear fuel is safe. We also reported that DOE and the Electric Power Research Institute have planned a joint development project to test high burn-up fuel for degradation, but those results will not be available for about a decade. As we reported in October 2014,storage of spent nuclear fuel allow higher temperatures and external radiation levels than guidelines for transporting the fuel, some of the spent nuclear fuel in dry storage may not be readily transportable. For example, according to the Nuclear Energy Institute, as of 2012, only about 30 percent of spent nuclear fuel currently in dry storage is cool because the guidelines governing dry enough to be directly transportable. For safety reasons, transportation guidelines do not allow the surface of the transportation cask to exceed 185 degrees Fahrenheit (85 degrees Celsius) because the spent nuclear fuel is traveling through public areas using the nation’s public transportation infrastructure. NRC’s guidelines on spent nuclear fuel dry storage limit spent nuclear fuel temperature to 752 degrees Fahrenheit (400 degrees Celsius). Scientists from the national laboratories and experts from industry we interviewed suggested three options for dealing with the stored spent nuclear fuel so it can be transported safely: (1) leave it to cool and decay at reactor sites, (2) repackage it into smaller canisters that reduce the heat and radiation, or (3) develop a special transportation “overpack” to safely transport the spent nuclear fuel in the current large canisters. However, as we reported in August 2012, spent nuclear fuel stored at reactor sites that had already shut down and dismantled their infrastructure may pose an even more difficult challenge because the ability to repackage the fuel or develop similar solutions may be limited without building additional infrastructure, such as a special transfer facility, or the spent fuel would need to be shipped to a site that had a transfer facility. See DOE, Office of Fuel Cycle and Research Development, A Project Concept for Nuclear Fuels Storage and Transportation, FCRD-NFST-2013-000132 Rev. 1 (June 15, 2013). 2013, DOE completed a preliminary technical evaluation of options available and needed infrastructure for DOE or a new waste management and disposal organization to transport spent nuclear fuel from shut-down sites to a consolidated interim storage facility. According to DOE officials, there was no need to make a decision regarding how best to move forward with the study results because there was, at that time, no site and no authorization to site, license, construct, and operate a consolidated interim storage facility. We also reported in October 2014 that procuring qualified railcars may be a time-consuming process, in part because of the design, testing, and approval for a railcar that meets specific Association of American Railroads standards for transporting spent nuclear fuel. As we found in October 2014, public acceptance is key to any aspect of a spent nuclear fuel management and disposition program, including transportation. Specifically, unless and until there is a broad understanding of the issues associated with management of spent nuclear fuel, specific stakeholders and the general public may be unlikely to support any spent nuclear fuel program. In particular, a program that has not yet been developed or for which a site has not been identified may have challenges in obtaining public acceptance. This finding is not new and, in April 2011 and in October 2014 we found reports spanning several decades that identified societal and political opposition as the key For example, in 1982, the obstacles to spent nuclear fuel management.congressional Office of Technology Assessment reported that public and political opposition were key factors to siting and building a repository. The National Research Council of the National Academies reiterated this conclusion in a 2001 report, stating that the most significant challenge to siting and commencing operations at a repository is societal. Our analysis of stakeholder and expert comments indicates the societal and political factors opposing a repository are the same for a consolidated interim storage facility. Moreover, we reported in April 2011 and October 2014 that any spent nuclear fuel management program is going to take decades to develop and to implement and that maintaining public acceptance over that length of time will face significant challenges. We also reported in November 2009, that the nation could not be certain that future generations would have the willingness or ability to maintain decades-long programs we put into place today.nuclear fuel more than once, which may be required if some spent nuclear fuel is moved to an interim storage facility prior to permanent disposal. Some stakeholders have voiced concerns that because of this opposition to multiple transport events, a consolidated interim storage site may become a de facto permanent storage site. Of particular concern is having to transport spent In October 2014, we reported that according to experts and stakeholders, social media has been used effectively to provide information to the public through coordinated outreach efforts by organizations with an interest in spent nuclear fuel policy. Some of these organizations oppose DOE’s strategy and the information they distribute reflects their agendas. In contrast, we reported that DOE had no coordinated outreach strategy, including social media. We concluded that in the absence of a coordinated outreach strategy by DOE, specific stakeholders and the general public may not have complete or accurate information about the agency’s activities, making it more difficult for the federal government to move forward with any policy to manage spent nuclear fuel. We recommended that DOE develop and implement a coordinate outreach strategy for providing information to specific stakeholders and the general public on federal activities related to managing spent nuclear fuel—which would include transportation planning. DOE generally agreed with our recommendation. Chairman Shimkus, Ranking Member Tonko, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Karla Springer (Assistant Director), and Antoinette Capaccio, Robert Sánchez, and Kiki Theodoropoulos also made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Spent nuclear fuel—the used fuel removed from commercial nuclear power reactors—is an extremely harmful substance if not managed properly. The nation's inventory of spent nuclear fuel has grown to about 72,000 metric tons currently stored at 75 sites in 33 states, primarily where it was generated. Under the Nuclear Waste Policy Act of 1982, DOE was to investigate Yucca Mountain, a site about 100 miles northwest of Las Vegas, Nevada, for the disposal of spent nuclear fuel. DOE terminated its work at Yucca Mountain in 2010 and now plans to transport the spent nuclear fuel to interim storage sites beginning in 2021 and 2024, then to a permanent disposal site by 2048. Transportation of spent nuclear fuel is a major element of any policy adopted to manage and dispose of spent nuclear fuel. This testimony discusses three key challenges related to transporting spent nuclear fuel: legislative, technical, and societal. It is based on reports GAO issued from November 2009 to October 2014. Based on its prior work, GAO found three key challenges related to the transportation of spent nuclear fuel: legislative, technical, and societal. Societal challenges . As GAO reported in October 2014, public acceptance is key for any aspect of a spent nuclear fuel management and disposition program—including transporting it—and maintaining that acceptance over the decades needed to implement a spent fuel management program is challenging. In that regard, GAO reported that in order for stakeholders and the general public to support any spent nuclear fuel program—particularly one for which a site has not been identified—there must be a broad understanding of the issues associated with management of spent nuclear fuel. Also, GAO found that some organizations that oppose DOE have effectively used social media to promote their agendas to the public, but that DOE had no coordinated outreach strategy, including social media. GAO recommended that DOE develop and implement a coordinated outreach strategy for providing information to the public on their spent nuclear fuel program. DOE generally agreed with GAO's recommendation. GAO is making no new recommendations.

The complexity of the environment in which CMS and its contractors operate the Medicare program cannot be overstated. CMS is an agency within the Department of Health and Human Services (HHS) but has responsibilities over expenditures that are larger than those of most other federal departments. Under the fee-for-service system—which accounts for over 80 percent of program beneficiaries—physicians, hospitals, and other providers submit claims for services they provide to Medicare beneficiaries to receive reimbursement. The providers billing Medicare, whose interests vary widely, create with program beneficiaries and taxpayers a vast universe of stakeholders. About 50 Medicare claims administration contractors carry out the day-to- day operations of the program and are responsible not only for paying claims but for providing information and education to providers and beneficiaries that participate in Medicare. They periodically issue bulletins that outline changes in national and local Medicare policy, inform providers of billing system changes, and address frequently asked questions. To enhance communications with providers, the agency recently required contractors to maintain toll-free telephone lines to respond to provider inquiries. It also directed them to develop Internet sites to address, among other things, frequently asked questions. In addition, CMS is responsible for monitoring the claims administration contractors to ensure that they appropriately perform their claims processing duties and protect Medicare from fraud and abuse. In 1996, the Congress enacted the Health Insurance Portability and Accountability Act (HIPAA), in part to provide better stewardship of the program. This act gave HCFA the authority to contract with specialized entities, known as program safeguard contractors (PSC), to combat fraud, waste, and abuse. HCFA initially selected 12 firms to conduct a variety of program safeguard tasks, such as medical reviews of claims and audits of providers’ cost reports. Previously, only claims administration contractors performed these activities. In response to the escalation of improper Medicare payments, Congress and executive branch agencies have focused attention on efforts to safeguard the Medicare Trust Fund. HIPAA earmarked increased funds for the prevention and detection of health care fraud and abuse and increased sanctions for abusive providers. The HHS Office of Inspector General (OIG) and the Department of Justice (DOJ) subsequently became more aggressive in pursuing abusive providers. In response, the medical community has expressed concern about the complexity of the program and the fairness of certain program safeguard activities, such as detailed reviews of claims, and the process for appealing denied claims. Recent actions address some of these concerns. Since 1996, the HHS OIG has repeatedly estimated that Medicare contractors inappropriately paid claims worth billions of dollars annually. The depletion of Medicare’s hospital trust fund and the projected growth in Medicare’s share of the federal budget have focused attention on program safeguards to prevent and detect health care fraud and abuse. It has also reinforced the importance of having CMS and its contractors develop and implement effective strategies to prevent and detect improper payments. HIPAA provided the opportunity for HCFA to enhance its program integrity efforts by creating the Medicare Integrity Program (MIP). MIP gave the agency a stable source of funding for its safeguard activities. Beginning in 1997, funding for antifraud-and-abuse activities has increased significantly—by 2003, funding for these activities will have grown about 80 percent. In fiscal year 2000, HCFA used its $630 million in MIP funding to support a wide range of efforts, including audits of provider and managed care organizations and targeted medical review of claims. By concentrating attention on specific provider types or benefits where program dollars are most at risk, HCFA has taken a cost-effective approach to identify overpayments. Based on the agency’s estimates, MIP saved the Medicare program more than $16 for each dollar spent in fiscal year 2000. CMS is only one of several entities responsible for ensuring the integrity of the Medicare program. HIPAA also provided additional resources to both the HHS OIG and DOJ. The HHS OIG has emphasized the importance of safeguarding Medicare by auditing providers and issuing compliance guidance for various types of providers. It also pursues potential fraud brought to its attention by contractors and other sources, such as beneficiaries and whistleblowers. DOJ has placed a high priority on identifying patterns of improper billing by Medicare providers. DOJ investigates cases that have been referred by the HHS OIG and others to determine if health care providers have engaged in fraudulent activity, and it pursues civil actions or criminal prosecutions, as appropriate. The False Claims Act (31 U.S.C. sec. 3729 to 3733) gives DOJ a powerful enforcement tool as it provides for substantial damages and penalties against providers who knowingly submit false or fraudulent bills to Medicare, Medicaid, or other federal health programs. DOJ has instituted a series of investigations known as national initiatives, which involve examinations of similarly situated providers who may have engaged in common patterns of improper Medicare billing. As safeguard and enforcement actions have increased, so have provider concerns about their interaction with contractors. Individual physicians and representatives of medical associations have made a number of serious charges regarding the following. Inadequate communications from CMS’ contractors. Providers assert that the information they receive is poorly organized, difficult to understand, and not always communicated promptly. As a result, providers are concerned that they may inadvertently violate Medicare billing rules. Inappropriate targeting of claims for review and excessive paperwork demands of the medical review process. For example, some physicians have complained that the documentation required by some contractors goes beyond what is outlined in agency guidance or what is needed to demonstrate medical necessity. Unfair method used to calculate Medicare overpayments. Providers expressed concern that repayment amounts calculated through the use of samples that are not statistically representative do not accurately represent actual overpayments. Overzealous enforcement activities by other federal agencies. For example, providers have charged that DOJ has been overly aggressive in its use of the False Claims Act and has been too accommodating to the OIG’s insistence on including corporate integrity agreements in provider settlements. Lengthy process to appeal denied claim. Related to this issue is that a provider who successfully appeals a claim that was initially denied does not earn interest for the period during which the administrative appeal was pending. We have studies underway to examine the regulatory environment in which Medicare providers operate. At the request of the House Committee on the Budget and the House Ways and Means Subcommittee on Health, we are reviewing CMS’ communications with providers and have confirmed some provider concerns. For example, our review of several information sources, such as bulletins, telephone call centers, and Internet sites, found a disappointing performance record. Specifically, we reviewed recently issued contractor bulletins—newsletters from carriers to physicians outlining changes in national and local Medicare policy—from 10 carriers. Some of these bulletins contained lengthy discussions with overly technical and legalistic language that providers may find difficult to understand. These bulletins also omitted some important information about mandatory billing procedures. Similarly, we found that the calls we placed to telephone call centers this spring were rarely answered appropriately. For example, for 85 percent of our calls, the answers that call center representatives provided were either incomplete or inaccurate. Finally, we recently reviewed 10 Internet sites, which CMS requires carriers to maintain. We found that these sites rarely met all CMS requirements and often lacked user-friendly features such as site maps and search functions. We are continuing our work and formulating recommendations that should help CMS and its contractors improve their communications with providers. We are also in the preliminary stages of examining how claims are reviewed and how overpayments are detected to assess the actions of contractors as they perform their program safeguard activities. Although we have not yet formulated our conclusions, agency actions may address some provider concerns. For example, HCFA clarified the conditions under which contractors should conduct medical reviews of providers. In August 2000, the agency issued guidance to contractors regarding the selection of providers for medical reviews, noting, among other things, that a provider’s claims should only be reviewed when data suggest a pattern of billing problems. Although providers may be wary of the prospect of medical reviews, the extent to which they are subjected to such reviews is largely unknown. Last year, HCFA conducted a one-time limited survey of contractors to determine the number of physicians subject to complex medical reviews in fiscal year 2000. It found that only 1,891, or 0.3 percent, of all physicians who billed the Medicare program that year were selected for complex medical reviews—examinations by clinically trained staff of medical records. In regard to physician complaints about sampling methodologies, HCFA outlined procedures to give providers several options to determine overpayment amounts. Contractors would initially review a small sample (probe sample) of a provider’s claims and determine the amount of the overpayment. A provider could then (1) enter into a consent settlement, whereby the provider accepts the results of this probe review and agrees to an extrapolated “potential” overpayment amount based on the small sample, (2) accept the settlement but submit additional documentation on specific claims in the probe sample to potentially adjust downward the amount of the projected overpayment, or (3) require the contractor to review a larger statistically valid random sample of claims to extrapolate the overpayment amount. According to agency officials, although providers can select any of these options, consent settlements are usually chosen when offered because they are less burdensome for providers, as fewer claims have to be documented and reviewed. In response to concerns regarding its use of the False Claims Act, DOJ issued guidance in June 1998 to all of its attorneys that emphasized the fair and responsible use of the act in civil health care matters, including national initiatives. In 1999, we reviewed DOJ’s compliance with its False Claims Act guidance and found that implementation of this guidance varied among U.S. Attorneys’ Offices. However, the next year we reported that DOJ had made progress in incorporating the guidance into its ongoing investigations and had also developed a meaningful assessment of compliance in its periodic evaluations of U.S. Attorneys’ Offices. Regarding corporate integrity agreements, we noted in our March 2001 report that these agreements were not always a standard feature of DOJ settlements. For example, 4 of 11 recent settlements that we reviewed were resolved without the imposition of such agreements. Finally, some providers’ concerns about the timeliness of the appeals process could be addressed by the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), which imposes deadlines at each step of the appeals process. For example, initial determination of a claim must be concluded within 45 days from the date of the claim, and redetermination must be completed within 30 days of receipt of the request. These revisions are scheduled to take effect on October 1, 2002. CMS’ oversight of its contractors is essential to ensuring that the Medicare program is administered efficiently and effectively. CMS is faced with the challenge of protecting program dollars and treating providers fairly. However, to accomplish these goals, contractors must implement CMS’ policies fully and consistently. Historically, the agency’s oversight of contractors has been weak, although it has made substantial improvements in the past 2 years. Continued vigilance in this area is critical as CMS tries to cope with known weaknesses and begins to rely on new specialty contractors for some of its payment safeguard activities. Medicare’s claims administration contractors are responsible for all aspects of claims administration, conduct particular safeguard activities, and are the primary source of Medicare communications to providers. However, oversight of Medicare contractors has historically been weak, leaving the agency without assurance that contractors are implementing program safeguards or paying providers appropriately. For years, HCFA’s contractor performance and evaluation program (CPE)—its principal tool used to evaluate contractor performance—lacked the consistency that agency reviewers need to make comparable assessments of contractor performance. HCFA reviewers had few measurable performance standards and little direction on monitoring contractors’ payment safeguard activities. The reviewers in HCFA’s 10 regional offices, who were responsible for conducting these evaluations, had broad discretion to decide what and how much to review as well as what disciplinary actions to take against contractors with performance problems. This highly discretionary evaluation process allowed key program safeguards to go unchecked and led to the inconsistent treatment of contractors with similar performance problems. Dispersed responsibility for contractor activities across many central office components, limited information about how many resources are used or needed for contractor oversight, and late and outdated guidance provided to regional offices have also weakened contractor oversight. Over the years, we have made several recommendations to improve HCFA’s oversight of its claims administration contractors. For example, we recommended that the agency strengthen accountability for evaluating contractor performance. In response to our recommendations, HCFA has established an executive-level position at its central office with ultimate responsibility for contractor oversight, instituted national review teams to conduct contractor evaluations, and provided more direction to its regional offices through standardized review protocols and detailed instructions for CPE reviews. Although the agency has taken a number of steps to improve its oversight efforts, our ongoing work suggests that opportunities for additional improvement exist. Last month, we joined CMS representatives as they conducted a CPE review at a contractor’s telephone center. Although providers’ ability to appropriately bill Medicare is dependent on their obtaining accurate and complete answers to their questions, the review focused primarily on adherence to call center procedures and the timeliness of responses to provider questions. Moreover, the CMS reviewer selected a small number of cases to evaluate—only 4 of the roughly 140,000 provider calls this center receives each year. While CMS’ management of claims administration contractors suffers from weak oversight, its contracting practices for selecting fiscal intermediaries and carriers may contribute to these difficulties. Unlike most of the federal government, the agency was exempted from conducting full and open competitions by the Social Security Act. Thus, for decades, HCFA has relied on many of the same contractors to perform program management activities, and has been at a considerable disadvantage in attracting new entities to perform these functions. Congress included provisions in HIPAA that provided HCFA with more flexibility in contracting for program safeguard activities. It allowed the agency to contract with any entity that was capable of performing certain antifraud activities. In May 1999, HCFA implemented its new contracting authority by selecting 12 program safeguard contractors—PSCs—using a competitive bidding process. These entities represent a mix of health insurance companies, information technology businesses, and several other types of firms. In May of this year, we reported on the opportunities and challenges that the agency faces as it integrates its PSCs into its overall program safeguard strategy. The PSCs represent a new means of promoting program integrity and enable CMS to test a multitude of options. CMS is currently experimenting with these options to identify how PSCs can be most effectively utilized. For example, some PSCs are performing narrowly focused tasks that are related to a specific service considered to be particularly vulnerable to fraud and abuse. Others are conducting more broadly based work that may have national implications for the way program safeguard activities are conducted in the future or which may result in the identification of best practices.

In fiscal year 2000, Medicare made more than $200 billion in payments to hundreds of thousands of health care providers who served nearly 40 million beneficiaries. Because of the program's vast size and complexity, GAO has included Medicare on its list of government areas at high risk for waste, fraud, abuse, and mismanagement. GAO first included Medicare on that list in 1990, and it remains there today. GAO has continually reported on the efforts of the Health Care Financing Administration -- recently renamed the Centers for Medicare and Medicaid Services (CMS) -- to safeguard Medicare payments and streamline operations. CMS relies on its claims administration contractors to run Medicare. As these contractors have become more aggressive in identifying and pursuing inappropriate payments, providers have expressed concern that Medicare has become to complex and difficult to navigate. CMS's oversight of its contractors has historically been weak. In the last two years, however, CMS has made substantial progress. GAO has identified several areas in which CMS still need improvement, especially in ensuring that contractors provide accurate, complete, and timely information to providers on Medicare billing rules and coverage policies.

Several components within DOJ, DHS, and the Departments of Defense, Labor, and State have responsibility for investigating and prosecuting human trafficking crimes, as shown in figure 1. In addition to federal investigative and prosecutorial agencies, other agencies play a role in helping to identify human trafficking, such as DHS’s Transportation Security Administration (TSA), U.S. Citizenship and Immigration Services (USCIS), U.S. Customs and Border Protection, Federal Emergency Management Agency, and Coast Guard. These agencies may encounter human trafficking victims in their daily operations, including at airports, land borders, and seaports. The Equal Employment Opportunity Commission (EEOC) and the Department of Labor’s Wage and Hour Division may encounter human trafficking when conducting investigations related to their statutory authority. For example, EEOC investigates alleged violations of Title VII of the Civil Rights Act of 1964, which prohibits employment discrimination based on, race, color, religion, sex, and national origin, which in certain circumstances involve human trafficking victims. In addition to investigating and prosecuting human trafficking crimes, federal agencies, primarily DOJ and the Department of Health and Human Services (HHS), support state and local efforts to combat human trafficking and assist victims. Several components within DOJ’s Office of Justice Programs, including the Office of Juvenile Justice and Delinquency Prevention, Office for Victims of Crime, Bureau of Justice Assistance (BJA), and National Institute of Justice (NIJ), administer grants to help support state and local law enforcement in combating human trafficking and to support nongovernmental organizations and others in assisting trafficking victims or conducting research on human trafficking in the United States. HHS also provides grant funding to entities to provide services and support for trafficking victims, primarily through components of the Administration for Children and Families (ACF), including the Children’s Bureau, Family and Youth Services Bureau, and Administration for Native Americans. Further, ACF established the Office on Trafficking in Persons in 2015 to coordinate anti-trafficking responses across multiple systems of care. Specifically, HHS supports health care providers, child welfare, social service providers, and other first responders likely to interact with potential victims of trafficking through a variety of grant programs. These efforts include integrated and tailored services for victims of trafficking, training and technical assistance to communities serving high-risk populations, and capacity-building to strengthen coordinated regional and local responses to human trafficking. In our May 2016 report, we identified 105 provisions across the six statutes that we reviewed that called for the establishment of a program or initiative. Many of the provisions identified more than one entity that is responsible for implementing the programs or initiatives. The breakdown of whether or not federal entities reported taking actions to implement these provisions is as follows: For 91 provisions, all responsible federal entities reported taking action to implement the provision. For 11 provisions, all responsible federal entities reported that they had not taken action to implement the provision. For 2 provisions, at least one of the responsible federal entities reported that they had not taken action to implement the provision or they did not provide a response. For 1 provision, none of the responsible federal entities provided a response. The provisions cover various types of activities to address human trafficking and related issues, including: Grants (33), Coordination and Information Sharing (29), Victim Services (28), Reporting Requirements (26), Training and Technical Assistance (25), Research (24), Criminal Justice (20), Public Awareness (14), and Penalties and Sanctions (7). Agency officials provided various explanations for why they had not taken any actions to implement certain provisions for which they were designated as the lead or co-lead. For example, in three cases, officials cited that funding was not appropriated for the activity. In June 2016, we reported that federal, state and local law enforcement officials and prosecutors identified several challenges with investigating and prosecuting human trafficking, including a lack of victim cooperation, limited availability of services for victims, and difficulty identifying human trafficking. The officials told us that obtaining the victim’s cooperation is important because the victim is generally the primary witness and source of evidence. However, the officials said that obtaining and securing victims’ cooperation is difficult, as victims may be unable or unwilling to testify due to distrust of law enforcement or fear of retaliation by the trafficker, among other reasons. According to these officials, victim service programs, such as those that provide mental health and substance abuse services have helped improve victim cooperation; however, the availability of services is limited. Further, the officials reported that identifying and distinguishing human trafficking from other crimes such as prostitution can be challenging. Federal, state, and local agencies have taken or are taking actions to address these challenges, such as increasing the availability of victim services through grants and implementing training and public awareness initiatives. With respect to training, we reported that federal agencies have implemented several initiatives to train judges, prosecutors, investigators and others on human trafficking. For example, in accordance with the JVTA, the Federal Judicial Center provided training to federal judges and judicial branch attorneys, including judicial law clerks, on human trafficking through a webinar in August 2015. The training walked participants through the provisions of the JVTA and addressed how child exploitation manifests in human trafficking cases, among other things. According to Federal Judicial Center officials, 1,300 registered viewers participated in the webinar, which is now available for on-demand viewing on the Federal Judicial Center website. In addition, DHS’s Immigration and Customs Enforcement, Homeland Security Investigations provides a human trafficking training course that uses video scenarios and group discussions to teach its agents how to identify human trafficking, how to distinguish human trafficking from smuggling, and how to conduct victim- centered investigations, among other things. Similarly, the Federal Bureau of Investigation provides annual specialized training in the commercial sexual exploitation of children and dealing with victims of child sex trafficking. We reported that some federal agencies also have efforts related to increasing public awareness of human trafficking. For example, In January 2016, DOJ’s Office for Victims of Crime released resources to raise awareness and serve victims, including a video series called “The Faces of Human Trafficking” and posters to be used for outreach and education efforts of service providers, law enforcement, prosecutors, and others in the community. The video series includes information about sex and labor trafficking, multidisciplinary approaches to serving victims of human trafficking, effective victim services, victims’ legal needs, and voices of survivors. Since 2010, DHS, through the Blue Campaign, reported it has worked to raise public awareness about human trafficking, leveraging partnerships with select government and nongovernmental entities to educate the public to recognize human trafficking and report suspected instances. According to DHS officials, Blue Campaign posters are displayed in public locations including airports and bus stops. HHS established the “Look Beneath the Surface” public awareness campaign through its Rescue and Restore Victims of Human Trafficking program. These materials, which included posters, brochures, fact sheets, and cards with tips on identifying victims, were available in eight languages. In June 2016, we also reported that in addition to training and public awareness, federal agencies have established grant programs to, among other things, increase the availability of services to assist human trafficking victims. We identified 42 grant programs with awards made in 2014 and 2015 that may be used to combat human trafficking or to assist victims of human trafficking, 15 of which are intended solely for these purposes. According to our prior work addressing overlap and duplication: Overlap occurs when multiple granting agencies or grant programs have similar goals, engage in similar activities or strategies to achieve these goals, or target the same or similar beneficiaries. Duplication occurs when a single grantee uses grant funds from different federal sources to pay for the exact same expenditure or when two or more granting agencies or grant programs engage in the same or similar activities or provide funding to support the same or similar services to the same beneficiaries. Each of the15 grant programs that are intended solely to combat human trafficking contained at least some potential overlap with other human trafficking grant programs in authorized uses. For instance, funding under each of the 15 grant programs can be used for either collaboration or training purposes. Similarly, 9 of the 15 grant programs provide support for direct services to victims of human trafficking. Further, of the 123 organizations that were awarded grants specific to human trafficking in fiscal years 2014 or 2015, 13 received multiple grants for either victim services or for collaboration, training, and technical assistance from DOJ and HHS. Of the 13, 7 had multiple grants that could be used for victim services, and 3 had multiple grants that could be used for collaboration, training, and technical assistance. We also reported in June 2016 that there are circumstances in which some overlap or duplication may be appropriate. For example, overlap can enable granting agencies to leverage multiple funding streams to serve a single purpose. However, coordination across the administering granting agencies is critical for such leveraging to occur. On the other hand, there are times when overlap and duplication are unnecessary, such as if a grantee uses multiple funding streams to provide the same services to the same beneficiaries. DOJ and HHS each have intra-agency processes in place to prevent unnecessary duplication. According to DOJ and HHS officials, each agency operates an internal working group to allow the components administering human trafficking grants to communicate on a regular basis. For example, HHS officials indicated that offices that administer human trafficking grant programs meet monthly to exchange information, which may include grant-related announcements and coordination of anti-trafficking activities. DOJ has taken action to implement recommendations from a prior GAO report to identify overlapping grant programs and mitigate the risk of unnecessary grant award duplication in its programs. In response to these recommendations, DOJ also requires grant applicants to identify in their applications any federal grants they are currently operating under as well as federal grants for which they have applied. DOJ and HHS officials also reported that they routinely shared grant announcements with one another in an informal manner. For instance, HHS officials noted that DOJ and HHS meet bi-weekly during co-chair meetings for the Senior Policy Operating Group (SPOG) Victim Services Committee and both agencies participate in the SPOG Grantmaking Committee meetings, which provide opportunities to share information for the purposes of coordination and collaboration. Since 2006, the SPOG has provided a formal mechanism for all agencies administering human trafficking grants to communicate with one another. According to the SPOG guidance, which was updated in March 2016, participating agencies are to share information with members of the grants committee prior to final decisions in at least one of the following ways: (1) share plans for programs containing anti-trafficking components during the grant program development process; (2) notify the SPOG of grant solicitations within a reasonable time after they are issued; or (3) notify SPOG partner agencies of proposed funding recipients prior to announcing the award. Further, agencies are also to share information with members of the Grantmaking Committee after final decisions are made. Chairman Grassley, Ranking Member Leahy, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Gretta L. Goodwin, Acting Director, Homeland Security and Justice at (202) 512-8777 or goodwing@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Kristy Love, Assistant Director; Kisha Clark, Analyst-in Charge; Paulissa Earl; Marycella Mierez; and Amanda Parker. Key contributors for the previous work on which this testimony is based are listed in each product. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Human trafficking involves the exploitation of a person typically through force, fraud, or coercion for the purpose of forced labor, involuntary servitude, or commercial sex. Human trafficking victims include women, men and transgender individuals; adults and children; and foreign nationals and U.S. citizens or nationals who are diverse with respect to race, ethnicity, and sexuality, among other factors. Over the few decades, Congress has taken legislative action to help combat human trafficking and ensure that victims have access to needed services. The executive branch also has several initiatives to address human trafficking in the United States and assist victims. The Justice for Victims of Trafficking Act of 2015 (JVTA) includes two provisions for GAO to study efforts to combat human trafficking. This testimony summarizes GAO’s May 2016 and June 2016 reports that were related to the JVTA. Specifically, this testimony addresses (1) federal efforts to implement certain provisions across six human trafficking-related statutes, including the JVTA; (2) any challenges faced by federal and selected state law enforcement and prosecutorial agencies when addressing human trafficking; and (3) federal grant programs to combat trafficking and assist trafficking victims, as well as the extent to which there is any duplication across these grant programs. GAO identified 105 provisions across six human trafficking-related statutes that called for the establishment of a program or initiative. Many of the provisions identified more than one entity that is responsible for implementing the programs or initiatives. The breakdown of whether or not federal entities reported taking actions to implement these provisions is as follows: For 91 provisions, all responsible federal entities reported taking action to implement the provision. For 11 provisions, all responsible federal entities reported that they had not taken action to implement the provision. For 2 provisions, at least one of the responsible federal entities reported that they had not taken action to implement the provision or they did not provide a response. For 1 provision, none of the responsible federal entities provided a response. GAO identified 42 grant programs with awards made in 2014 and 2015 that may be used to combat human trafficking or to assist victims of human trafficking, 15 of which are intended solely for these purposes. Although some overlap exists among these human trafficking grant programs, federal agencies have established processes to help prevent unnecessary duplication. For instance, in response to recommendations in a prior GAO report, DOJ requires grant applicants to identify any federal grants they are currently operating under as well as federal grants for which they have applied. In addition, agencies that participate in the grantmaking committee of the Senior Policy Operating Group (SPOG)—an entity through which federal agencies coordinate their efforts to combat human trafficking—are to share grant solicitations and information on proposed grant awards, allowing other agencies to comment on proposed grant awards and determine whether they plan to award funding to the same organization.

VA policy specifies how VAMCs can purchase expendable medical supplies and RME. VAMCs can purchase expendable medical supplies and RME through their acquisition departments or through purchase card holders, who have been granted the authority to make such purchases. Purchase cards are issued to certain VAMC staff, including staff from clinical departments, to acquire a range of goods and services, including those used to provide care to veterans. According to VA, as of the third quarter of 2010, there were about 27,000 purchase cards in use across VA’s health care system. VA has two inventory management systems, which VAMCs use to track the type and quantity of supplies and equipment in the facilities. Each VAMC is responsible for maintaining its own systems and for entering information about certain expendable medical supplies and certain RME in the facilities into the appropriate system. Specifically, the Generic Inventory Package (GIP) is used to track information about expendable medical supplies that are ordered on a recurring basis. The Automated Engineering Management System/Medical Equipment Reporting System (AEMS/MERS) is used to track information about RME that is valued at $5,000 or more and has a useful life of 2 years or more. VAMC officials told us they use information about the items in their facilities for a variety of purposes, for example, to readily determine whether they have expendable medical supplies or RME that are the subject of a manufacturer or FDA recall or a patient safety alert. VA’s purchasing and tracking policies include the following three requirements for VAMCs: 1. A designated VAMC committee must review and approve proposed purchases of any expendable medical supplies or RME that have not been previously purchased by the VAMC. The committee, which typically includes administrative staff and clinicians from various departments, reviews the proposed purchases to evaluate the cost of the purchase as well as its likely impact on veterans’ care. For example, the committee that reviews and approves proposed RME purchases often includes a representative from the department responsible for reprocessing RME, in order to determine whether the VAMC has the capability to reprocess—clean and disinfect or sterilize—the item correctly and that staff are appropriately trained to do so. Proper reprocessing of RME is important to ensure that RME is safe to use and that veterans are not exposed to infectious diseases, such as Human Immunodeficiency Virus (HIV), during treatment. 2. All approvals for purchases of expendable medical supplies or RME must be signed by two officials, the official placing the order and the official responsible for approving the purchase. 3. VAMCs must enter information on all expendable medical supplies that are ordered on a recurring basis and all RME that is valued at $5,000 or more and has a useful life of 2 years or more into the appropriate inventory management system, either GIP or AEMS/MERS. VA does not require information about RME that is valued at less than $5,000 to be entered into AEMS/MERS. At the five VAMCs we visited, our preliminary work identified examples of inconsistent compliance with the three purchasing and tracking requirements we selected for our review. In some cases, noncompliance with these requirements created potential risks to veterans’ safety. We are continuing to conduct this work. VAMC committee review and approval. Officials at two of the five VAMCs we visited stated that VAMC committees reviewed and approved all of the expendable medical supplies the VAMCs purchased for the first time. However, at the remaining three VAMCs, officials told us that VAMC committees did not conduct these reviews in all cases. Officials from these three VAMCs told us that certain expendable medical supplies—for example, new specialty supplies—were purchased without VAMC committee review and approval. Specialty supplies, such as those used in conjunction with dialysis machines, are expendable medical supplies that are only used in a limited number of clinical departments. Without obtaining that review and approval, however, the VAMCs purchased these supplies without evaluating their cost effectiveness or likely impact on veterans’ care. At one VAMC we visited, officials told us that clinical department staff were permitted to purchase certain RME—surgical and dental instruments—using purchase cards and that these purchases were not reviewed and approved by a committee. Therefore, the VAMC had no assurance that RME purchased by clinical department staff using purchase cards had been reviewed and approved by a committee before it was purchased for the first time. As a result, these purchases may have been made without assurance that they were cost effective and safe for use on veterans and that the VAMC had the capability and trained staff to reprocess these items correctly. Signatures of purchasing and approving officials. At one of the five VAMCs we visited, VAMC officials discovered that one staff member working in a dialysis department purchased specialty supplies without obtaining the required signature of an appropriate approving official. That staff member was responsible for ordering an item for use in 17 dialysis machines that was impermeable to blood and would thus prevent blood from entering the dialysis machine. However, the staff member ordered an incorrect item, which was permeable to blood, allowing blood to pass into the machine. After the item was purchased, the incorrect item was used for 83 veterans, resulting in potential cross- contamination of these veterans’ blood, which may have exposed them to infectious diseases, such as HIV, Hepatitis B, and Hepatitis C. Entry of information about items into VA’s inventory management systems. At the time of our site visits, officials from one of the five VAMCs we visited told us that information about expendable medical supplies that were ordered on a recurring basis was entered into GIP, as required. In contrast, officials at the remaining four VAMCs told us that information about certain expendable supplies that were ordered on a recurring basis, such as specialty supplies, was not always entered into GIP. Since our visit, one of the four VAMCs has reported that it has begun to enter all expendable medical supplies that are ordered on a recurring basis, including specialty supplies, into GIP. By not following VA’s policy governing GIP, VAMCs have an incomplete record of the expendable medical supplies in use at their facilities. This lack of information can pose a potential risk to veterans’ safety. For example, VAMCs may have difficulty ensuring that expired supplies are removed from patient care areas. In addition, in the event of a manufacturer or FDA recall or patient safety alert related to a specialty supply, VAMCs may have difficulty determining whether they possess the targeted expendable medical supply. Officials at one VAMC we visited told us about an issue related to tracking RME in AEMS/MERS that contributed to a patient safety incident, even though the VAMC was not out of compliance with VA’s requirement for entering information on RME into AEMS/MERS. Specifically, because VA policy does not require RME valued under $5,000 to be entered into AEMS/MERS, an auxiliary water tube, a type of RME valued under $5,000 that is used with a colonoscope, was not listed in AEMS/MERS. According to VAMC officials and the VA Office of the Inspector General, in response to a patient safety alert that was issued on the auxiliary water tube in December 2008, officials from the VAMC checked their inventory management systems and concluded—incorrectly—that the tube was not used at the facility. However, in March 2009, the VAMC discovered that the tube was in use and was not being reprocessed correctly, potentially exposing 2,526 veterans to infectious diseases, such as HIV, Hepatitis B, and Hepatitis C. In addition, officials from VA headquarters told us that when information about certain RME is entered into AEMS/MERS, it is sometimes done inconsistently. The officials explained that this is because AEMS/MERS allows users to enter different names for the same type of RME. As a result, in the case of a manufacturer or FDA recall or patient safety alert related to a specific type of RME, VAMCs may have difficulty determining whether they have that specific type of RME. During our preliminary work, we discussed with VA headquarters officials examples of steps VA plans to take to improve its oversight of VAMCs’ purchasing and tracking of expendable medical supplies and RME. For example, VA plans to change its oversight of the use of purchase cards. Specifically, VA headquarters officials told us that designated VAMC staff are currently responsible for reviewing purchase card transactions to ensure that purchases are appropriate. However, one VA headquarters official stated that these reviews are currently conducted inconsistently, with some being more rigorous than others. VA headquarters officials stated that VA plans to shift greater responsibility for these reviews from the VAMCs to the VISNs, effective October 1, 2010. In addition, VA plans to standardize the reviews by, for example, adding a checklist for reviewers. Because this change has not yet been implemented across VA, we can not evaluate the extent to which it will address the appropriateness of purchases using purchase cards. Our preliminary work also shows that VA plans to create a new inventory management system. VA headquarters officials told us that they are developing a new inventory management system—Strategic Asset Management (SAM)—which will replace GIP and AEMS/MERS and will include standardized names for expendable medical supplies and RME. According to these officials, SAM will help address inconsistencies in how information about these items is entered into the inventory management systems. VA headquarters officials stated that SAM will help improve VA’s ability to monitor information about expendable medical supplies and RME across VAMCs. VA provided us with an implementation plan for SAM, which stated that this new system would be operational in March 2011. At this time, we have not done work to determine whether this date is realistic or what challenges VA will face in implementing it. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other members of the committee may have. For further information about this statement, please contact Debra A. Draper at (202) 512-7114 or draperd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Key contributors to this statement were Randall B. Williamson, Director; Mary Ann Curran, Assistant Director; David Barish; Alana Burke; Krister Friday; Melanie Krause; Lisa Motley; and Michael Zose. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

VA clinicians use expendable medical supplies--disposable items that are generally used one time--and reusable medical equipment (RME), which is designed to be reused for multiple patients. VA has policies that VA medical centers (VAMC) must follow when purchasing such supplies and equipment and tracking--that is, accounting for--these items at VAMCs. GAO was asked to evaluate VA's purchasing and tracking of expendable medical supplies and RME and their potential impact on veterans' safety. This testimony is based on GAO's ongoing work and provides preliminary observations on (1) the extent of compliance with VA's requirements for purchasing and tracking of expendable medical supplies and RME and (2) steps VA plans to take to improve its oversight of VAMCs' purchasing and tracking of expendable medical supplies and RME. GAO reviewed VA policies and selected three requirements that GAO determined to be relevant to patient safety. At each of the five VAMCs GAO visited, GAO reviewed documents used to identify issues related to the three requirements and interviewed officials to gather further information on these issues. The VAMCs GAO visited represent different surgical complexity groups, sizes of veteran populations served, and geographic regions. GAO also interviewed VA headquarters officials and obtained and reviewed documents regarding VA headquarters' oversight. GAO shared the information in this statement with VA officials. During its preliminary work at the five selected VAMCs, GAO found inconsistent compliance with the three VA purchasing and tracking requirements selected for review. Noncompliance with these requirements created potential risks to veterans' safety. (1) Requirement for VAMC committee review and approval. At two of the VAMCs, officials stated that the required designated committee review and approval occurred for all of the expendable medical supplies and RME that the VAMCs had not previously purchased. These reviews are designed to evaluate the cost of the purchase as well as its likely impact on veterans' care. However, at the remaining three VAMCs, officials stated that the required committee review and approval of the expendable medical supplies, such as those used in conjunction with dialysis machines, did not always occur. As a result, these purchases were made without evaluating the likely impact on veterans' care. (2) Requirement for signatures of purchasing and approving officials. At one of the VAMCs, VAMC officials discovered that a staff member in a dialysis department ordered an expendable medical supply item for use in dialysis machines, without obtaining the required signature of an approving official. That staff member ordered an incorrect item, the use of which presented a risk of exposing veterans to infectious diseases, such as Human Immunodeficiency Virus. (3) Requirement for entering information in VA's inventory management systems. Officials from one of the five VAMCs told GAO that information about expendable medical supplies that were ordered on a recurring basis was entered into the appropriate inventory management system, as required. At the remaining four VAMCs, officials told GAO that information about certain expendable medical supplies--those used in a limited number of clinical departments such as dialysis departments--was not always entered into the system. This lack of information can pose a potential risk to veterans' safety; in the event of a recall of these items, these VAMCs may have difficulty determining whether they possess the targeted item. VA reports that it plans to improve its oversight of VAMCs' purchasing and tracking of expendable medical supplies and RME. For example, VA headquarters officials stated that, effective October 1, 2010, VA plans to shift greater responsibility for reviews of purchase card transactions from the VAMCs to the Veterans Integrated Service Networks, which are responsible for overseeing VAMCs. VA headquarters officials also told GAO that VA is developing a new inventory management system, which it expects will help improve VA's ability to track information about expendable medical supplies and RME across VAMCs. VA expects this new system to be operational in March 2011.

Outreach efforts by EAC representatives indicate that most employees support many portions of the legislative proposal under consideration by the Subcommittee but have concerns about provisions in the proposal related to pay. Specifically, employees generally support provisions that make the authorities provided to GAO for voluntary early retirement pay incentives permanent, to provide enhancements in vacation time and relocation expenses deemed necessary by the Comptroller General to recruit and retain top employees, and to establish a private sector exchange program. However, many employees are concerned about the provisions that change the way that annual pay decisions are made and, to a lesser extent, the proposed change to traditional protections for pay retention. Employees had differing opinions about the proposed change to GAO’s name. Most employees support the Comptroller General’s proposed provisions to make permanent GAO’s 3-year authority to offer voluntary early retirement and voluntary separation payments to provide flexibility to realign GAO’s workforce. In addition, GAO employees recognize that attracting and retaining high-quality employees and managers throughout the organization is vitally important for the future of GAO. Employees thus generally support the provisions to offer flexible relocation reimbursements, provide upper-level hires with 6-hour leave accrual, and establish an executive exchange program with private sector organizations. Most employees commented positively on these authorities so long as there are internal controls to monitor and report on their use, as are present to provide accountability for other authorities throughout GAO. Many employees expressed concern about the provisions that affect the determination of annual pay increases and pay retention. The opinions expressed by employees generally fall into three categories: (1) general concerns and some supporting views regarding changes in traditional civil service employment rules that could reduce the amount of annual pay increases provided for economic adjustments but provide greater opportunity for rewarding performance, (2) concerns about making a portion of annual economic adjustments variable based on performance assessment, and to a lesser extent (3) concerns about the loss of traditional pay retention protections. The first area of employee concern is proposed changes to traditional federal civil service employment rules that have historically provided a fixed annual increase for all federal employees determined by the President and the Congress. Government employees in general, and GAO employees in particular, often conduct work that can have far reaching implications and impacts. Such work can positively or negatively affect segments of the population and thereby the general public’s perceptions of, and reactions to, the federal government, including Members of Congress. Over the years, the Congress has developed a bulwark of protections to shield federal workers from reprisals that might result from their service as employees. Included among these has been the process by which federal employees’ salaries are annually adjusted as a result of the passage of, and signing into law, of the annual budget. The historical process relies on passage of legislation which includes an annual increase in pay to reflect increases in inflation and overall employment costs, followed by determinations by the President (and the Office of Personnel Management) to calculate the distribution of the legislative economic adjustments between an overall cost-of-living adjustment and locality-based increases to reflect differences in cities across the nation. The current mechanism for annual federal pay adjustments is found in Public Law 101-509, the Federal Employees Pay Comparability Act. The Comptroller General has expressed his concern about trends in the executive branch that make it highly likely that the current civil service pay system will be the subject of comprehensive reform within the next few years. Citing federal agencies that already have many of these flexibilities, such as the Federal Aviation Administration and the new Department of Homeland Security, as well as agencies currently seeking reform, such as the Department of Defense, he has stated his belief that GAO needs to be “ahead of the curve.” Under the proposal, rather than relying on the administration’s determination and the Congress’ mandate for an annual salary adjustment, GAO can develop and apply its own methodology for the annual cost-of- living adjustments and compensation differences by locality that the Comptroller General believes would be more representative of the nature, skills, and composition of GAO’s workforce. Some employees have expressed following concerns. Removing GAO from the traditional process significantly alters a key element of federal pay protection that led some employees to seek employment in the federal sector. Changing this protection could diminish the attractiveness of federal service and result in the need for higher salaries to attract top candidates. A portion of appropriations historically intended to provide all federal employees with increases to keep pace with inflation and the cost of living in particular localities should not be tied to individual performance. GAO-based annual economic adjustments are more likely to be less than, rather than more than, amounts annually provided by the Congress; thus employees performing at lower (but satisfactory) levels who may not receive an equal or greater amount in the form of a bonus or dividend may experience an effective pay cut from amounts traditionally provided. The flexibility for the Comptroller General to use funds appropriated for cost-of-living adjustments for pay-for-performance purposes could imperil future GAO budgets by making that portion of the annual budget discretionary where it was once mandatory. The wide latitude provided in the proposal gives the Comptroller General broad discretion and limited accountability for determining whether employees receive annual across-the-board economic adjustments, the amount of such adjustments, and the timing of adjustments could result in unfair financial harm for some employees if the broad authorities were improperly exercised. The Comptroller General has not made a compelling case regarding the need for these pay-related and other legislative changes, for example by showing that existing cost-of-living adjustment mechanisms are inaccurate or that the agency has had difficulty in attracting and retaining high-quality employees. On the other hand, some employees also recognize that the proposed pay provisions may offer some distinct advantages for some employees. Some employees commented in support of the provision indicating that the existing system for calculating inflation and local cost adjustments may not accurately reflect reality; most employees would not likely be harmed by a system that allocates a greater share of pay to performance-based compensation; the authorities would allow GAO managers to provide greater financial rewards to the agency’s top performers, as compared to the present pay- for-performance system; making a stronger link between pay and performance could facilitate GAO’s recruitment of top talent. In addition, the provision may, to a limited extent, address a concern of some field employees by providing alternatives to reductions in force in times when mandated pay increases are not fully funded or in other extraordinary circumstances. For example, from 1992 to 1997, GAO underwent budgetary cuts totaling 33 percent (in constant fiscal year 1992 dollars.) To achieve these budgetary reductions, GAO staff was reduced by 39 percent, primarily through field office closures and the associated elimination of field-based employees. While we hope the agency will never again have to manage budget reductions of this magnitude, this provides a painful example of the vulnerability of staffing levels, particularly in the field, to budgetary fluctuations. The proposed pay provisions would provide the Comptroller General with greater flexibility to manage any future budget crises by adjusting the annual pay increases of all employees without adversely and disproportionately impacting the careers and lives of field-based employees. In addition to the revised basis for calculating annual economic adjustments, employees are concerned about the provision that transforms a portion of the annual pay increases that have historically been granted to federal employees for cost-of-living and locality-pay adjustments into variable, performance-based pay increases and bonuses. Because the GAO workforce is comprised of a wide range of highly qualified and talented people performing a similarly wide range of tasks, employees recognize that it is likely that some employees at times have more productive years with greater contributions than others. Therefore, most agree with the underlying principle of the provision to provide larger financial rewards for employees determined to be performing at the highest level. However, in commenting on the proposal, some employees said that GAO management already has multiple options to reward high performers through bonuses, placement in top pay-for-performance categories, and promotions. Others expressed concern that increased emphasis on individual performance could result in diminished teamwork, collaboration, and morale because GAO work typically is conducted in teams, often comprised of employees who are peers. “The PFP (pay-for-performance) process involves managers making very fine distinctions in staff’s performance in order to place them in discrete performance management categories. These categories set artificial limits on the number of staff being recognized for their contributions with merit pay and bonuses.” Related to concerns about subjectivity in the performance assessment system, Council representatives and employees expressed concern about data indicating that as a group, minorities, veterans, and field-based employees have historically received lower ratings than the employee population as a whole. While the data indicate that the disparity is considerably improved or eliminated for employees who have been with the agency fewer than 5 years, some employees have serious reservations about providing even greater discretion in allocating pay based on the current performance management system. To a lesser extent, some employees expressed concerns about the elimination of traditional federal employment rules related to grade and pay retention for employees who are demoted due to such conditions as a workforce restructuring or reclassification. The proposed legislation will allow the Comptroller General to set the pay of employees downgraded as a result of workforce restructuring or reclassification at their current rates (i.e., no drop in current pay), but with no automatic annual increase to basic pay until their salaries are less than the maximum rates of their new grades or bands. Employee concern, particularly among some Band II analysts and mission support staff, focuses on the extent to which this provision may result in a substantial erosion in future pay, since there is a strong possibility that these two groups may be restructured in the near future. For example, one observation is that the salary range within pay bands is such that senior analysts who are demoted would likely wait several years for their next increase in pay or bonus. In this circumstance, employees would need to reconcile themselves to no permanent pay increases regardless of their performance. Some employees cited this potential negative impact on staff motivation and productivity and emphasized that to continue providing service at the level of excellence that the Congress and the American people expect from GAO, this agency needs the best contributions of all its midlevel and journeymen employees. However, the EAC recognizes that, absent this kind of authority and given some of the authorities already provided to the Comptroller General, some employees who may be demoted could otherwise face termination rather than diminished salary increases. Finally, employees had differing opinions regarding the provision to change GAO’s name to the Government Accountability Office. Some employees are concerned that the proposed change in GAO’s name to more accurately reflect the work that we do will damage GAO’s “brand recognition.” Most employees who oppose the name change do not see the current name as an impediment to doing our work or to attracting quality employees. Some employees expressed concern that the legacy of high-quality service to the Congress that is embedded in the name “United States General Accounting Office” might be lost by changing the name. Other employees support the name change and cited their own experiences in being recruited or recruiting others and in their interaction with other federal agencies. In their opinion, the title “General Accounting Office” reflects misunderstandings and incorrect assumptions about GAO’s role and function by those who are not familiar with our operations and may serve as a deterrent to attracting employees who are otherwise not interested in accounting. We appreciate the Comptroller General’s efforts to involve the Employee Advisory Council and to solicit employee input through discussions of the proposal. As a result of employee feedback and feedback from GAO managers and the EAC, the Comptroller General has made a number of revisions and clarifications to the legislative proposal along with commitments to address concerns relating to the annual pay adjustment by issuing formal GAO policy to formally establish his intent to retain employees’ earning power in implementing the authorities; by revising the performance management system; and by deferring implementation of pay changes until 2005. Key among the commitments made by the Comptroller General is his assurance to explicitly consider factors such as cost-of-living and locality- pay differentials among other factors, both items that were not in the preliminary proposal. In addition, the Comptroller General has said that employees who are performing adequately will be assured of some annual increase that maintains spending power. He outlined his assurance in GAO’s weekly newsletter for June 30th that successful employees will not witness erosion in earning power and will receive an annual adjustment commensurate with locality-specific costs and salaries. According to the Comptroller General, pay protection commitments that are not included in the statute will be incorporated in the GAO orders required to implement the new authorities. This is consistent with the approach followed when GAO made similar pay protection commitments during the conversion to broad bands in the 1980s. To the extent that these steps are taken, overall employee opinion of the changes should improve because much of the concern has focused on making sure that staff who are performing adequately do not witness economic erosion in their pay. In response to concerns regarding the performance management system and the related variable elements of annual pay increases raised by the EAC, employees, and senior managers, the Comptroller General has told employees that he will provide increased transparency in the area of ratings distributions, for example by releasing summary-level performance appraisal results. In addition, the Comptroller General has stated that he plans to take steps to improve the performance management system that could further reduce any disparities. Specifically, on June 26, the Comptroller General released a "Performance Management System Improvement Proposal for the FY 2003 Performance Cycle" that outlines proposed short-term improvements to the analyst performance management system that applies to the majority of GAO employees. These include additional training for staff and performance managers and a reduction in the number of pay categories from five to four. A number of longer-term improvements to the performance appraisal system requiring validation are also under consideration, including weighting competencies and modifying, adding, or eliminating competencies. For all employees to embrace any additional pay-for-performance efforts, it is vital that the Comptroller General take steps that will provide an increased level of confidence that the appraisal process is capable of accurately identifying high performers and fairly distinguishing between levels of performance. Finally, the Comptroller General has agreed to delay implementation of the pay-for-performance provisions of the proposal until October 1, 2005. This change should provide an opportunity to assess efforts to improve the annual assessment process and lessen any impact of changes in the permanent annual pay increase process for employees approaching retirement. It should also provide an opportunity to implement a number of measures designed to improve confidence in the annual assessment process. In summary, as GAO employees we are proud of our work assisting the Congress and federal agencies to make government operations more efficient and effective. Although all of us would agree that our agency is not perfect, the EAC believes GAO is making a concerted effort to become a more effective organization. We will continue to work closely with management to improve GAO, particularly in efforts to implement and monitor any additional authorities granted to the Comptroller General. We believe that it is vital that we help to develop and implement innovative approaches to human capital management that will enable GAO to continue to meet the needs of the Congress; further improve the work environment to maximize the potential of our highly skilled, diverse, and dedicated workforce; and serve as a model for the rest of the federal government. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses how the Comptroller General formed the Employee Advisory Council (EAC) about 4 years ago to be fully representative of the GAO population and to advise him on issues pertaining to both management and employees. The members of the EAC represent a variety of employee groups and almost all employees outside of the senior executive service (more than 3,000 of GAO's 3,200 employees or 94 percent). The EAC operates as an umbrella organization that incorporates representatives of GAO's long-standing employee organizations including groups representing the disabled, Hispanics, Asian-Americans, African-Americans, gays and lesbians, veterans, and women, as well as employees in various pay bands, attorneys, and administrative and professional staff. The EAC serves as an advisory body to the Comptroller General and other senior executives by (1) seeking and conveying the views and concerns of the individual employee groups it represents while being sensitive to the mutual interests of all employees, regardless of their grade, band, or classification group, (2) proposing solutions to concerns raised by employees, as appropriate, (3) providing input by assessing and commenting on GAO policies, procedures, plans, and practices and (4) communicating issues and concerns of the Comptroller General and other senior managers to employees.

Treasury created CPP to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of preferred shares and subordinated debt. Rather than purchasing troubled mortgage-backed securities and whole loans, as initially envisioned under TARP, Treasury used CPP investments to strengthen the capital levels of financial institutions. Treasury determined that strengthening capital levels was the more effective mechanism to help stabilize financial markets, encourage interbank lending, and increase confidence in the financial system. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion, later reduced to $475 billion, in overall TARP funds for CPP. In March 2009, the CPP allocation was reduced to $218 billion to reflect lower estimated funding needs, as evidenced by actual participation rates. On December 31, 2009, the program was closed to new investments. Institutions participating in CPP entered into securities purchase agreements with Treasury. Under CPP, qualified financial institutions were eligible to receive an investment of 1 percent to 3 percent of their risk-weighted assets, up to $25 billion. In exchange for the investment, Treasury generally received preferred shares that would pay dividends. As of the end of 2014, all the institutions with outstanding preferred share investments were required to pay dividends at a rate of 9 percent, rather than the 5 percent rate that was in place for the first 5 years after the purchase of the preferred shares. EESA requires that Treasury also receive warrants to purchase shares of common or preferred stock or a senior debt instrument to further protect taxpayers and help ensure returns on the investments. Institutions are allowed to repay CPP investments with the approval of their primary federal bank regulator, and after repayment, institutions are permitted to repurchase warrants on common stock from Treasury. Treasury continues to make progress winding down CPP. As of December 31, 2016, Treasury had received repayments and sales of original CPP investments for more than 97 percent of its original investment. For the life of the program, repayments and sales totaled almost $200 billion (see fig.1). In 2016, institutions’ repayments totaled about $25 million. Moreover, as of December 31, 2016, Treasury had received about $227 billion in returns, including repayments and income, from its CPP investments, which exceeds the amount originally disbursed by almost $22 billion. Income from CPP totaled about $27 billion, and included about $12 billion in dividend and interest payments, almost $7 billion in proceeds in excess of costs, and about $8 billion from the sale of warrants. After accounting for write-offs and realized losses from sales totaling about $5 billion, CPP had about $0.2 billion in outstanding investments as of December 31, 2016. Investments outstanding represent about 0.1 percent of the amount Treasury disbursed for CPP. Treasury’s most recent estimate of lifetime income for CPP (as of Sept. 30, 2016) was about $16 billion. As of December 31, 2016, 696 of the 707 institutions that originally participated in CPP had exited the program (see fig. 2). A total of 6 institutions exited CPP in 2016. Among the institutions that had exited the program, 262 repurchased their preferred shares or subordinated debentures in full. Another 165 institutions refinanced their shares through other federal programs. In addition, 190 institutions had their investments sold through auction, 43 institutions had their investments restructured through non-auction sales, and 32 institutions went into bankruptcy or receivership. The remaining 4 merged with other CPP institutions. The method by which institutions have exited the program has varied over time. From 2009 through 2011, a total of 336 institutions exited the program. During this 3-year period, most institutions exited by fully repaying the investment or by refinancing the investment through another program. From 2012 through 2016, a total of 360 institutions exited the program. During this 5-year period, most institutions exited by Treasury selling the investment through an auction, repaying the investment to Treasury, or restructuring the investment. Repayments. Repayments allow financial institutions to redeem their preferred shares in full. Institutions have the contractual right to redeem their shares at any time provided that they receive the approval of their primary regulator(s). Institutions must demonstrate that they are financially strong enough to repay the CPP investments to receive regulatory approval to proceed with a repayment exit. As of December 31, 2016, 262 institutions had exited CPP through repayments. Restructurings. Restructurings allow troubled financial institutions to negotiate new terms or discounted redemptions for their CPP investment. Treasury requires institutions to raise new capital from outside investors (or merge with another institution) as a prerequisite for a restructuring. With this option, Treasury receives cash or other securities that generally can be sold more easily than preferred stock, but the restructured investments sometimes result in recoveries at less than par value. According to Treasury officials, Treasury facilitated restructurings as an exit from CPP in cases where new capital investment and the redemption of the CPP investment by the institutions otherwise was not possible. Treasury officials said that they approved the restructurings only if the terms represented a fair and equitable financial outcome for taxpayers. Treasury completed 43 such restructurings through December 31, 2016. Auctions. Auctions allow Treasury to sell its preferred stock investments in CPP participants. Treasury conducted the first auction of CPP investments in March 2012, and has continued to use this strategy to sell its investments. As of December 31, 2016, Treasury had conducted a total of 28 auctions of stock from 190 CPP institutions. Through these transactions, Treasury received over $3 billion in proceeds, which was about 80 percent of the investments’ face amount. As we have previously reported, thus far Treasury has sold investments individually but noted that combining smaller investments into pooled auctions remained an option. Whether Treasury sells CPP investments individually or in pools, the outcome of this option will depend largely on investor demand for these securities and the quality of the underlying financial institutions. As of December 31, 2016, 11 institutions remained in CPP (see fig. 3). The largest outstanding investment, about $125 million, accounted for almost two-thirds of the outstanding CPP investments. The investments at the 10 other institutions ranged from about $1.5 million to $17 million. As figure 4 illustrates, Treasury’s original CPP investments were scattered across the country in 48 states and Puerto Rico and the amount of investments varied. Almost 4 percent (25) of the investments were greater than $1 billion and almost half (314) of the investments were less than $10 million. The largest investment totaled $25 billion and the smallest investment totaled about $300,000. The 11 institutions that remained in CPP as of December 31, 2016 were in Arkansas, California (2), Colorado, Florida, Kentucky, Maryland (2), Massachusetts, Missouri, and Puerto Rico. Treasury officials said that they expect the majority of the remaining institutions will require a restructuring to exit the program in the future because the overall weaker financial condition of the remaining institutions makes full repayment unlikely. However, they added that repayments, restructurings, and auctions all remain possible exit strategies for the remaining CPP institutions. Since we last reported in May 2016, Treasury continues to maintain its position of not fully writing off any investments. Treasury officials anticipate that the current strategy to restructure the remaining investments will result in a better return for taxpayers. According to officials, any savings achieved by writing off the remaining CPP assets and eliminating administrative costs associated with maintaining CPP would be limited, because much of the TARP infrastructure, such as staff resources, will remain intact for several years to manage other TARP programs. Treasury officials also noted that writing off the remaining assets, thereby not requiring repayment from the remaining institutions, would be unfair to the institutions that have already repaid their investment and exited the program. Treasury officials told us that they continue to have discussions with institutions about their plans to exit the program. Overall, the financial condition of institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011. As shown in figure 5, the median of all six indicators of financial condition that we analyzed improved from 2011 to September 30, 2016. However, some institutions show signs of financial weakness. As figure 5 illustrates, the median for the first three financial condition indicators—Texas ratio, noncurrent loan percentage, and net chargeoffs to average loans ratio—have decreased, which indicates stronger financial health. The median for the remaining three financial condition indicators—return on average assets, common equity Tier 1 ratio, and reserves to nonperforming loans—have increased, which also indicates stronger financial health. However, some institutions show signs of financial weakness. For example, 5 of the 11 institutions had negative return on average assets for the third quarter of 2016. Six institutions had a lower return on average assets for the third quarter of 2016, compared to the third quarter of 2011. The remaining institutions also had varying levels of reserves for covering losses, as measured by the ratio of reserves to nonperforming loans. For example, 4 institutions had lower levels of reserves for covering losses for the third quarter of 2016 compared to the third quarter of 2011. For 1 institution, four of the financial indicators had weakened from the third quarter of 2011 to the third quarter of 2016. Treasury officials stated that the remaining CPP institutions generally had weaker capital levels and poorer asset quality relative to institutions that had exited the program. They noted that this situation was a function of the life cycle of the program, because stronger institutions had greater access to new capital and higher earnings and were able to exit, while the weaker institutions had been unable to raise the capital or generate the earnings needed to exit the program. Of the remaining 11 CPP institutions as of December 31, 2016, 1 of the 9 required to pay dividends made the most recent scheduled dividend or interest payment. The 8 institutions that are delinquent have missed an average of 28 quarterly dividend payments, with 19 being the fewest missed payments and 32 being the most. Institutions can choose whether to pay dividends and may choose not to pay for a variety of reasons, including decisions they or their federal or state regulators make to conserve cash and capital. However, investors may view an institution’s ability to pay dividends as an indicator of its financial strength and may see failure to pay as a sign of financial weakness. Treasury officials told us that Treasury regularly monitors all institutions remaining in the program. For example, Treasury’s financial agent has provided quarterly valuations and credit reports for all of the institutions remaining in the CPP portfolio. In addition, Treasury has requested to attend the Board of Directors meetings at nine of the remaining institutions and has observed meetings at eight institutions. One institution has declined Treasury’s request. Treasury officials said that the agency currently does not plan to take any other actions with respect to its request to send a board observer to that institution but will continue to monitor the institution’s financial condition. As discussed previously, Treasury officials told us that they have continued to have discussions with institutions remaining in the program. We provided Treasury with a draft of this report for review and comment. Treasury provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Treasury, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. In addition to the contact named above, Karen Tremba (Assistant Director), Anne Akin (Analyst-in-Charge), William R. Chatlos, Lynda Downing, Risto Laboski, John Mingus, Tovah Rom, Jena Sinkfield, and Tyler Spunaugle have made significant contributions to this report.

CPP was established as the primary means of restoring stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, Treasury invested almost $205 billion in 707 eligible financial institutions between October 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. The Emergency Economic Stabilization Act of 2008, as amended, includes a provision that GAO report at least annually on TARP activities and performance. This report examines (1) the status of CPP, including repayments, investments outstanding, and number of remaining institutions; and (2) the financial condition of institutions remaining in CPP. To assess the program's status, GAO reviewed Treasury reports on the status of CPP. In addition, GAO reviewed information from Treasury officials to identify the agency's current efforts to wind down the program. Finally, GAO used financial and regulatory data to assess the financial condition of institutions remaining in CPP. GAO provided a draft of this report to Treasury for its review and comment. Treasury provided technical comments that GAO incorporated as appropriate. The Department of the Treasury (Treasury) continues to make progress winding down the Capital Purchase Program (CPP). As of December 31, 2016, investments outstanding stood at almost $0.2 billion (see figure), which represents about 0.1 percent of the original amount disbursed. Treasury had received almost $200 billion in repayments, including about $25 million in 2016. Further, Treasury's returns for the program, including repayments and income, totaled about $227 billion, exceeding the amount originally disbursed by almost $22 billion. Of the 707 institutions that originally participated in CPP, 696 had exited the program, including 6 institutions in 2016. Treasury officials expect that the majority of the remaining institutions will require a restructuring to exit the program. Restructurings allow institutions to negotiate terms for their CPP investments. With this option, Treasury requires institutions to raise new capital or merge with another institution and Treasury agrees to receive cash or other securities, typically at less than par value. Treasury officials expect to rely primarily on restructurings because the overall weaker financial condition of the remaining institutions makes full repayment unlikely. The financial condition of the institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011, but some institutions show signs of financial weakness. For example, 5 institutions had negative returns on average assets (a common measure of profitability) for the third quarter of 2016.

NMMSS is the United States’ official nuclear materials tracking and accounting system. NMMSS provides information on nuclear materials to support both domestic programs and international nuclear policies. Keeping track of the growing amount of nuclear materials is especially important as a result of the breakdown of the Soviet Union and increases in both domestic and international terrorism. Tracking and accounting for the hundreds of tons of plutonium, highly enriched uranium, and other nuclear materials that have accumulated are important to help (1) ensure that nuclear materials are used only for peaceful purposes, (2) protect nuclear materials from loss, theft, or other diversion, (3) comply with international treaty obligations, and (4) provide data to policymakers and other government officials on the amount and location of nuclear materials. The NMMSS database contains data on nuclear materials supplied and controlled under international agreements, including U.S.-supplied international nuclear materials transactions, foreign contracts, import/export licenses, government-to-government approvals, and other DOE authorizations, such as authorizations to retransfer U.S.-supplied materials between foreign countries. NMMSS also maintains and provides DOE with information on domestic production and materials management, safeguards, physical accountability, financial and cost accounting, and other data related to nuclear materials accountability and safeguards for Nuclear Regulatory Commission licensees. DOE and the Nuclear Regulatory Commission cosponsor NMMSS, and it is managed and operated by a DOE contractor—Martin Marietta Energy Systems, Incorporated. NMMSS has been used to account for U.S. imports and exports of nuclear materials since 1977. Because the existing NMMSS is an older system, DOE decided to replace and modernize it. The existing NMMSS is housed on a mainframe using unstructured COBOL code. Performing modifications on the existing NMMSS and designing custom reports are difficult because of the volume and complexity of the code. Accordingly, DOE’s Office of Nonproliferation and National Security, which is responsible for operating NMMSS, tasked the Lawrence Livermore National Laboratory with developing a new NMMSS. Livermore hired a subcontractor to perform this task in February 1994 and assigned a program manager to oversee the effort. In April 1994, Livermore formed a technical advisory committee, composed of senior computer scientists and material control and accountability specialists, to assist the program manager in overseeing the system development. The replacement NMMSS is scheduled to become operational on September 1, 1995. Martin Marietta is scheduled to discontinue operation of the existing NMMSS during September 1995. To address our objectives, we reviewed the replacement NMMSS contract, transition plan, test plan, and various other draft system documents. We requested documentation on the status of the system coding and testing; however, none was available for our review. We also analyzed documentation provided to us by Lawrence Livermore’s technical advisory committee on the subcontractor’s development efforts. In addition, we analyzed documentation from various user groups on their concerns with the NMMSS development. We analyzed DOE Order 1330.1D, Computer Software Management, to determine its applicability to this project and whether or not it was being followed. We interviewed DOE officials in the Office of Nonproliferation and National Security concerning actions taken to implement the recommendations in our previous report and the status of the NMMSS development. We also interviewed the NMMSS program manager, members of Lawrence Livermore’s technical advisory committee, contract officials at DOE and Lawrence Livermore, and the NMMSS subcontractor’s lead programmers, system engineer, and project managers to determine the status of the system development. In addition, we interviewed officials in DOE’s Defense Programs Office—the biggest user of NMMSS information—on their concerns about the replacement NMMSS development. We performed our work between February 1995 and May 1995, in accordance with generally accepted government auditing standards. Our work was primarily done at DOE’s headquarters in Washington, D.C., and its offices in Germantown, Maryland; at Lawrence Livermore National Laboratory in Livermore, California; and at the subcontractor’s facility in Norcross, Georgia. The Department of Energy provided written comments on a draft of this report. These comments are presented and evaluated in the report, and are reprinted in appendix I. In December 1994, we reported that DOE did not adequately plan the development effort for the replacement NMMSS. For example, DOE did not follow sound system development practices such as identifying and defining users’ needs and adequately exploring design alternatives that would best satisfy these needs in the most economic fashion. Accordingly, we recommended that DOE determine users’ requirements, investigate alternatives, conduct cost-benefit analyses, and develop a plan to meet identified needs before investing further resources in the replacement NMMSS. In its official response to the recommendations in our prior report, DOE stated that it did not concur with our recommendations and that it did not believe it would be cost-effective to delay its effort to transition from the existing system to the new system. Further, in commenting on a draft of this report, the Acting Director of the Office of Nonproliferation and National Security stated that DOE’s planning was sufficient. However, because of DOE’s lack of basic planning, it does not know if the system will fulfill the needs of its major users or be cost-effective. Adhering to generally accepted system development practices helps to ensure that information systems perform as desired. These practices include (1) generating clear, complete, and accurate documentation throughout the system development process, (2) placing the software development under configuration management, and (3) ensuring that the system successfully completes acceptance testing prior to becoming operational. However, because DOE has not required the subcontractor to follow any of these practices for the replacement NMMSS, the Department does not know how much of the system development is completed and whether the part that is completed performs as required. As a result, the risk of system failure is inordinately high. DOE Order 1330.1D, Computer Software Management, requires that the development of a system be documented so that, among other things, the status of the system is known at all times. Documentation, such as the results of system testing and the tracking of source code as it changes, allows program managers to review the development’s progress and determine if requirements are being met. The subcontractor developing the replacement NMMSS could not provide any system documentation—software specifications, system requirements, results of formal reviews (e.g., system/preliminary/critical design) or informal system testing reports, operational procedures, quality assurance checklists, or project tracking reports. Because little system documentation exists, and the contract does not require any interim deliverables that measure system performance, DOE does not know the status of the system development. In addition, members of Livermore’s technical advisory committee told us they have been unable to obtain the documentation they needed to determine the status of the development effort. As a result, the committee said it could not accurately determine such factors as the number of lines of code in the system. In fact, the advisory committee could only estimate system size in very gross terms—between 10,000 and 100,000 lines of code. DOE officials agreed that the development effort is largely undocumented and stated that DOE historically has not enforced its own regulations requiring system documentation. At the conclusion of our review and in commenting on a draft of this report, DOE officials told us that they will begin to require such documentation for the replacement NMMSS. A successful system development project should include a software configuration management plan that clearly defines the procedures for identifying, accounting for, and reporting on changes to software items that are under configuration control. Configuration management is necessary throughout the life cycle of a software project because it provides (1) a control mechanism to ensure that the software status is accurately known at all times and (2) a baseline for system developers and testers. Although the subcontractor developed a software configuration management plan for the replacement NMMSS, no software had been placed under configuration control. As a result, DOE does not know what version of the software is current, which versions of the software have been tested, what problems were identified during testing, and what corrections are being made. Developing software without configuration management frequently results in projects that are delivered late, exceed budget, and perform poorly. Officials in DOE’s Office of Nonproliferation and National Security agreed that the replacement NMMSS software had not been placed under configuration management at the time of our exit conference. The officials stated that, until recently, they had not required the use of configuration management on software development projects. In its written comments on a draft of this report, DOE stated that the replacement NMMSS is now being placed under configuration control. During acceptance testing, tests are performed to determine if a system will meet its hardware, software, performance, and user operational requirements. Acceptance testing is usually performed by the system developer and witnessed by an independent verification and validation group, which includes system users. Such testing is important to determine if the new system performs as required. The previous implementation schedule for the replacement NMMSS called for acceptance testing and 2 months of parallel operation with the existing NMMSS. In addition, in a January 1994 memorandum, an official from DOE’s Office of Nonproliferation and National Security stated that the replacement NMMSS would not be made operational until “it has been demonstrated that the new system is capable of meeting present and new customer needs and requirements.” Adhering to this position on testing the replacement NMMSS would have greatly reduced system risks. In January 1995, DOE changed its position and decided to make the replacement NMMSS operational without performing acceptance testing. DOE officials stated that this decision was made to avoid the cost of simultaneously funding both the existing and replacement systems. Instead, DOE plans to perform what it is calling “system testing” on a subset of system reports—87 of approximately 500 reports. While DOE stated that these 87 reports were selected based on users’ needs, it could not produce documentation to validate this statement. The only system testing at the time of our review was the informal testing that the subcontractor stated it had performed. However, the subcontractor could not provide documentation on either its test plans or the test results. In its written comments on a draft of this report, DOE officials stated that system test procedures have now been written and approved. In addition, parallel operations with the existing NMMSS are not scheduled. During parallel operations, both systems would perform all required functions, and then outputs would be compared to ensure that the replacement system is producing accurate reports. Because the replacement NMMSS will replicate the functions of the existing NMMSS, a period of parallel operations is especially important. Without parallel processing, DOE is introducing additional risk that the replacement system will not perform all functions of the existing system or, more importantly, that the information produced by the replacement system will not be accurate. As a result, DOE cannot guarantee its users that the information they need from NMMSS to do their jobs will continue to be available. NMMSS users told us that information they get from the existing NMMSS within hours could take weeks or months to gather if they cannot obtain it from the new NMMSS or if they cannot be sure that the information in the new NMMSS is accurate. DOE has stated that it will discontinue the existing system on September 1, 1995, and begin operation of the replacement NMMSS without acceptance testing. However, DOE’s replacement NMMSS is being developed in an undisciplined, poorly controlled manner that makes success unlikely. Planning was inadequate and basic system development practices are not being followed. As a result, DOE will not know if the replacement NMMSS will produce the accurate and timely reports needed to meet users’ needs before it accepts the system and pays the subcontractor. DOE’s disregard for basic system development practices necessary to ensure the accuracy and dependability of its nuclear tracking system is inconsistent with the importance of NMMSS, which provides the United States’ official record for tracking nuclear materials. It is not in DOE’s best interests, therefore, to disconnect the existing NMMSS and replace it with an untested, undocumented new system. The history of software development is littered with systems that failed under similar circumstances. We recommend that the Secretary of Energy immediately terminate any further development of the replacement NMMSS. Further, as we recommended in our December 1994 report, the Secretary should direct the Office of Nonproliferation and National Security to determine users’ requirements, investigate alternatives, and conduct cost-benefit analyses before proceeding with any plan to develop a replacement NMMSS. If, after thorough planning, the Office proceeds with plans to develop a new NMMSS, we recommend that it follow generally accepted system development practices. In the interim, we recommend that DOE continue using the existing NMMSS system until the above recommendations are addressed. The Department of Energy provided written comments on a draft of this report. Their comments are summarized below and reproduced in appendix I. The Department of Energy agreed with the need for systems development documentation, configuration management, and adequate testing. However, the Department did not concur with our assessment of its analyses and planning for the system development effort, or with our recommendation that it terminate the system development until users’ requirements, alternatives, and cost-benefit analyses have been performed. DOE stated that its planning was adequate because it is converting an existing system from an unstructured language to a structured, fourth generation language, rather than developing a new system. We disagree. Without sound analyses or planning, DOE does not know that “converting an existing system” is a cost-effective way to meet its needs. Furthermore, as our report discusses, DOE is implementing this unsupported approach in an unsatisfactory manner. Therefore, DOE should discontinue its current effort and perform users’ requirements, alternatives, and cost-benefit analyses before proceeding. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will provide copies of this report to the Secretary of Energy; the Director, Office of Management and Budget; appropriate congressional committees; and other interested parties. Copies will also be made available to others upon request. Please call me at (202) 512-6253 if you or your staff have any questions. Major contributors to this report are listed in appendix II. Valerie C. Melvin, Assistant Director Keith A. Rhodes, Technical Assistant Director Suzanne M. Burns, Evaluator-in-Charge Linda J. Lambert, Senior Auditor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the Department of Energy's (DOE) progress in developing a new nuclear materials tracking system, focusing on: (1) DOE actions to implement previous GAO recommendations concerning the system; and (2) whether DOE is adequately addressing key system development risks. GAO found that: (1) DOE has not implemented any of the GAO recommendations regarding new system planning and analysis and has no plans to do so because it believes its planning is sufficient and delaying the system would lead to unnecessary costs; (2) DOE does not know if its new system will meet users' needs or be cost-effective; (3) DOE has not addressed the subcontractor's failure to document its system development process and to place its software under configuration management, or its failure to require acceptance testing before taking delivery of the system and plan for parallel operations of the new and old systems to check the new system's performance; and (4) the risk of system failure is high, since DOE does not know the status of the system development effort or whether certain system components will perform as required.

I am pleased to be here today to discuss the implementation of the Community Policing Act with special attention to statutory requirements for implementing the Community Oriented Policing Services (COPS) grants. The Community Policing Act authorized $8.8 billion to be used from fiscal years 1995 to 2000 to enhance public safety. Its goals are to add 100,000 officer positions, funded by grants, to the streets of communities nationwide and to promote community policing. This statement is based primarily on our September 3, 1997, report on the design, operation, and management of the COPS grant program. At that time, the COPS grant program was midway through its 6-year authorization period. Thus, the information contained in this statement should be considered as a status report at that time rather than a reflection of current operations. My statement makes the following points. COPS grants were not targeted on the basis of greatest need for assistance. However, the higher the crime rate, the more likely a jurisdiction was to apply for a COPS grant. COPS office grant monitoring was limited. Monitoring guidelines were not prepared, site visits and telephone monitoring did not systematically take place, and information on activities and accomplishments was not consistently collected or reviewed. Small communities were awarded most COPS office grants, but large cities received larger awards. In accordance with the act, about half the funds were awarded to agencies serving populations less than 150,000. As of June 1997, a total of 30,155 law enforcement positions funded by COPS grants were estimated by the COPS office to be on the street. Community policing is a philosophy under which local police departments develop strategies to address the causes of and reduce the fear of crime through problem solving tactics and community-police partnerships. Community policing emphasizes the importance of police-citizen partnerships and cooperation to control crime, maintain order, and improve the quality of life in communities. Community Policing Act, the Attorney General had discretion to decide which Justice component would administer community policing grants. Justice officials believed that a new, efficient customer-oriented organization was needed to process the record number of grants. The result was the creation of the new Office of Community Oriented Policing Services (COPS). The Community Policing Act requires that grantees contribute 25 percent of the costs of the program, project, or activity funded by the grant, unless the Attorney General waives the matching requirement. According to Justice officials, the basis for waiver of the matching requirements is extraordinary local fiscal hardship. The act also requires that grants be used to supplement, not supplant, state and local funds. To prevent supplanting, grantees must devote resources to law enforcement beyond those resources that would have been available without a COPS grant. In general, grantees are expected to use the hiring grants to increase the number of funded sworn officers above the number on board in October 1994, when the program began. Grantees are required to have plans to assume a progressively larger share of the cost over time, looking toward keeping the increased number of officers by using state and local funds after the expiration of the federal grant program at the end of fiscal year 2000. The Community Policing Act does not target grants to law enforcement agencies on the basis of which agency has the greatest need for assistance, but rather to agencies that meet COPS program criteria. In one of our previous reports, among other things, we reviewed alternative strategies for targeting grants. We noted that federal grants have been established to achieve a variety of goals. For example, if the desired goal is to target fiscal relief to areas experiencing greater fiscal stress, grant allocation formulas could be changed to include a combination of factors that allocate a larger share of federal aid to those states with relatively greater program needs and fewer resources. expressed uncertainty about being able to continue officer funding after the grant expired and about their ability to provide the required 25-percent match. However, community groups and local government representatives we interviewed generally supported community policing in their neighborhoods. Monitoring is an important tool for Justice to use in ensuring that law enforcement jurisdictions funded by COPS grants comply with federal program requirements. The Community Policing Act requires that each COPS Office program, project, or activity contain a monitoring component developed pursuant to guidelines established by the Attorney General. In addition, the COPS program regulations specify that each grant is to contain a monitoring component, including periodic financial and programmatic reporting and, in appropriate circumstances, on-site reviews. The regulations state that the guidelines for monitoring are to be issued by the COPS Office. COPS Office grant-monitoring activities during the first 2-1/2 years of the program were limited. Final COPS Office monitoring guidance had not been issued as of June 1997. Information on activities and accomplishments for COPS-funded programs was not consistently collected or reviewed. Site visits and telephone monitoring by grant advisers did not systematically take place. COPS Office officials said that monitoring efforts were limited due to a lack of grant adviser staff and an early program focus on processing applications to get officers on the street. According to a COPS Office official, as of July 1997, the COPS Office had about 155 total staff positions, up from about 130 positions that it had when the office was established. Seventy of these positions were for grant administration, including processing grant applications, responding to questions from grantees, and monitoring grantee performance. The remaining positions were for staff who worked in various other areas, including training; technical assistance; administration; and public, intergovernmental, and congressional liaison. According to the COPS Office, in January 1997, it began taking steps to increase the level of its monitoring. It developed monitoring guidelines, revised reporting forms, piloted on-site monitoring visits, and initiated telephone monitoring of grantees’ activities. process of hiring up to this level. In commenting on our draft report, COPS officials also noted that they were recruiting for more than 30 staff positions in a new monitoring component to be exclusively devoted to overseeing grant compliance activities. COPS Office officials also said that some efforts were under way to review compliance with requirements of the Community Policing Act that grants be used to supplement, not supplant, local funding. In previous work, we reported that enforcing such provisions of grant programs was difficult for federal agencies due to problems in ascertaining state and local spending intentions. According to the COPS Office Assistant Director of Grant Administration, the COPS Office’s approach to achieving compliance with the nonsupplantation provision was to receive accounts of potential violations from grantees or other sources and then to work with grantees to bring them into compliance, not to abruptly terminate grants or otherwise penalize grantees. COPS Office grant advisers attempted to work with grantees to develop mutually acceptable plans for corrective actions. Also, in our 1997 report on grant design, our synthesis of literature on the fiscal impact of grants suggested that each additional federal grant dollar resulted in about 40 cents of added spending on the aided activity. This means that the fiscal impact of the remaining 60 cents was to free up state or local funds that otherwise would have been spent on that activity for other programs or tax relief. In April 1997, COPS Office officials said that they were discussing ways to encourage grantees to sustain hiring levels achieved under the grants, in light of the language of the Community Policing Act regarding the continuation of these increased hiring levels after the conclusion of federal support. Law enforcement agencies in small communities were awarded most of the COPS grants for fiscal years 1995 and 1996. Our work showed that 6,588 grants—49 percent of the total 13,396 grants awarded—were awarded to law enforcement agencies serving communities with populations of fewer than 10,000. Eighty-three percent—11,173 grants—of the total grants awarded went to agencies serving populations of fewer than 50,000. Large cities—with populations of over 1 million—were awarded about 1 percent of the grants, but these grants made up over 23 percent—about $612 million—of the total grant dollars awarded. About 50 percent of the grant funds were awarded to law enforcement agencies serving populations of 150,000 or less, and about 50 percent of the grant funds were awarded to law enforcement agencies serving populations exceeding 150,000, as the Community Policing Act required. In commenting on our draft report, the COPS Office noted that these distributions were not surprising given that the vast majority of police departments nationwide are also relatively small. The COPS Office also noted that the Community Policing Act requires that the level of assistance given to large and small agencies be equal. Of the grants awarded in fiscal years 1995 and 1996, special law enforcement agencies, such as those serving Native American communities, universities and colleges, and mass transit passengers, were awarded 329 hiring grants. This number was less than 3 percent of the 11,434 hiring grants awarded during the 2-year period. As of the end of fiscal year 1996, after 2 years of operation, the COPS Office had issued award letters to 8,803 communities for 13,396 grants totaling about $2.6 billion. Eighty-six percent of these grant dollars were to be used to hire additional law enforcement officers. Other grant funds were to be used to buy new technology and equipment; hire support personnel; and/or pay law enforcement officers overtime, train officers in community policing, and develop innovative prevention programs, including domestic violence prevention, youth firearms reduction, and antigang initiatives. As of June 1997, a total of 30,155 law enforcement officer positions funded by COPS grants were estimated by the COPS Office to be on the street. COPS Office estimates of the numbers of new community policing officers on the street were based on three funding sources: (1) officers on board as a result of COPS hiring grants; (2) officers redeployed to community policing as a result of time savings achieved through technology and equipment purchases, hiring of civilian personnel, and/or law enforcement officers’ overtime; and (3) officers funded under the Police Hiring Supplement Program, which was in place before the COPS grant program. According to COPS Office officials, the office’s first systematic attempt to estimate the progress toward the goal of 100,000 new community policing officers on the street was a telephone survey of grantees done between September and December, 1996. COPS Office staff contacted 8,360 grantees to inquire about their progress in hiring officers and getting them on the street. According to a COPS Office official, a follow-up survey, which estimated 30,155 law enforcement officer positions to be on the street, was done between late March and June, 1997. The official said that this survey was contracted out because the earlier in-house survey had been extremely time consuming. The official said that, as of May 1997, the office was in the process of selecting a contractor to do three additional surveys during fiscal year 1998. Mr. Chairman, this concludes my prepared statement. Again, I wish to emphasize that my statement is based primarily on a report issued at about the mid-point of the COPS program implementation, and that facts and circumstances relating to the program would likely have changed since then. I would be pleased to answer any questions that you or other members of the Subcommittee may have. Contacts and Acknowledgment For future contacts regarding this testimony, please contact Richard M. Stana at (202) 512-8777. Individuals making key contributions to this testimony included Weldon McPhail and Dennise R. Stickley. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch- tone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the implementation of the Community Policing Act, focusing on statutory requirements for implementing the Community Oriented Policing Services (COPS) grants. GAO noted that: (1) the Public Safety Partnership and Community Policing Act authorizes $8.8 billion to be used from fiscal years (FY) 1995 to 2000 to enhance public safety; (2) it has the goals of adding 100,000 officer positions, funded by grants, to the streets of communities nationwide and promoting community policing; (3) among other things, the act required that half the grants go to law enforcement agencies serving populations of 150,000 or less; (4) the Attorney General created the Office of Community Oriented Policing Services to administer community policing grants; (5) at the end of FY 1997, GAO reported on the Department of Justice's implementation of the act and progress toward achieving program goals; (6) GAO found that grants were not targeted to law enforcement agencies on the basis of which agency had the greatest need for assistance, but rather to agencies that met COPS program criteria; (7) previous work had shown that overall, the higher crime rate, the more likely a jurisdiction was to apply for a COPS grant; (8) the primary reasons contacted jurisdictions chose not to apply for a grant were cost related; (9) GAO reported that the COPS Office provided limited monitoring to assure compliance with the act during the period reviewed; (10) COPS officials said they were taking steps to increase the level of monitoring; (11) the majority of the 13,396 grants awarded in FY 1995 and FY 1996 went to law enforcement agencies serving populations of fewer than 50,000; (12) communities with populations of over 1 million were awarded less than 1 percent of the grants, although they were awarded over 23 percent of the total grant dollars; and (13) as of June 1997, the COPS Office estimated that a total of 30,155 law enforcement officer positions funded by COPS grants were on the streets.

Crude oil prices are a major determinant of gasoline prices. As figure 1 shows, crude oil and gasoline prices have generally followed a similar path over the past three decades and have risen considerably over the past few years. Also, as is the case for most goods and services, changes in the demand for gasoline relative to changes in supply affect the price that consumers pay. In other words, if the demand for gasoline increases faster than the ability to supply it, the price of gasoline will most likely increase. In 2006, the United States consumed an average of 387 million gallons of gasoline per day. This consumption is 59 percent more than the 1970 average per day consumption of 243 million gallons—an average increase of about 1.6 percent per year for the last 36 years. As we have shown in a previous GAO report, most of the increased U.S. gasoline consumption over the last two decades has been due to consumer preference for larger, less-fuel efficient vehicles such as vans, pickups, and SUVs, which have become a growing part of the automotive fleet. Refining capacity and utilization rates also play a role in determining gasoline prices. Refinery capacity in the United States has not expanded at the same pace as demand for gasoline and other petroleum products in recent years. According to FTC, no new refinery still in operation has been built in the U.S. since 1976. As a result, existing U.S. refineries have been running at very high rates of utilization averaging 92 percent since the 1990s, compared to about an average of 78 percent in the 1980s. Figure 2 shows that since 1970 utilization has been approaching the limits of U.S. refining capacity. Although the average capacity of existing refineries has increased, refiners have limited ability to increase production as demand increases. While the lack of spare refinery capacity may contribute to higher refinery margins, it also increases the vulnerability of gasoline markets to short-term supply disruptions that could result in price spikes for consumers at the pump. Although imported gasoline could mitigate short-term disruptions in domestic supply, the fact that imported gasoline comes from farther away than domestic supply means that when supply disruptions occur in the United States it might take longer to get replacement gasoline than if we had spare refining capacity in the United States. This could mean that gasoline prices remain high until the imported supplies can reach the market. Further, gasoline inventories maintained by refiners or marketers of gasoline can also have an impact on prices. As have a number of other industries, the petroleum industry has adopted so-called “just-in-time” delivery processes to reduce costs leading to a downward trend in the level of gasoline inventories in the United States. For example, in the early 1980s U.S. oil companies held stocks of gasoline of about 40 days of average U.S. consumption, while in 2006 these stocks had decreased to 23 days of consumption. While lower costs of holding inventories may reduce gasoline prices, lower levels of inventories may also cause prices to be more volatile because when a supply disruption occurs, there are fewer stocks of readily available gasoline to draw from, putting upward pressure on prices. Regulatory factors play a role as well. For example, in order to meet national air quality standards under the Clean Air Act, as amended, many states have adopted the use of special gasoline blends—so-called “boutique fuels.” As we reported in a recent study, there is a general consensus that higher costs associated with supplying special gasoline blends contribute to higher gasoline prices, either because of more frequent or more severe supply disruptions, or because higher costs are likely passed on, at least in part, to consumers. Furthermore, changes in regulatory standards generally make it difficult for firms to arbitrage across markets because gasoline produced according to one set of specifications may not meet another area’s specifications. Finally, market consolidation in the U.S. petroleum industry through mergers can influence the prices of gasoline. Mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, either through unilateral actions of the merged companies or coordinated interaction with other companies, potentially allowing them to increase and maintain prices above competitive levels. On the other hand, mergers could also yield cost savings and efficiency gains, which could be passed on to consumers through lower prices. Ultimately, the impact depends on whether the market power or the efficiency effects dominate. During the 1990s, the U.S. petroleum industry experienced a wave of mergers, acquisitions, and joint ventures, several of them between large oil companies that had previously competed with each other for the sale of petroleum products. More than 2,600 merger transactions occurred from 1991to 2000 involving all segments of the U.S. petroleum industry. These mergers contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry. Econometric modeling we performed of eight mergers involving major integrated oil companies that occurred in the 1990s showed that the majority resulted in small but significant increases in wholesale gasoline prices. The effects of some of the mergers were inconclusive, especially for boutique fuels sold in the East Coast and Gulf Coast regions and in California. While we have not performed modeling on mergers that occurred since 2000, and thus cannot comment on any potential effect on wholesale gasoline prices at this time, these mergers would further increase market concentration nationwide since there are now fewer oil companies. Some of the mergers involved large partially or fully vertically integrated companies that previously competed with each other. For example, in 1998 British Petroleum (BP) and Amoco merged to form BPAmoco, which later merged with ARCO, and in 1999 Exxon, the largest U.S. oil company merged with Mobil, the second largest. Since 2000, we found that at least 8 large mergers have occurred. Some of these mergers have involved major integrated oil companies, such as the Chevron-Texaco merger, announced in 2000, to form ChevronTexaco, which went on to acquire Unocal in 2005. In addition, Phillips and Tosco announced a merger in 2001 and the resulting company, Phillips, then merged with Conoco to become ConocoPhillips. Independent oil companies have also been involved in mergers. For example, Devon Energy and Ocean Energy, two independent oil producers, announced a merger in 2003 to become the largest independent oil and gas producer in the United States at that time. Petroleum industry officials and experts we contacted cited several reasons for the industry’s wave of mergers since the 1990s, including increasing growth, diversifying assets, and reducing costs. Economic literature indicates that enhancing market power is also sometimes a motive for mergers, which could reduce competition and lead to higher prices. Ultimately, these reasons mostly relate to companies’ desire to maximize profits or stock values. Proposed mergers in all industries are generally reviewed by federal antitrust authorities—including the Federal Trade Commission (FTC) and the Department of Justice (DOJ)—to assess the potential impact on market competition and consumer prices. According to FTC officials, FTC generally reviews proposed mergers involving the petroleum industry because of the agency’s expertise in that industry. To help determine the potential effect of a merger on market competition, FTC evaluates, among other factors, how the merger would change the level of market concentration. Conceptually, when market concentration is higher, the market is less competitive and it is more likely that firms can exert control over prices. DOJ and FTC have jointly issued guidelines to measure market concentration. The scale is divided into three separate categories: unconcentrated, moderately concentrated, and highly concentrated. The index of market concentration in refining increased all over the country during the 1990s, and changed from moderately to highly concentrated on the East Coast. In wholesale gasoline markets, market concentration increased throughout the United States between 1994 and 2002. Specifically, 46 states and the District of Columbia had moderately or highly concentrated markets by 2002, compared to 27 in 1994. To estimate the effect of mergers on wholesale gasoline prices, we performed econometric modeling on eight mergers that occurred during the 1990s: Ultramar Diamond Shamrock (UDS)-Total, Tosco-Unocal, Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva), BP- Amoco, Exxon-Mobil, and Marathon Ashland Petroleum (MAP)-UDS. For the seven mergers that we modeled for conventional gasoline, five led to increased prices, especially the MAP-UDS and Exxon-Mobil mergers, where the increases generally exceeded 2 cents per gallon, on average. For the four mergers that we modeled for reformulated gasoline, two— Exxon-Mobil and Marathon-Ashland—led to increased prices of about 1 cent per gallon, on average. In contrast, the Shell-Texaco II (Motiva) merger led to price decreases of less than one-half cent per gallon, on average, for branded gasoline only. For the two mergers—Tosco-Unocal and Shell-Texaco I (Equilon)—that we modeled for gasoline used in California, known as California Air Resources Board (CARB) gasoline, only the Tosco-Unocal merger led to price increases. The increases were for branded gasoline only and were about 7 cents per gallon, on average. Our analysis shows that wholesale gasoline prices were also affected by other factors included in the econometric models, including gasoline inventories relative to demand, supply disruptions in some parts of the Midwest and the West Coast, and refinery capacity utilization rates. Our past work has shown that, the price of crude oil is a major determinant of gasoline prices along with changes in demand for gasoline. Limited refinery capacity and the lack of spare capacity due to high refinery capacity utilization rates, decreasing gasoline inventory levels and the high cost and changes in regulatory standards also play important roles. In addition, merger activity can influence gasoline prices. During the 1990s, mergers decreased the number of oil companies and refiners and our findings suggest that these changes in the state of competition in the industry caused wholesale prices to rise. The impact of more recent mergers is unknown. While we have not performed modeling on mergers that occurred since 2000, and thus cannot comment on any potential effect on wholesale gasoline prices at this time, these mergers would further increase market concentration nationwide since there are now fewer oil companies. We are currently in the process of studying the effects of the mergers that have occurred since 2000 on gasoline prices as a follow up to our previous report on mergers in the 1990s. Also, we are working on a separate study on issues related to petroleum inventories, refining, and fuel prices. With these and other related work, we will continue to provide Congress the information needed to make informed decisions on gasoline prices that will have far-reaching effects on our economy and our way of life. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or the other Members of the Committee may have at this time. For further information about this testimony, please contact me at (202) 512-2642 (mccoolt@gao.gov) or Mark Gaffigan at (202) 512-3841 (gaffiganm@gao.gov). Godwin Agbara, John Karikari, Robert Marek, and Mark Metcalfe made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Few issues generate more attention and anxiety among American consumers than the price of gasoline. The most current upsurge in prices is no exception. According to data from the Energy Information Administration (EIA), the average retail price of regular unleaded gasoline in the United States has increased almost every week this year since January 29th and reached an all-time high of $3.10 the week of May 14th. Over this time period, the price has increase 94 cents per gallon and added about $20 billion to consumers' total gasoline bill, or about $146 for each passenger car in the United States. Given the importance of gasoline for the nation's economy, it is essential to understand the market for gasoline and the factors that influence gasoline prices. In this context, this testimony addresses the following questions: (1) what key factors affect the prices of gasoline and (2) what effects have mergers had on market concentration and wholesale gasoline prices? To address these questions, GAO relied on previous reports, including a 2004 GAO report on mergers in the U.S. petroleum industry, a 2005 GAO primer on gasoline prices and a 2006 testimony. GAO also collected updated data from EIA. This work was performed in accordance with generally accepted government auditing standards. The price of crude oil is a major determinant of gasoline prices. However, a number of other factors also affect gasoline prices including (1) increasing demand for gasoline; (2) refinery capacity in the United States that has not expanded at the same pace as the demand for gasoline; (3) a declining trend in gasoline inventories and (4) regulatory factors, such as national air quality standards, that have induced some states to switch to special gasoline blends. Consolidation in the petroleum industry plays a role in determining gasoline prices as well. For example, mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, potentially allowing them to increase and sustain prices above competitive levels; on the other hand, these mergers could lead to efficiency effects enabling the merged companies to lower prices. The 1990s saw a wave of merger activity in which over 2600 mergers occurred in all segments of the U.S. petroleum industry. This wave of mergers contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry. Econometric modeling that GAO performed on eight of these mergers showed that, after controlling for other factors including crude oil prices, the majority resulted in wholesale gasoline price increases--generally between about 1 and 7 cents per gallon. While these price increases seem small, they are not trivial because according to the Federal Trade Commission's (FTC) standards for merger review in the petroleum industry, a 1-cent increase is considered to be significant. Additional mergers occurring since 2000 are expected to increase the level of industry concentration further, and because GAO has not yet performed modeling on these mergers, we cannot comment on any potential effect on gasoline prices at this time. However, we are currently in the process of studying the effects of the mergers that have occurred since 2000 on gasoline prices as a follow up to our previous work on mergers in the 1990s. Also, we are working on a separate study on issues related to petroleum inventories, refining, and fuel prices.

HCFA used a test methodology that was comparable with processes followed by other public insurers who have successfully tested and implemented such commercial systems. Other public insurers—such as the military’s TRICARE, Veterans Affairs’ CHAMPVA, and the Kansas and Mississippi Medicaid offices—each used four key steps to test their claims-auditing systems prior to implementation. Specifically, they (1) performed detailed comparisons of their payment policies with systems’ edits to determine where conflicts existed, (2) modified the commercial systems’ edits to comply with their payment policies, (3) integrated the systems into their claims payment systems, and (4) conducted operational tests to ensure that the integrated systems processed claims properly. This is a comprehensive approach that requires significant time to complete. For example, TRICARE took about 18 months for two sites and allowed about 2 years for its remaining nine sites. HCFA’s approach was similar. From contract award on September 30, 1996, through its conclusion 15 months later at the end of December 1997, both HCFA and contractor staff made significant progress in integrating the test commercial system and evaluating its potential for Medicare use nationwide. HCFA used both a policy evaluation team and a technical team to concentrate separately on these aspects of the test. A detailed comparison of the commercial system’s payment policies with those of Medicare identified conflicting edits—inconsistencies that in some cases would increase and in others decrease the amount of the Medicare payments. For example, the commercial system would pay for the higher cost procedure of those deemed mutually exclusive, while Medicare dictates paying for the lower cost procedure. (A mutually exclusive procedure would be, for instance, the same patient’s receiving both an open and a closed treatment for a fracture.) Conversely, the commercial claims-auditing system would deny certain payments for assistant surgeons, while Medicare allows them. These and all other identified conflicts were provided to the vendor, who modified the system’s edits to make them consistent with HCFA policy. The technical team carried out three critical tasks. First, it developed the design specifications and related computer code necessary for integrating the commercial system into the Medicare claims-processing software. Second, it integrated the claims-auditing system into the system that processes Medicare part B claims. Finally, the team conducted numerous tests of the integrated system to determine its effect both on processing speed and accuracy. HCFA management was kept apprised of the status of the test through regular progress reports and frequent contact with the project management team. HCFA found that the edits in this commercial system could save Medicare up to $465 million annually by identifying inappropriate claims. Specifically, HCFA’s analysis showed that the system’s mutually exclusive and incidental procedure edits would save about $205 million, and the diagnosis-to-procedure edits could save about $260 million. HCFA’s analysis was based on a national sample of paid claims already processed by Medicare part B and audited for inappropriate coding with HCFA’s internal software. We reviewed the reports of HCFA’s estimated savings, but did not independently verify the national sample from which these savings were derived. However, the magnitude of savings—$682 million, including the savings derived from HCFA’s internal software, which HCFA reported at $217 million for 1996—is in line with our 1995 estimate that about $600 million in annual savings are possible. On November 25, 1997, HCFA officials notified the Administrator of the successful test of the commercial system. This was a far different conclusion than the one reported by HCFA 2 months earlier, while testing was ongoing. At a September 29, 1997, hearing before this subcommittee, a senior HCFA official stated that the agency was testing the commercial system as a stand-alone system against Medicare’s claims-processing system. He testified that “for the month of August, our system, the CCI system achieves savings of $422,000 more than the system would have achieved if that would have been what we were using. We were outperforming a product.” However, as we testified at that same hearing, the test needed to compare the commercial system as a supplement to the existing one, rather than as a replacement. Before HCFA completed its test it did compare the commercial system as a supplement. This comparison showed that commercial systems offer the potential for substantial Medicare savings. Despite the successful outcome of the test, two early management decisions, if left unchanged, would have significantly delayed national implementation of claims-auditing software in the Medicare program. First, the use of the test system was limited to its single Iowa location, thereby requiring another contract for nationwide implementation. Second, HCFA’s initial plan following the test was to proceed with developing its own edits, rather than to acquire those available through commercial systems. This plan would not only have required additional time before implementation, but could well have resulted in a system less comprehensive in its capacity to flag suspect claims than what is available commercially. I would now like to provide some details surrounding both of these decisions. HCFA’s contract limited the use of the test system to its Iowa site and did not include a provision for implementation throughout the Medicare program if the test proved successful. As a result, additional time will now be needed to award another contract to implement the test system’s claims-auditing software or any other approach nationwide. According to a HCFA contracting official, it could take as much as a year to award another contract using “full and open” competition—the method normally used for such implementation. This entails preparing for and issuing a request for proposals, evaluating the resulting bids, and awarding the contract. HCFA’s estimated savings of up to $465 million per year demonstrates the costs associated with delays in implementing such payment controls nationwide. Along with additional time and lost savings from the lack of early nationwide implementation, awarding a new contract could result in additional expense to either develop new edits or for substantial rework to adapt the new system’s edits to HCFA’s payment policies if a contractor other than the one performing the original test wins the competition. If another contractor were to become involved, much of the work HCFA performed during the test period would have to be redone. Specifically, another company’s claims-auditing edits would have to be evaluated for potential conflict with agency payment policy. Other options were open to HCFA from the beginning. For example, HCFA could have followed the approach used by TRICARE, whose contract provided for a phased, 3-year implementation at its 11 processing sites following successful testing. According to HCFA’s Administrator, the agency is doing what it can to avoid any delays resulting from the limited test contract. The Administrator said HCFA is evaluating legal options to determine if other contracting avenues are available, options that would allow expedited national implementation of commercial claims-auditing software. In reporting the test results, HCFA representatives recommended that the HCFA Administrator award a contract to develop HCFA-owned claims-auditing edits to supplement the correct coding initiative, rather than acquire these edits commercially. They provided the following rationale: First, this approach could cost substantially less than commercial edits because HCFA would have the option of changing contractors for edit updates, it would not have to pay annual licensing fees, and the developmental cost would be much less than purchasing the capability commercially. Second, according to HCFA officials, this approach would result in HCFA-owned claims-auditing edits, which are in the public domain and consequently allow HCFA to disclose its policies and coding combinations to providers, as it currently does with the correct coding initiative edits. Officials also explained that if a commercial vendor bid, won, and agreed to allow its claims-auditing edits to enter the public domain, HCFA would allow the vendor to start with its existing edits, which should shorten development time. We found serious flaws in this approach—in terms of cost, overall effectiveness, and underlying assumptions. First, upgrading the edits by moving from the initial contract developer to one unfamiliar with them would not be easy or inexpensive; it is a major task, facilitated by a thorough clinical knowledge of the existing edits. Second, the annual licensing fees that HCFA would avoid with its own edits would be offset to some degree by the need to pay a contractor with the clinical expertise to keep the edits current. Third, while the commercial software could cost more than developing HCFA-owned edits, this increased cost has already been more than justified by HCFA’s test results demonstrating that commercial edits provide significantly more Medicare savings. Finally, the cost of delay is significant: HCFA has realized no savings from such commercial software over the past 6 years. Moreover, we found that HCFA’s plan to fully disclose its edits to the medical community is not required by federal law and is not followed by other public insurers; it could also result in limiting the number of potential contractors with an interest in bidding. In May 1995 HHS’ Office of General Counsel informed HCFA that no federal law or regulation precludes it from protecting the proprietary nature of the edits and the related computer logic used in commercial claims-auditing systems. Further, HCFA’s Deputy Director of the Provider Purchasing and Administration Group stated that the agency has no explicit Medicare policy requiring it to disclose to providers the specific edits used to audit their claims. Rather than disclosing the edits, other public insurers, such as CHAMPVA and TRICARE, notified providers that they were implementing the system, and supplied examples of categories of edits that would be used to check for such disparities as mutually exclusive claims. Finally, while it is true that development time would likely be shortened if a commercial claims-auditing vendor were awarded the contract and used its existing edits as a starting point, it is doubtful that such vendors would bid on the contract if resulting edits were to be in the public domain. This response was confirmed to us by an executive of a company that has already developed a claims-auditing system; he said he would not enter into such a contractual agreement if HCFA insisted on making the edits public because this would result in the loss of the proprietary rights to his company’s claims-auditing edits. HCFA’s plan to develop its own edits was also inconsistent with Office of Management and Budget (OMB) policy in acquiring information resources. HCFA has not demonstrated the cost-effectiveness of its plan to develop edits internally. In fact, a prime example showing otherwise is HCFA’s own estimate that every year it delays implementing claims-auditing edits of the caliber of those used in the commercial test system in Iowa, about $465 million in savings could be lost. Developing comprehensive HCFA-owned claims-auditing edits could take years, during which time hundreds of millions of dollars could be lost annually due to incorrectly coded claims. To illustrate: HCFA began developing its database of edits in 1991 and has continued to improve it over the past 6 years. While HCFA reported that its correct coding initiative identified $217 million in savings in 1996 (in the mutually exclusive and incidental procedure categories), this database did not identify an additional $205 million in those categories identified by the test edits, nor does it address the diagnosis-to-procedure category, where the test edits identified an additional $260 million in possible savings. HCFA has no assurance that its own edits would be as effective as those available commercially. This past March, after considering our findings and other factors, the HCFA Administrator said that the agency’s plans had changed. She said that HCFA plans to begin immediately to acquire and implement commercial claims-auditing software in as expedited a manner as possible. We are encouraged that after a slow start, HCFA now plans to move quickly to take advantage of the comprehensive claims-auditing capability that is available, and we are looking forward to seeing HCFA’s milestones for expeditiously implementing this capability. Typically, such milestones would include dates for awarding a contract for the commercial claims-auditing edits, initiating and completing implementation at the first Medicare site, and implementing the edits at the remaining Medicare processing sites. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed: (1) the Health Care Financing Administration's (HCFA) progress in testing and acquiring a commercial system for identifying inappropriate Medicare bills; (2) how HCFA tested this commercial system; (3) HCFA's initial management decisions and their consequences; and (4) HCFA's plans for immediate implementation. GAO noted that: (1) from contract award on September 30, 1996, through its conclusion at the end of December 1997, both HCFA and contractor staff made significant progress in integrating the test commercial system and evaluating its potential for Medicare use nationwide; (2) HCFA used both a policy evaluation team and a technical team to concentrate separately on aspects of the test; (3) a detailed comparison of the commercial system's payment policies with those of Medicare identified conflicting edits--inconsistencies that in some cases would increase and in others decrease the amount of the Medicare payments; (4) the technical team: (a) developed the design specifications and related computer code necessary for integrating the commercial system into Medicare claims-processing software; (b) integrated the claims-auditing system into the system that processes Medicare part B claims; and (c) conducted numerous tests of the integrated system to determine its effect both on processing speed and accuracy; (5) HCFA management was kept apprised of the status of the test through regular reports and frequent contact with the project management team; (6) HCFA's contract limited the use of the test system to its Iowa site and did not include a provision for implementation throughout the Medicare program if the test proved successful; (7) additional time will be needed to award another contract to implement the test system's claims-auditing software; (8) HCFA representatives recommended that the HCFA Administrator award a contract to develop HCFA-owned claims-auditing edits to supplement the correct coding initiative, rather than acquire these edits commercially; (9) GAO found serious flaws in terms of cost, overall effectiveness, and underlying assumptions; (10) HCFA's plan to develop its own edits was also inconsistent with Office of Management and Budget policy in acquiring information resources; (11) HCFA has not demonstrated the cost-effectiveness of its plan to develop edits internally; (12) HCFA plans to begin immediately to acquire and implement commercial claims-auditing software in as expedient a manner as possible; and (13) HCFA now plans to move quickly to take advantage of the comprehensive claims-auditing capability that is available.

FAA guidance prescribes an annual inspection to cover all aspects of a repair station’s operations, including the currency of technical data, facilities, calibration of special tooling and equipment, and inspection procedures, as well as to ensure that the repair station is performing only the work that it has approval to do. Most FAA offices assign an individual inspector to conduct routine surveillance at a repair station, even one that is large and complex, rather than using a team of inspectors. Most inspectors are responsible for oversight at more than one repair station. At the FAA offices we visited, we examined the workloads of 98 inspectors and found that, on average, they were responsible for 12 repair stations each, although their individual workloads varied from 1 to 42 facilities of varying size and complexity. The inspectors assigned responsibility for repair stations are also assigned oversight of other aviation activities such as air taxis, agricultural operators, helicopter operators, and training schools for pilots and mechanics. FAA uses teams for more comprehensive reviews of a few repair stations through its National Aviation Safety Inspection Program or its Regional Aviation Safety Inspection Program. These special, in-depth inspections are conducted at only a small portion of repair stations. In the past 4 years, an average of only 23 of these inspections have been conducted annually at repair stations (less than 1 percent of the repair stations performing work for air carriers). From fiscal year 1993 through 1996, we found 16 repair stations that were inspected by a single inspector and were also inspected by a special team of inspectors during the same year. The teams found a total of 347 deficiencies, only 15 of which had been identified by individual inspectors. Many of the deficiencies the teams identified were systemic and apparently long-standing, such as inadequate training programs or poor quality control manuals. Such deficiencies were likely to have been present when the repair stations were inspected earlier by individual inspectors. We believe that there are several reasons why team inspections identify a higher proportion of the deficiencies that may exist in the operation of large repair stations. First, many FAA inspectors responsible for conducting individual inspections said that, because they have many competing demands on their time, their inspections of repair stations may not be as thorough as they would like. Second, team inspections make use of checklists or other job aids to ensure that all points are covered. Although FAA’s guidance requires inspectors to address all aspects of repair stations’ operations during routine surveillance, it does not prescribe any checklist or other means for assuring that all items are covered. The lack of a standardized approach for routine surveillance increases the possibility that items will not be covered. Finally, inspectors believe team inspections help ensure that their judgments are independent because most team members have no ongoing relationship with the repair station. By contrast, individual-inspector reviews are conducted by personnel who have a continuing regulatory responsibility for the facilities and, therefore, a continuing working relationship with the repair station operator. A substantial number of the inspectors we surveyed supported the use of team inspections. We found that 71 percent of the inspectors responding favored team inspections using district office staff as a means to improve compliance, and 50 percent favored an increase in National or Regional Aviation Safety Inspection Program inspections staffed from other FAA offices. We also found that some district offices had already begun using locally based teams to perform routine surveillance of large and complex repair stations. Thus, in our October 1997 report, we recommended that FAA expand the use of locally based teams for repair station inspections, particularly for those repair stations that are large or complex. FAA’s guidance is limited in specifying what documents pertaining to inspections and follow-up need to be maintained. We examined records of 172 instances in which FAA sent deficiency letters to domestic repair stations to determine if follow-up documentation was present. However, responses from the repair stations were not on file in about one-fourth of these instances, and FAA’s assessments of the adequacy of the corrective actions taken by the repair stations were not on file in about three-fourths of the instances. We also examined inspection results reported in FAA’s Program Tracking and Reporting Subsystem, a computerized reporting system, and found it to be less complete than individual files on repair stations. Without better documentation, FAA cannot readily determine how quickly and thoroughly repair stations are complying with regulations. Just as important, FAA cannot identify trends on repair station performance in order to make informed decisions on how best to apply its inspection resources to those areas posing the greatest risk to aviation safety. FAA is spending more than $30 million to develop a system called the Safety Performance Analysis System, whose intent is to help the agency identify safety-related risks and establish priorities for its inspections. It relies in part on the current reporting subsystem, which contains the results of safety inspections. However, this system will not be fully implemented until late 1999, and it will be of limited use if the documentation on which it is based is inaccurate, incomplete, or outdated. We also found that FAA’s documentation of inspections and follow-up was better in its files for foreign repair stations than for domestic repair stations, perhaps in part because under agency regulations, foreign repair stations must renew their certification every 2 years. By comparison, domestic repair stations retain their certification indefinitely unless they surrender it or FAA suspends or revokes it. Foreign repair stations appear to be correcting their deficiencies quickly so that they qualify for certificate renewal. The 34 FAA inspectors that we interviewed who had conducted inspections of both foreign and domestic repair stations were unanimous in concluding that compliance occurred more quickly at foreign facilities. They attributed the quicker compliance to the renewal requirement and said that it allowed them to spend less time on follow-up, freeing them for other surveillance work. However, we were unable to confirm whether foreign repair stations achieve compliance more quickly than domestic repair stations do, because of the poor documentation in domestic repair station files. To address these problems, we recommended that FAA specify what documentation should be maintained in its files to record complete inspection results and follow-up actions, and that FAA monitor the implementation of its strategy for improving the quality of data in its new management information system. FAA concurred with these recommendations and has reported actions underway to implement them. FAA has several efforts under way that may hold potential for improving its inspections of repair stations. Two efforts involve initiatives to change the regulations covering repair station operations and the certification requirements for mechanics and repairmen. FAA acknowledges that the existing regulations do not reflect many of the technological changes that have occurred in the aviation industry in recent years. The FAA inspectors we surveyed strongly supported a comprehensive update of repair station regulations as a way to improve repair stations’ compliance. Of the inspectors we surveyed, 88 percent favored updating the regulations. This update, begun in 1989, has been repeatedly delayed and still remains in process. The most recent target—to have draft regulations for comment published in the Federal Register during the summer of 1997—was not met. Similarly, the update of the certification requirements for maintenance personnel has been suspended since 1994. Because of these long-standing delays, completion of both updates may require additional attention on management’s part to help keep both efforts on track. Our October 1997 report recommended that FAA expedite efforts to update regulations pertaining to repair stations and establish and meet schedules for completing the updates. A third effort involves increasing and training FAA’s inspection resources. Since fiscal year 1995, FAA has been in the process of adding more than 700 inspectors to its workforce who will, in part, oversee repair stations. Survey responses from current inspectors indicated that the success of this effort will depend partly on the qualifications of the new inspectors and on the training available to all of those in the inspector ranks. Specifically, 82 percent of the inspectors we surveyed said that they strongly or generally favored providing inspectors with maintenance and avionics training, including hands-on training as a way to improve repair stations’ compliance with regulations. Another effort is FAA’s new Air Transportation Oversight System. This system is intended to respond to problems in FAA’s oversight that have been pointed out in recent years by GAO, the Department of Transportation’s Inspector General, FAA’s 90 Day Safety Review, and others. The goal of this new system is to target surveillance to deal with risks identified through more systematic inspections. Phase I of the system is expected to be implemented in the fall. When fully implemented, this system will offer promise of significant improvements in the way FAA conducts and tracks all of its inspections, including those performed at repair stations. However, in its initial phase, the system will affect the oversight of only the 10 largest air carriers and may not be fully applied to repair stations for several years. We will continue to monitor FAA’s progress in improving the effectiveness of its oversight in this important area. Mr. Chairman, this concludes our statement. We would be pleased to respond to questions at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the Federal Aviation Administration's (FAA) oversight of repair stations that maintain and repair aircraft and aircraft components, focusing on: (1) the practice of using individual inspectors in repair station inspections; (2) the condition of inspection documentation; and (3) current FAA actions to improve the inspection process. GAO noted that: (1) FAA was meeting its goal of inspecting every repair station at least once a year and 84 percent of the inspectors believed that the overall compliance of repair stations was good or excellent; (2) more than half of the inspectors said that there were areas of compliance that repair stations could improve, such as ensuring that their personnel receive training from all airlines for which they perform work and have current maintenance manuals; (3) while FAA typically relies on individual inspectors, the use of teams of inspectors, particularly at large or complex repair stations, may be more effective at identifying problems and are more liable to uncover systemic and long-standing deficiencies; (4) because of insufficient documentation, GAO was unable to determine how well FAA followed up to ensure that the deficiencies found during the inspections were corrected; (5) GAO was not able to assess how completely or quickly repair stations were bringing themselves into compliance; (6) because FAA does not tell its inspectors what documentation to keep, the agency's ability to identify and react to trends is hampered; (7) FAA is spending more than $30 million to develop a reporting system that, among other things, is designed to enable the agency to apply its inspection resources to address those areas that pose the greatest risk to aviation safety; (8) as GAO has reported in the past, this goal will not be achieved without significant improvements in the completeness of inspection records; (9) since the May 1996 crash of a ValuJet DC-9 in the Florida Everglades, FAA has announced new initiatives to upgrade the oversight of repair stations; (10) these initiatives were directed at clarifying and augmenting air carriers' oversight of repair stations, not at ways in which FAA's own inspection resources could be better utilized; (11) FAA has several other efforts under way that would have a more direct bearing on its own inspection activities at repair stations; (12) one effort would revise the regulations governing operations at repair stations, and another would revise the regulations governing the qualifications of repair station personnel; (13) the revision of the regulations began in 1989 and has been repeatedly delayed; (14) the third effort is the addition of more FAA inspectors, which should mean that more resources can be devoted to inspecting repair stations; (15) FAA has recently announced a major overhaul of its entire inspection process; and (16) it is designed to systematize the process and ensure consistency in inspections and in reporting the results of these inspections so as to allow more efficient targeting of inspection resources.

Twelve western states assess royalties on the hardrock mining operations on state lands. In addition, each of these states, except Oregon, assesses taxes that function like a royalty, which we refer to as functional royalties, on the hardrock mining operations on private, state, and federal lands. To aid in the understanding of royalties, including functional royalties, the royalties are grouped as follows: Unit-based is typically assessed as a dollar rate per quantity or weight of mineral produced or extracted, and does not allow for deductions of mining costs. Gross revenue is typically assessed as a percentage of the value of the mineral extracted and does not allow for deductions of mining costs. Net smelter returns is assessed as a percentage of the value of the mineral, but with deductions allowed for costs associated with transporting and processing the mineral (typically referred to as mill, smelter, or treatment costs); however, costs associated with extraction of the mineral are not deductible. Net proceeds is assessed as a percentage of the net proceeds (or net profit) of the sale of the mineral with deductions for a broad set of mining costs. The particular deductions allowed vary widely from state to state, but may include extraction costs, processing costs, transportation costs, and administrative costs, such as for capital, marketing, and insurance. Royalties, including functional royalties, often differ depending on land ownership and the mineral being extracted, as the following illustrates: For private mining operations conducted on federal, state, or private lands, Arizona assesses a net proceeds functional royalty of 1.25 percent on gold mining operations, and an additional gross revenue royalty of at least 2 percent for gold mining operations on state lands. Nine of the 12 states assess different types of royalties for different types of minerals. For example, Wyoming employs three different functional royalties for all lands: (1) net smelter returns for uranium, (2) a different net smelter returns for trona—a mineral used in the production of glass, and (3) gross revenue for all other minerals. Furthermore, the royalties the states assess often differ in the allowable exclusions, deductions, and limitations. For example, in Colorado, a functional royalty on metallic mining excludes gross incomes below $19 million, whereas in Montana a functional royalty on metallic mining is applied on all mining operations after the first $250,000 of revenue. Finally, the actual amount assessed for a particular mine may depend not only on the type of royalty, its rate, and exclusions, but also on such factors as the mineral’s processing requirements, mineral markets, mine efficiency, and mine location relative to markets, among other factors. Table 1 shows the types of royalties, including functional royalties, that the 12 western states assess on all lands, including federal, state, and private lands, as well as the royalties assessed only on state lands. It has been difficult to determine the number of abandoned hardrock mine sites in the 12 western states, and South Dakota, in part because there is no generally accepted definition for a hardrock mine site. The six studies we reviewed relied on the different definitions that the states used, and estimates varied widely from study to study. Furthermore, BLM and the Forest Service have had difficulty determining the number of abandoned hardrock mines on their lands. In September 2007, the agencies reported an estimated 100,000 abandoned mine sites, but we found problems with this estimate. For example, the Forest Service had reported that it had approximately 39,000 abandoned hardrock mine sites on its lands. However, this estimate includes a substantial number of non-hardrock mines, such as coal mines, and sites that are not on Forest Service land. At our request, the Forest Service provided a revised estimate of the number of abandoned hardrock mine sites on its lands, excluding coal or other non-hardrock sites. According to this estimate, the Forest Service may have about 29,000 abandoned hardrock mine sites on its lands. That said, we still have concerns about the accuracy of the Forest Service’s recent estimate because it identified a large number of sites with “undetermined” ownership, and therefore these sites may not all be on Forest Service lands. BLM has also acknowledged that its estimate of abandoned hardrock mine sites on its lands may not be accurate because it includes sites on its lands that are of unknown or mixed ownership (state, private, and federal) and a few coal sites. In addition, BLM officials said that the agency’s field offices used a variety of methods to identify sites in the early 1980s, and the extent and quality of these efforts varied greatly. For example, they estimated that only about 20 percent of BLM land has been surveyed in Arizona. Furthermore, BLM officials said that the agency focuses more on identifying sites closer to human habitation and recreational areas than on identifying more remote sites, such as in the desert. Table 2 shows the Forest Service’s and BLM’s most recent available estimates of abandoned mine sites on their lands. To estimate abandoned hardrock mine sites in the 12 western states and South Dakota, we developed a standard definition for these mine sites. In developing this definition, we consulted with mining experts at the National Association of Abandoned Mine Land Programs; the Interstate Mining Compact Commission; and the Colorado Department of Natural Resources, Division of Reclamation, Mining and Safety, Office of Active and Inactive Mines. We defined an abandoned hardrock mine site as a site that includes all associated facilities, structures, improvements, and disturbances at a distinct location associated with activities to support a past operation, including prospecting, exploration, uncovering, drilling, discovery, mine development, excavation, extraction, or processing of mineral deposits locatable under the general mining laws. We also asked the states to estimate the number of features at these sites that pose physical safety hazards and the number of sites with environmental degradation. Using this definition, states reported to us the number of abandoned sites in their states, and we calculated that there are at least 161,000 abandoned hardrock mine sites in their states. At these sites, on the basis of state data, we estimated that at least 332,000 features may pose physical safety hazards, such as open shafts or unstable or decayed mine structures. Furthermore, we estimated that at least 33,000 sites have degraded the environment, by, for example, contaminating surface and ground water or leaving arsenic- contaminated tailings piles. Table 3 shows our estimate of the number of abandoned hardrock mine sites in the 12 western states and South Dakota, the number of features that pose significant public health and safety hazards, and the number of sites with environmental degradation. As of November 2007, hardrock mining operators had provided financial assurances valued at approximately $982 million to guarantee the reclamation cost for 1,463 hardrock mining operations on BLM land in 11 western states, according to BLM’s Bond Review Report. The report also indicates that 52 of the 1,463 hardrock mining operations had inadequate financial assurances—about $28 million less than needed to fully cover estimated reclamation costs. We determined, however, that the financial assurances for these 52 operations should be more accurately reported as about $61 million less than needed to fully cover estimated reclamation costs. Table 4 shows total operations by state, the number of operations with inadequate financial assurances, the financial assurances required, BLM’s calculation of the shortfall in assurances, and our estimate of the shortfall, as of November 2007. The $33 million difference between our estimated shortfall of nearly $61 million and BLM’s estimated shortfall of nearly $28 million occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This calculation approach has the effect of offsetting the shortfalls in some operations with the greater than required financial assurances of other operations. However, the financial assurances that are greater than the amount required for an operation cannot be transferred to an operation with inadequate financial assurances. In contrast, we totaled the difference between the financial assurance in place for an operation and the financial assurances needed for that operation to determine the actual shortfall for each of the 52 operations for which BLM had determined that financial assurances were inadequate. BLM’s approach to determining the adequacy of financial assurances is not useful because it does not clearly lay out the extent to which financial assurances are inadequate. For example, in California, BLM reported that, statewide, the financial assurances in place were $1.5 million greater than required as of November 2007, suggesting reclamation costs are being more than fully covered. However, according to our analysis of only those California operations with inadequate financial assurances, the financial assurances in place were nearly $440,000 less than needed to fully cover reclamations costs. BLM officials agreed that it would be valuable for the Bond Review Report to report the dollar value of the difference between financial assurances in place and required for those operations where financial assurances are inadequate and have taken steps to modify LR2000. BLM officials said that financial assurances may appear inadequate in the Bond Review Report when expansions or other changes in the operation have occurred, thus requiring an increase in the amount of the financial assurance; BLM’s estimate of reclamation costs has increased and there is a delay between when BLM enters the new estimate into LR2000 and when the operator provides the additional bond amount; and BLM has delayed updating its case records in LR2000. Conversely, hardrock mining operators may have financial assurances greater than required for a number of reasons; for example, they may increase their financial assurances because they anticipate expanding their hardrock operations. In addition, according to the Bond Review Report, there are about 2.4 times as many notice-level operations—generally, operations that cause surface disturbance on 5 acres or less—as there are plan-level operations on BLM land—generally operations that disturb more than 5 acres (1,033 notice-level operations and 430 plan-level operations). However, about 99 percent of the value of financial assurances is for plan-level operations, while 1 percent of the value is for notice-level operations. While financial assurances were inadequate for both notice- and plan-level operations, a greater percentage of plan-level operations had inadequate financial assurances than did notice-level operations—6.7 percent and 2.2 percent, respectively. Finally, over one-third of the number of all hardrock operations and about 84 percent of the value of all financial assurances are for hardrock mining operations located in Nevada. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Committee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Robin M. Nazzaro, Director, Natural Resources and Environment (202) 512-3841 or Nazzaror@gao.gov. Key contributors to this testimony were Andrea Wamstad Brown (Assistant Director); Elizabeth Beardsley; Casey L. Brown; Kristen Sullivan Massey; Rebecca Shea; and Carol Herrnstadt Shulman. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The General Mining Act of 1872 helped open the West by allowing individuals to obtain exclusive rights to mine billions of dollars worth of gold, silver, and other hardrock (locatable) minerals from federal lands without having to pay a federal royalty. However, western states charge royalties so that they share in the proceeds from various hardrock minerals extracted from their lands. For years, some mining operators did not reclaim land used in their mining operations, creating environmental and physical safety hazards. To curb further growth in the number of abandoned hardrock mines on federal lands, in 1981, the Department of the Interior's Bureau of Land Management (BLM) began requiring mining operators to reclaim BLM land disturbed by these operations, and in 2001 began requiring operators to provide financial assurances to cover reclamation costs before they began exploration or mining operations. This testimony focuses on the (1) royalties states charge, (2) number of abandoned hardrock mine sites and hazards, and (3) value and coverage of financial assurances operators use to guarantee reclamation costs. It is based on two GAO reports: Hardrock Mining: Information on Abandoned Mines and Value and Coverage of Financial Assurances on BLM Land, GAO-08-574T (Mar. 12, 2008) and Hardrock Mining: Information on State Royalties and Trends in Imports and Exports, GAO-08-849R (July 21, 2008). Twelve western states, including Alaska, that GAO reviewed assess royalties on hardrock mining operations on state lands. In addition, each of these states, except Oregon, assesses taxes that function like a royalty, which GAO refers to as functional royalties, on the hardrock mining operations on private, state, and federal lands. The royalties the states assess often differ depending on land ownership and the mineral being extracted. For example, for private mining operations conducted on federal, state, or private land, Arizona assesses a functional royalty of 1.25 percent of net revenue on gold mining operations, and an additional royalty of at least 2 percent of gross value for gold mining operations on state lands. The actual amount assessed for a particular mine may depend not only on the type of royalty, its rate, and exclusions, but also on other factors, such as the mine's location relative to markets. Over the past 10 years, estimates of the number of abandoned hardrock mine sites in the 12 western states reviewed, as well as South Dakota, have varied widely, in part because there is no generally accepted definition for a hardrock mine site. Using a consistent definition that GAO provided, these states reported the number of abandoned sites in their states. On the basis of these data, GAO estimated that there are at least 161,000 abandoned hardrock mine sites in these states, and these sites have at least 332,000 features that may pose physical safety hazards and at least 33,000 sites that have degraded the environment. According to BLM data, as of November 2007, hardrock mining operators had provided financial assurances worth approximately $982 million to guarantee reclamation costs for 1,463 hardrock mining operations on BLM land and 52 of these operations had financial assurances valued at about $28 million less than needed to fully cover estimated reclamation costs. However, GAO determined that the assurances for these 52 operations should be more accurately reported as about $61 million less than needed for full coverage. The $33 million difference between GAO's and BLM's estimated shortfalls occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This approach effectively offsets the shortfalls in some operations with the higher than needed financial assurances of others. However, the financial assurances that are greater than the amount required for an operation cannot be transferred to an operation with inadequate financial assurances. In contrast, GAO totaled the difference between the financial assurances in place for an operation and the financial assurances needed for that operation to determine the actual shortfall for each of the 52 operations for which BLM had determined that financial assurances were inadequate. BLM has taken steps to correct the reporting problem GAO identified.

Our review of surveys and academic studies, and interviews with people with Social Security expertise, suggest that most individuals do not understand key details of Social Security rules that could potentially affect their retirement benefits or the benefits of their spouses and survivors. Specifically, many people approaching retirement age are unclear on how claiming age affects the amount of monthly benefits, how earnings (both before and after claiming) affect benefits, the availability of spousal benefits, and other factors that may influence their claiming decision. For example, while some people understand that delaying claiming leads to higher monthly benefits, many are unclear about the actual amount that benefits increase with claiming age. The surveys also showed that many people do not understand the implications of the retirement earnings test, under which SSA withholds benefits for some claimants earning above an annual income limit but which are, on average, paid back later with interest. Understanding these rules and other information, such as life expectancy and longevity risk, could be central to people making informed decisions about when to claim benefits. With an understanding of Social Security benefits, people would also be in a better position to balance other factors that influence when they claim benefits, including financial need, poor health, and psychological factors. SSA makes comprehensive information on key rules and other considerations related to claiming retirement benefits available through its website, publications, personalized benefits statements, and online calculators. The information provided includes many of the items identified from our literature review and expert interviews, including how claiming age affects monthly benefit amounts, how benefits are determined, details on spousal and survivor benefits, the retirement earnings test, information about life expectancy and longevity risk, and the taxation of benefits. In particular, SSA’s website provides access to information on available benefits, key program rules, and interactive calculators that can be used to get estimates on what future benefits would be. Additionally, the Social Security statement is the most widespread piece of communication that SSA provides to individuals about their future benefits. It is a 4- to 6-page summary of personalized information that includes an estimate of the individual’s future benefit payable at age 62, full retirement age (FRA), and age 70, as well as estimates for the individual’s current disability and survivor benefit amounts. In May 2012, SSA made the statement available electronically for those establishing an online account. Since September 2014, SSA has mailed printed statements to workers age 25, 30, 35, 40, 45, 50, 55, and 60 or older who have not created a personal online Social Security account. At age 60, SSA sends the statement annually. While important information is provided through SSA’s website and publications to help people make informed decisions about when to claim retirement benefits, our observation of 30 claims interviews in SSA field offices and of a demonstration of the online claims process found that some key information may not be consistently provided to potential claimants when they file. POMS states that claims specialists are to provide information, and avoid giving advice, to claimants. The POMS also specifies that when taking an application for Social Security benefits, the claims specialist is responsible for explaining the advantages and disadvantages of filing an application so that the individual can make an informed filing decision. The SSA protocol has claims specialists follow a screen-by-screen process of questions and prompts to collect basic information from claimants, but does not prompt questions or discussion of some key information. The following summarizes key information that was not consistently covered during the in-person claims process. We discuss additional areas of key information in our full report. How claiming age affects monthly benefits: POMS states that claimants filing for benefits should be advised that higher benefits may be payable if filing is delayed. It also states that claimants should, if applicable, be provided with at least three monthly benefit amounts at three different claiming ages—at the earliest possible month for claiming, at FRA, and age 70. In 18 of 26 in-person interviews we observed in which delaying claiming was a potential choice, the claims specialist mentioned that the claimant’s benefit amount would be higher if he or she delayed claiming. However, the remaining 8 did not discuss this option. Of the 18 interviews that mentioned delayed claiming, 13 claims specialists presented at least the three benefit amounts per POMS, while 5 did not. Surveys have shown that most individuals do not know how much monthly benefits can increase by waiting to claim, so offering benefit estimates at different ages is likely to provide information many claimants do not have. This information can influence the age at which they claim, and expert opinion and past GAO reports have found that delayed claiming can be an important strategy to consider for most retirees. In contrast, the online claims process includes screens that provide information on how claiming at different ages raises or lowers monthly benefits. How taking retroactive benefits affects monthly benefits: SSA allows for up to 6 months of retroactive benefits when a claimant is at least FRA or has a “protective filing date”—a documented date within the 6 months prior to a claims appointment when a claimant first contacted SSA about filing a retirement claim. In 10 of the 30 observed interviews, claims specialists offered the opportunity to claim up to 6 months of retroactive benefits as a lump sum. While retroactive benefits offer an attractive lump sum, taking it essentially means applying for benefits up to 6 months earlier, and results in a permanent reduction in the monthly benefit amount. POMS provides eligibility criteria for retroactive benefits. However, it does not instruct claims specialists to inform claimants that taking lump-sum retroactive benefits will result in permanently lower monthly benefits, compared to not taking retroactive benefits, a tradeoff claimants may not be aware of. The claims specialist explained this tradeoff in only 1 of the interviews we observed. In another interview, a claimant who initially said he wanted benefits to start later in the year changed his mind to start 6 months earlier after being offered a lump sum. In the online claims process, if a claimant has the option of starting benefits retroactively and chooses not to, the claimant is asked to provide a reason. This step runs the risk of making the claimant believe he is making an unusual decision, or a mistake, by choosing a later claiming date. How lifetime earnings affect monthly benefits: We observed only 8 interviews in which a claims specialist mentioned that benefits are based on 35 years of earnings and that working longer could potentially raise benefits by boosting average lifetime earnings. While POMS does not require claims specialists to explain how earnings affect benefit amounts, the claims process could be modified to include prompts for claims specialists to inform claimants that benefits are based on 35 years of earnings—information that SSA already makes available on its website. By discussing how years of earnings are calculated to determine one’s benefit amounts, claims specialists might better inform claimants who are deciding when to claim, especially for those who have fewer than 35 years of earnings. Similarly, the online application process does not inform claimants that benefits are based on the highest 35 years of earnings. How the retirement earnings test affects income before and after FRA: Individuals who claim benefits before their FRA but continue to work for pay face a retirement earnings test, with earnings above a certain limit resulting in a temporary reduction of monthly benefits. In the 18 interviews we observed in which a potential claimant was younger than FRA, most of the claims specialists explained, accurately, that the claimant would have benefits withheld if he or she earned more than the retirement earnings limit. However, in fewer than half of applicable interviews (7 of 17) did the claims specialists explain that any benefits withheld due to earnings would be recalculated and result in higher benefit amounts after FRA. Some claims specialists mentioned only that earnings may result in lower benefits, or that the claimant cannot earn above the limit, perhaps inaccurately suggesting the earnings test would result in a permanent loss of benefits. In one interview, a claims specialist told the claimant she would be “penalized” if she earned over the limit. POMS states that, when applicable, the claims specialist should explain to claimants that earnings could be withheld based on the annual earnings test, but does not instruct claims specialists to explain that the earnings test is not a penalty or tax, or that withheld benefits are repaid. However, if claimants do not understand the full implications of the earnings test, they could erroneously think it will result in a permanent loss in benefits and, as a result, unnecessarily stop working or reduce their working income. This was made clear in one interview in which a claimant with earnings likely to be above the limit said she might have to quit one of her two jobs unless she waited until FRA to claim. In the online application process, screens provide information explaining that any benefits withheld because of the retirement earnings test will raise monthly benefits after FRA. How life expectancy and longevity risk could factor into the claiming decision: While claims specialists are not specifically required to discuss life expectancy and longevity risk, the POMS does state that information should be provided to help claimants make informed filing decisions. SSA also emphasizes the importance of considering longevity and life expectancy in information made available on its website. According to the American Academy of Actuaries and the Society of Actuaries, understanding how longevity, and in particular longevity risk, can affect retirement planning is an important aspect of preparing for a well-funded retirement. However, the subject of how family health and longevity might influence the timing of benefit claims arose only twice in our 30 observations, and both times because the claimant raised the subject. Similarly, the online application process does not inform claimants that life expectancy and longevity risk are important considerations in deciding when to claim. Potentially misleading use of breakeven ages: Additionally, in contrast to providing potential claimants with key information to help inform their claiming decisions, the POMS instructs claims specialist not to provide a “breakeven age”—the age at which the cumulative higher monthly benefits starting later would equal the cumulative lower benefits from an earlier claiming date. Research shows that breakeven analysis can influence people to claim benefits earlier than they might otherwise. During our in-person observations, we saw 6 instances in which a claims specialist presented a breakeven age to help a claimant compare claiming benefits now or waiting to claim. In some interviews, claims specialists not only offered a breakeven year, they added their conclusion that the analysis showed that claiming earlier was preferable. One claims specialist showed the claimant that it would take 11 and 1/2 years to make up the difference for waiting to claim, and added that “according to the actuaries, that is a reasonable choice.” Another claims specialist said the breakeven analysis showed “it pays to file early.” Many American will rely heavily on Social Security for a substantial portion of their retirement income, so it is imperative that they have the necessary information to make informed claiming decisions. Though we found SSA’s claims process largely provides accurate information and avoids overt financial advice, certain key information is not provided or explained clearly during the claims process. POMS specifies that claims specialists should explain the advantages and disadvantages of filing for Social Security benefits to help people make informed filing decisions. However, because SSA is not fully operationalizing this guidance in the claims interviews, some claimants do not receive all the information that is critical to making informed claiming decisions. The claims process, either in person with a claims specialist or online, allows for SSA to add additional questions or prompts—potentially using language SSA already provides on its website and in publications. Updating this information would help each individual receive the information they need to make an optimal decision. In our issued report, we make several recommendations that would ensure potential claimants are consistently provided with key information during the claiming process to help them make informed decisions about when to claim Social Security retirement benefits. Specifically, we recommend that SSA take steps to ensure that: when applicable, claims specialists inform claimants that delaying claiming will result in permanently higher monthly benefit amounts, and at least offer to provide claimants their estimated benefits at their current age, at FRA (unless the claimant is already older than FRA), and age 70; claims specialists understand that they should avoid the use of breakeven analysis to compare benefits at different claiming ages; when applicable, claims specialists inform claimants that monthly benefit amounts are determined by the highest (indexed) 35 years of earnings, and that in some cases, additional work could increase benefits; when appropriate, claims specialists clearly explain the retirement earnings test and inform claimants that any benefits withheld because of earnings above the earnings limit will result in higher monthly benefits starting at FRA; claims specialists explain that lump sum retroactive benefits will result in a permanent reduction of monthly benefits. For the online claiming process, SSA should evaluate removing or revising the online question that asks claimants to provide a reason for not choosing retroactive benefits; and the claims process include basic information on how life expectancy and longevity risk may affect the decision to claim benefits. SSA generally agreed with our recommendations. Chairman Collins, Ranking Member McCaskill, and Members of the Committee, this concludes my prepared remarks. I would be happy to answer any questions that you may have at this time. For further information regarding this testimony, please contact Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who make key contributions to this testimony include Mark Glickman (Assistant Director), Laurel Beedon, Susan Chin, Susan Aschoff, Alexander Galuten, Frank Todisco (Chief Actuary), and Walter Vance. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony summarizes the information contained in GAO's September 2016 report, entitled Social Security: Improvements to Claims Process Could Help People Make Better Informed Decisions about Retirement Benefits ( GAO-16-786 ). GAO's review of nine surveys and academic studies, and interviews with retirement experts, suggest that many individuals do not fully understand key details of Social Security rules that can potentially affect their retirement benefits. For example, while some people understand that delaying claiming leads to higher monthly benefits, many are unclear about the actual amount that benefits increase with claiming age. The studies and surveys also found widespread misunderstanding about whether spousal benefits are available, how monthly benefits are determined, and how the retirement earnings test works. Understanding these rules and other information, such as life expectancy and longevity risk, could be central to people making well-informed decisions about when to claim benefits. By having this understanding of retirement benefits, people would also be in a better position to balance other factors that influence when they should claim benefits, including financial need, poor health, and psychological factors. The Social Security Administration (SSA) makes comprehensive information on key rules and other considerations related to claiming retirement benefits available through its publications, website, personalized benefits statements, and online calculators. However, GAO observed 30 in-person claims at SSA field offices and found that claimants were not consistently provided key information that people may need to make well-informed decisions. For example, in 8 of 26 claims interviews in which the claimant could have received higher monthly benefits by waiting until a later age, the claims specialist did not discuss the advantages and disadvantages of delaying claiming. Further, only 7 of the 18 claimants for whom the retirement earnings test could potentially apply were given complete information about how the test worked. SSA's Program Operations Manual System (POMS) states that claims specialists should explain the advantages and disadvantages of filing an application so that the individual can make an informed filing decision. The problems we observed during the claims interviews occurred in part because the questions included in the claims process did not specifically cover some key information. Online applicants have more access to key information on the screen or through tabs and pop-up boxes as they complete an application. However, similar to in-person interviews, the online application process does not inform claimants that benefits are based on the highest 35 years of earnings or that life expectancy is an important consideration in deciding when to claim.

Energy audits typically identify information on projects that could address the consumption of fossil fuel and electricity as well as projects that could reduce emissions from other sources, such as leaks in refrigeration equipment. Energy audits also include information on the cost- effectiveness of projects and on the extent to which the projects could reduce emissions. This information can then be used to evaluate and select projects. The audits generally fall into three categories— preliminary, targeted, and comprehensive—and are distinguished by the level of detail and analysis required. Preliminary audits are the least detailed and provide quick evaluations to determine a project’s potential. These audits typically do not provide sufficiently detailed information to justify investments but may prove useful in identifying opportunities for more detailed evaluations. Targeted audits are detailed analyses of specific systems, such as lighting. Comprehensive audits are detailed analyses of all major energy-using systems. Both targeted and comprehensive audits provide sufficiently detailed information to justify investing in projects. Energy-saving projects that fall outside the scope of energy audits include efforts to enhance outreach and education efforts to curtail energy use by building occupants and purchasing high-efficiency appliances. Outreach and education efforts include providing information on how employees can conserve energy, such as AOC’s “how-to guides” that detail cost- effective methods to save energy in the workplace. Efforts to curtail energy use include purchasing energy-efficient computer equipment and appliances, using information available from the Environmental Protection Agency’s Energy Star program or the Federal Energy Management Program (FEMP). Energy Star-qualified and FEMP-designated products meet energy-efficiency guidelines set by the Environmental Protection Agency and the Department of Energy and, in general, represent the top 30 percent most energy-efficient products in their class of products. These products cover a wide range of categories, including appliances and office equipment. According to the Energy Star program, office products that have earned the Energy Star rating use about half as much electricity as standard equipment and generally cost the same as equipment that is not Energy Star qualified. AOC has made some progress toward implementing the two recommendations in our April 2007 report. First, AOC has taken steps to address our recommendation that it develop a schedule for routinely conducting energy audits by developing a prioritized list of buildings for which it plans to conduct comprehensive energy audits (see App. 1). Specifically, AOC is currently undertaking a comprehensive energy audit of the U.S. Capitol Police Buildings and Grounds and obtained a draft submission in May 2008 from the private contractor performing the audit. AOC also plans to use $400,000 of fiscal year 2008 funds to perform comprehensive energy audits of the Capitol Building and the Ford House Office Building, and says it will direct any remaining fiscal year 2008 funds to an audit of the Hart Senate Office Building. Additionally, AOC has contracted with a private firm to conduct a preliminary energy audit of the Senate Office Buildings that could prove useful in identifying opportunities for more comprehensive and targeted evaluations. AOC officials said that they developed the prioritized list of buildings to audit by comparing the amount of energy used per square foot of space in each building (referred to as energy intensity) and then placing the buildings that use relatively higher levels of energy at the top of the list. However, AOC’s prioritized list does not provide information on the energy intensity of each building, an explanation of its prioritization scheme, or cost estimates. Furthermore, AOC has not developed a schedule for routinely conducting audits as we recommended in our April 2007 report. AOC officials said that they cannot complete a more comprehensive schedule because of uncertainty about the extent to which AOC will receive future appropriations to conduct the audits. We believe that developing a more detailed schedule for future audits along with an explanation of its prioritization scheme and cost estimates would assist the Congress in its appropriations decisions and facilitate the completion of additional audits. Second, AOC can do more to fully address the second recommendation in our April 2007 report that it implement selected projects as part of an overall plan to reduce emissions that considers cost-effectiveness, the extent to which the projects reduce emissions, and funding options. In recent years, AOC has undertaken numerous projects throughout the Capitol Hill Complex to reduce energy use and related emissions, but these projects were not identified through the process we recommended. Projects completed or underway include upgrading lighting systems, conducting education and outreach, purchasing energy-efficient equipment and appliances, and installing new windows in the Ford building. Examples of projects in Senate office buildings include upgrading the lighting in 11 offices with daylight and occupancy sensors, installing energy efficiency ceiling tiles in the Hart building, and replacing steam system components. According to AOC, these efforts have already decreased the energy intensity throughout the Capitol Hill Complex. Specifically, AOC said that it decreased its energy intensity—the amount of energy used per square foot of space within a facility—by 6.5 percent in fiscal year 2006 and 6.7 percent in fiscal year 2007. As AOC moves forward with identifying and selecting projects that could decrease energy use and related emissions, it could further respond to our recommendation by developing a plan that identifies the potential benefits and costs of each option based on the results of energy audits. Such a plan could build on AOC’s existing Sustainability Framework Plan and its Comprehensive Emissions Reduction Plan for the Capitol Complex, which identify measures that could lead to improvements in energy efficiency and reductions in greenhouse gas emissions. Complementing these plans with information on projects identified through energy audits would further assist AOC in using the resources devoted to energy efficiency enhancements as effectively as possible. The Senate has three primary options for decreasing greenhouse gas emissions and related environmental impacts associated with its operations. These include (1) implementing additional projects to decrease the demand for electricity and steam derived from fossil fuel; (2) adjusting the Capitol Power Plant’s fuel mix to rely more heavily on natural gas, which produces smaller quantities of greenhouse gas emissions for each unit of energy input than the coal and oil also burned in the plant; and (3) purchasing renewable electricity or carbon offsets from external providers. Each option involves economic and environmental tradeoffs and the first option is likely to be the most cost-effective because the projects could lead to recurring cost savings through reductions in energy expenditures. Regarding the first option, as we reported in April 2007, conducting energy audits would assist AOC in addressing the largest sources of emissions because the audits would help identify cost-effective energy-efficiency projects. In general, energy projects are deemed cost-effective if it is determined through an energy audit that they will generate sufficient savings to pay for their capital costs. These projects may require up-front capital investments that the Senate could finance through direct appropriations or contracts with utility or energy service companies, under which the company initially pays for the work and the Senate later repays the company with the resulting savings. Until AOC exhausts its opportunities for identifying energy-efficiency projects that will pay for themselves over a reasonable time horizon, this option is likely to be more cost-effective than the second two options, both of which would involve recurring expenditures. In pursuing energy audits, AOC faces a significant challenge collecting reliable data on the baseline level of energy use within each Senate office building. Such data would help identify inefficient systems and provide a baseline against which AOC could measure potential or actual energy- efficiency improvements. First, while AOC has meters that track electricity use in each building, the meters that track the steam and chilled water used by each building no longer work or provide unreliable data. AOC officials said that they have purchased but not installed new meters to track the use of chilled water and are evaluating options for acquiring new steam meters. Installing these meters and collecting reliable data would enhance any efforts to identify potential energy saving measures. Second, AOC does not have submeters within each building to track the electricity use within different sections of each building. Such submetering would further assist in targeting aspects of the Senate buildings’ operations that consume relatively high quantities of energy. AOC said that it plans to install submeters for electricity, chilled water, and steam by February 2009. A second option for decreasing greenhouse gas emissions would involve directing AOC to further adjust the fuel mix at the Capitol Power Plant to rely more heavily on the combustion of natural gas in generating steam for space heating. The plant currently produces steam using a combination of seven boilers—two that primarily burn coal, but could also burn natural gas, and five boilers that burn fuel oil or natural gas. The total capacity of these boilers is over 40 percent higher than the maximum capacity required at any given time, and the plant has the flexibility to switch among the three fuels or burn a combination of fuels. The percentage of energy input from each fuel has varied from year to year, with an average fuel mix of 43 percent natural gas, 47 percent coal, and 10 percent fuel oil between 2001 and 2007. In June 2007, the Chief Administrative Officer of the House of Representatives released the Green the Capitol Initiative, which directed AOC to operate the plant with natural gas instead of coal to meet the needs of the House. The House Appropriations Committee subsequently directed GAO to determine the expected increase in natural gas use for House operations and the associated costs at the power plant that would result from the initiative. In May 2008, we reported that the fuel-switching directive should lead to a 38 percent increase in natural gas use over the average annual quantity consumed between 2001 and 2007. We also estimated that the fuel switching should cost about $1.4 million in fiscal year 2008 and could range from between $1.0 and $1.8 million depending on actual fuel costs, among other factors. We also estimated that the costs would range from between $4.7 million and $8.3 million over the 2008 through 2012 period, depending on fuel prices, the plant’s output, and other factors. While we have not analyzed the potential costs of fuel switching at the Capitol Power Plant to meet the needs of the Senate, our estimates for the House may provide some indication of the potential costs of such a directive. Additionally, AOC officials said that further directives to increase its reliance on natural gas in the plant could require equipment upgrades and related capital expenditures. Our May 2008 report also found that decreasing the plant’s reliance on coal could decrease greenhouse gas emissions by about 9,970 metric tons per year at an average cost of $139 per ton and could yield other environmental and health benefits by decreasing emissions of nitrogen oxides, particulate matter, and pollutants that cause acid rain. While fuel switching could decrease emissions of carbon dioxide and other harmful substances, it would also impose recurring costs because natural gas costs about four times as much as coal for an equal amount of energy input. Thus, fuel switching may prove less cost-effective than decreasing the demand for energy. Finally, a third option for the Senate to decrease greenhouse gas emissions and related environmental impacts includes purchasing electricity that is derived from renewable sources and paying external parties for carbon offsets. Neither of these activities would involve modifications to the Capitol Complex or its operations but could nonetheless lead to offsite reductions in emissions and related environmental impacts. Both options, if sustained, would result in recurring costs that should be considered in the context of other options for decreasing emissions that may prove more cost-effective. Madam Chairman, this completes my prepared statement. I would be pleased to answer any questions that you or Members of the Committee may have. For further information about this testimony, please contact Terrell Dorn at (202) 512-6923. Other key contributors to this testimony include Daniel Cain, Janice Ceperich, Elizabeth R. Eisenstadt, Michael Hix, Frank Rusco, and Sara Vermillion. Senate Employees Child Care Center CPP Storage (Butler) Building East and West Underground Garages Capitol Police Courier Acceptance Site BG Production Facility (Greenhouse) Construction Management Division Supreme Court Building This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In April 2007, GAO reported that 96 percent of the greenhouse gas emissions from the Capitol Hill Complex facilities--managed by the Architect of the Capitol (AOC)--resulted from electricity use throughout the complex and combustion of fossil fuels in the Capitol Power Plant. The report concluded that AOC and other legislative branch agencies could benefit from conducting energy audits to identify projects that would reduce greenhouse gas emissions. GAO also recommended that AOC and the other agencies establish a schedule for conducting these audits and implement selected projects as part of an overall plan that considers cost-effectiveness, the extent to which the projects reduce emissions, and funding options. AOC and the other agencies agreed with our recommendations. This statement focuses on (1) the status of AOC's efforts to implement the recommendations in our April 2007 report and (2) opportunities for the Senate to decrease greenhouse gas emissions and associated environmental impacts. The statement is based on GAO's prior work, analysis of AOC documents, and discussions with AOC management. AOC has made some progress toward implementing the recommendations in GAO's April 2007 report, but opportunities remain. For example, AOC has prioritized a list of Capitol Hill buildings that need energy audits but has not developed a schedule for conducting the audits that explains the prioritization scheme or provides information on the anticipated costs. AOC prioritized the order of energy audits based on each building's energy use and has begun conducting the first of the audits. In addition, AOC has contracted with a private firm to conduct preliminary audits of the Senate office buildings that could lead to more targeted audits and eventually identify cost-effective projects that would decrease energy use and related greenhouse gas emissions. We believe that developing a more detailed schedule for future audits that includes an explanation of the prioritization scheme and cost estimates would assist the Congress in its appropriations decisions and facilitate the completion of additional audits. With respect to our recommendation that AOC implement selected projects as part of an overall plan to reduce emissions, AOC has implemented projects to reduce energy use and related emissions, but the projects were not identified through the processes we recommended. AOC could more fully respond to our recommendation by first completing the energy audits and then evaluating the cost-effectiveness and relative merits of projects that could further decrease the demand for energy. The Senate's options for decreasing the greenhouse gas emissions and related environmental impacts associated with its operations fall into three main categories--implementing projects to decrease the demand for electricity and steam derived from fossil fuels, adjusting the Capitol Power Plant's fuel mix, and purchasing carbon offsets or renewable electricity from external providers. Of these options, efforts to decrease the demand for energy could lead to recurring cost savings through reductions in energy expenditures while the other options may prove less cost-effective and involve recurring expenses. However, a key challenge in identifying energy-saving opportunities results from limited data on the baseline level of energy use within each Senate building. Specifically, the meters for steam and chilled water no longer function or do not provide reliable data. In addition, the buildings are not equipped with submeters for electricity that, if installed, could enhance efforts to identify sections of the buildings that consume relatively high levels of energy. AOC has purchased but not installed new chilled water meters, is evaluating options for acquiring new steam meters, and plans to install submeters by February 2009.

Crude oil prices are the fundamental determinant of gasoline prices. As figure 1 shows, crude oil and gasoline prices have generally followed a similar path over the past three decades and have risen considerably over the past few years. Refining capacity also plays a role in determining how gasoline prices vary across different locations and over time. Refinery capacity in the United States has not expanded at the same pace as demand for gasoline and other petroleum products in recent years. The American Petroleum Institute recently reported that U.S. average refinery capacity utilization has increased to 92 percent. As a result, domestic refineries have little room to expand production in the event of a temporary supply shortfall. Furthermore, the fact that imported gasoline comes from farther away than domestically produced gasoline means that when supply disruptions occur in the United States it might take longer to get replacement gasoline than if we had excess refining capacity in the United States. This could cause gasoline prices to rise and stay high until the imported supplies can reach the market. Gasoline inventories maintained by refiners or marketers of gasoline can also have an impact on prices. As have a number of other industries, the petroleum products industry has adopted so-called “just-in-time” delivery processes to reduce costs leading to a downward trend in the level of gasoline inventories in the United States. For example, in the early 1980s private companies held stocks of gasoline in excess of 35 days of average U.S. consumption, while in 2004 these stocks were equivalent to less than 25 days consumption. While lower costs of holding inventories may reduce gasoline prices, lower levels of inventories may also cause prices to be more volatile because when a supply disruption occurs, there are fewer stocks of readily available gasoline to draw from, putting upward pressure on prices. Regulatory factors also play a role. For example, in order to meet national air quality standards under the Clean Air Act, as amended, many states have adopted the use of special gasoline blends—so-called “boutique fuels.” As we reported in a recent study, there is a general consensus that higher costs associated with supplying special gasoline blends contribute to higher gasoline prices, either because of more frequent or more severe supply disruptions, or because higher costs are likely passed on, at least in part, to consumers. Finally, the structure of the gasoline market can play a role in determining prices. For example, mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, potentially allowing them to increase prices above competitive levels. On the other hand, mergers could also yield cost savings and efficiency gains, which may be passed on to consumers through lower prices. Ultimately, the impact depends on whether market power or efficiency dominates. During the 1990s, the U.S. petroleum industry experienced a wave of mergers, acquisitions, and joint ventures, several of them between large oil companies that had previously competed with each other for the sale of petroleum products. More than 2,600 merger transactions have occurred since 1991 involving all three segments of the U.S. petroleum industry. Almost 85 percent of the mergers occurred in the upstream segment (exploration and production), while the downstream segment (refining and marketing of petroleum) accounted for about 13 percent, and the midstream segment (transportation) accounted for about 2 percent. The vast majority of the mergers—about 80 percent—involved one company’s purchase of a segment or asset of another company, while about 20 percent involved the acquisition of a company’s total assets by another so that the two became one company. Most of the mergers occurred since the second half of the 1990s, including those involving large partially or fully vertically integrated companies. For example, in 1998 British Petroleum (BP) and Amoco merged to form BPAmoco, which later merged with ARCO, and in 1999 Exxon, the largest U.S. oil company merged with Mobil, the second largest. Since 2000, we found that at least 8 large mergers have occurred. Some of these mergers have involved major integrated oil companies, such as the Chevron- Texaco merger, announced in 2000, to form ChevronTexaco, which went on to acquire Unocal in 2005. In addition, Phillips and Tosco announced a merger in 2001 and the resulting company, Phillips, then merged with Conoco to become ConocoPhillips. Independent oil companies have also been involved in mergers. For example, Devon Energy and Ocean Energy, two independent oil producers, announced a merger in 2003 to become the largest independent oil and gas producer in the United States. Petroleum industry officials and experts we contacted cited several reasons for the industry’s wave of mergers since the 1990s, including increasing growth, diversifying assets, and reducing costs. Economic literature indicates that enhancing market power is also sometimes a motive for mergers, which could reduce competition and lead to higher prices. Ultimately, these reasons mostly relate to companies’ desire to maximize profits or stock values. Mergers in the 1990s contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry, while the exploration and production segment experienced little change in concentration. Econometric modeling we performed of eight mergers that occurred in the 1990s showed that the majority resulted in small wholesale gasoline price increases. The effects of some of the mergers were inconclusive, especially for boutique fuels sold in the East Coast and Gulf Coast regions and in California. While we have not performed modeling on mergers that occurred since 2000, and thus cannot comment on any potential additional effect on wholesale gasoline prices, these mergers would further increase market concentration nationwide since there are now fewer oil companies. Proposed mergers in all industries are generally reviewed by federal antitrust authorities—including the Federal Trade Commission (FTC) and the Department of Justice (DOJ)—to assess the potential impact on market competition and consumer prices. According to FTC officials, FTC generally reviews proposed mergers involving the petroleum industry because of the agency’s expertise in that industry. To help determine the potential effect of a merger on market competition, FTC evaluates, among other factors, how the merger would change the level of market concentration. Conceptually, when market concentration is higher, the market is less competitive and it is more likely that firms can exert control over prices. DOJ and FTC have jointly issued guidelines to measure market concentration. The scale is divided into three separate categories: unconcentrated, moderately concentrated, and highly concentrated. The index of market concentration in refining increased all over the country during the 1990s, and changed from moderately to highly concentrated on the East Coast. In wholesale gasoline markets, market concentration increased throughout the United States between 1994 and 2002. Specifically, 46 states and the District of Columbia had moderately or highly concentrated markets by 2002, compared to 27 in 1994. While market concentration is important, other aspects of the market that may be affected by mergers also play an important role in determining the level of competition in a market. These aspects include barriers to entry, which are market conditions that provide established sellers an advantage over potential new entrants in an industry, and vertical integration. Mergers may have also contributed to changes in these aspects. However, we could not quantify the extent of these changes because of a lack of relevant data. To estimate the effect of mergers on wholesale gasoline prices, we performed econometric modeling on eight mergers that occurred during the 1990s: Ultramar Diamond Shamrock (UDS)-Total, Tosco-Unocal, Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva), BP- Amoco, Exxon-Mobil, and Marathon Ashland Petroleum (MAP)-UDS. For the seven mergers that we modeled for conventional gasoline, five led to increased prices, especially the MAP-UDS and Exxon-Mobil mergers, where the increases generally exceeded 2 cents per gallon, on average. For the four mergers that we modeled for reformulated gasoline, two— Exxon-Mobil and Marathon-Ashland—led to increased prices of about 1 cent per gallon, on average. In contrast, the Shell-Texaco II (Motiva) merger led to price decreases of less than one-half cent per gallon, on average, for branded gasoline only. For the two mergers—Tosco-Unocal and Shell-Texaco I (Equilon)—that we modeled for gasoline used in California, known as California Air Resources Board (CARB) gasoline, only the Tosco-Unocal merger led to price increases. The increases were for branded gasoline only and were about 7 cents per gallon, on average. Our analysis shows that wholesale gasoline prices were also affected by other factors included in the econometric models, including gasoline inventories relative to demand, supply disruptions in some parts of the Midwest and the West Coast, and refinery capacity utilization rates. Our past work has shown that, crude oil price is the fundamental determinant of gasoline prices. Refinery capacity, gasoline inventory levels and regulatory factors also play important roles. In addition, merger activity can influence gasoline prices. During the 1990s, mergers decreased the number of oil companies and refiners and our findings suggest that this change caused wholesale prices to rise. The impact of more recent mergers is unknown. While we have not performed modeling on mergers that occurred since 2000, and thus cannot comment on any potential additional effect on wholesale gasoline prices, these mergers would further increase market concentration nationwide since there are now fewer oil companies. Our analysis of mergers during the 1990s differs from the approach taken by the FTC in reviewing potential mergers because our analysis was retrospective in nature—looking at actual prices and estimating the impacts of individual mergers on those prices—while FTC’s review of mergers takes place necessarily before the mergers. Going forward, we believe that, in light of our findings, both forward looking and retrospective analysis of the effects of mergers on gasoline prices are necessary to ensure that consumers are protected from anticompetitive forces. In addition, we welcome this hearing as an opportunity for continuing public scrutiny and discourse on this important issue. We encourage future independent analysis by the FTC or other parties, and see value in oversight of the regulatory agencies in carrying out their responsibilities. Regardless of the causes, high gasoline prices specifically, and high energy prices in general are a challenge for the nation. Rising demand for energy in the United States and across the world will put upward pressure on prices with potentially adverse economic impacts. Clearly none of the options for meeting the nation’s energy needs are without tradeoffs. Current U.S. energy supplies remain highly dependent on fossil energy sources that are costly, imported, potentially harmful to the environment, or some combination of these three, while many renewable energy options are currently more costly than traditional options. Striking a balance between efforts to boost supplies from alternative energy sources and policies and technologies focused on improved efficiency of petroleum burning vehicles or on overall energy conservation present challenges as well as opportunities. How we choose to meet the challenges and seize the opportunities will help determine our quality of life and economic prosperity in the future. We are currently studying gasoline prices in particular, and the petroleum industry more generally, including an analysis of the viability of the Strategic Petroleum Reserve, an evaluation of world oil reserves, and an assessment of U.S. contingency plans should oil imports from a major oil producing country, such as Venezuela, be disrupted. With this body of work, we will continue to provide Congress and the American people the information needed to make informed decisions on energy that will have far-reaching effects on our economy and our way of life. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or the other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-3841 (or at wellsj@gao.gov ). Godwin Agbara, Samantha Gross, John Karikari, and Frank Rusco made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Soaring retail gasoline prices, increased oil company profits, and mergers of large oil companies have garnered extensive media attention and generated considerable public concern. Gasoline prices impact the economy because of our heavy reliance on motor vehicles. According to the Department of Energy's Energy Information Administration (EIA), each additional ten cents per gallon of gasoline adds about $14 billion to America's annual gasoline bill. Given the importance of gasoline for the nation's economy, it is essential to understand the market for gasoline and how prices are determined. In this context, this testimony addresses the following questions: (1) What factors affect gasoline prices? (2) What has been the pattern of oil company mergers in the United States in recent years? (3) What effects have mergers had on market concentration and wholesale gasoline prices? To address these questions, GAO relied on previous reports, including (1) a 2005 GAO primer on gasoline prices, (2) a 2005 GAO report on the proliferation of special gasoline blends, and (3) a 2004 GAO report on mergers in the U.S. petroleum industry. GAO also collected updated data from a number of sources that we deemed reliable. This work was performed in accordance with generally accepted government auditing standards. Crude oil prices are the major determinant of gasoline prices. A number of other factors also affect gasoline prices including (1) refinery capacity in the United States, which has not expanded at the same pace as demand for gasoline and other petroleum products in recent years; (2) gasoline inventories maintained by refiners or marketers of gasoline, which as with trends in a number of other industries, have seen a general downward trend in recent years; and (3) regulatory factors, such as national air quality standards, that have induced some states to switch to special gasoline blends that have been linked to higher gasoline prices. Finally, the structure of the gasoline market can play a role in determining prices. For example, mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, potentially allowing them to increase prices above competitive levels. During the 1990s, the U.S. petroleum industry experienced a wave of mergers, acquisitions, and joint ventures, several of them between large oil companies that had previously competed with each other for the sale of petroleum products. During this period, more than 2,600 merger transactions occurred--almost 85 percent of the mergers occurred in the upstream segment (exploration and production), while the downstream segment (refining and marketing of petroleum) accounted for about 13 percent, and the midstream segment (transportation) accounted for about 2 percent. Since 2000, we found that at least 8 additional mergers have occurred, involving different segments of the industry. Petroleum industry officials and experts we contacted cited several reasons for the industry's wave of mergers since the 1990s, including increasing growth, diversifying assets, and reducing costs. Mergers in the 1990s contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry, while the exploration and production segment experienced little change in concentration. GAO evaluated eight mergers that occurred in the 1990s after they had been reviewed by the FTC--the FTC generally reviews proposed mergers involving the petroleum industry and only approves such mergers if they are deemed not to have anticompetitive effects. GAO's econometric modeling of these mergers showed that the majority resulted in small wholesale gasoline price increases. While mergers since 2000 also increased market concentration, we have not performed modeling on more recent mergers and thus cannot comment on any potential additional effect on wholesale gasoline prices.

H.R. 3947 would require the GSA administrator to take a leadership role, in consultation with the heads of other federal agencies and the director of the Office of Management and Budget (OMB), in establishing and maintaining a current set of real property asset management principles. We support this provision. Agencies would use these principles as guidance in making decisions about property planning, acquisition, use, maintenance, and disposal. The bill would also require the GSA administrator, in consultation with the heads of other landholding agencies, to establish performance measures to determine the effectiveness of federal real property management. Performance measures could address such areas as operating costs, security, occupancy rates, and tenant satisfaction. The performance measures should enable Congress and heads of federal agencies to track progress in the achievement of property management objectives on a governmentwide basis. This should allow Congress and the agencies to compare federal agencies’ performance against the performance of private sector and other public sector agencies. In addition, these provisions would emphasize the importance of effectively managing the government’s multibillion-dollar portfolio of federal real property assets, help facilitate a uniform approach to asset management, and assist federal managers in monitoring progress and measuring results. Another important provision in H.R. 3947, which we support, is the establishment of a senior real property officer in each landholding agency that emphasizes the importance of having someone with real property experience oversee agencies’ real property assets. This bill includes qualification requirements for the senior real property officer, such as real estate portfolio or facilities management experience. The senior real property officer would continually monitor real property assets to ensure that they are being used and invested in a way that supports the goals and objectives of the agency’s strategic plan. This provision would make federal agencies with real property holdings accountable for the management and oversight of their real property assets. One important feature of having senior real property officers is that they can be held accountable for providing reliable, useful, and timely data on their agencies’ real property assets to GSA for inclusion into its worldwide inventory. As you know, using data from over 30 real property-holding agencies, GSA maintains a governmentwide real property database commonly referred to as the worldwide inventory. This database is the only central source of descriptive data of governmentwide real property assets. As we found during our recently completed review of this inventory, which I will discuss later in more detail, decisionmakers, including Congress and OMB, currently do not have access to quality data for strategic management and budgeting purposes. Attempting to strategically manage and budget for the government’s vast and diverse portfolio without quality data puts the government’s real property operations at risk and can be likened to navigating the oceans of the world without the benefit of oceanographic charts. Although the senior real property officers would be responsible for developing their agencies’ real property asset management plans, there also is a need for guidance in establishing standards for the plans so they are developed in a consistent manner. The adequacy of these plans will play a key role in improving real property management and oversight throughout the government. Consequently, this would provide GSA with an opportunity, in its role as the government’s real property manager, to develop and provide specific guidance for agencies to use in preparing their real property management plans. This guidance should describe the types of analyses to be included in the plans to support planned actions to be taken and conclusions reached in the plans. For example, the plan should include a discussion of the benefits to the agency or government that would result from the proposed actions, and it should provide an analysis of the asset performance necessary to deliver the required service outcomes over the duration of the asset strategy-planning period. We believe such guidance would help ensure that the strategic actions that agencies plan to take relative to their properties will best meet the intended service delivery outcomes defined in their strategic plans. We envision that the senior real property officers would work together with three other senior agency officials—the chief financial officer (CFO), the chief information officer (CIO), and the head of human resources—to integrate the strategic planning and management of facilities, financial management, technology, and human capital to ensure that the agencies’ asset management plans are linked to the agencies’ overall missions and strategic plans. Given the significant responsibilities foreseen for senior real property officers, we believe that in addition to the qualification requirements specified in the bill, the officers should also have a recognized professional designation or certification, such as certified facility manager or real property administrator. H.R. 3947 would require the GSA administrator to establish and maintain a single, comprehensive, and descriptive inventory database of all real property interests under the custody and control of each federal agency. Subject to certain limitations, and as deemed appropriate by the administrator, portions of this database would be available to interested stakeholders and the public. We believe that a comprehensive, reliable listing of federal properties, as envisioned by H.R. 3947, is essential for the government to oversee and manage its large portfolio of federal assets. Lack of good data makes it difficult for the government to select the optimal level of capital spending needed for the acquisition and maintenance of real property. Inadequate data also impede the government’s ability to identify real property assets that are no longer needed or cost effective to retain. As I previously mentioned, GSA currently maintains a worldwide inventory of real property holdings. This week we reported that GSA’s worldwide inventory of federal real property contained data that were unreliable and of limited usefulness. Worldwide inventory data for 12 of the 31 reporting agencies, which held an estimated 32 percent of the inventory in terms of building square footage, were not current in the most recent inventory report. In addition, the inventory did not contain key data–such as data related to space utilization, facility condition, historical significance, security, and facility age–that would be useful for budgeting purposes and the strategic management of these assets. Given this, decisionmakers, including Congress and OMB, do not have access to quality data on what real property assets the government owns; their value; whether the assets are being used efficiently; and what costs are involved in preserving, protecting, and investing in them. Without quality data, decisionmakers have difficulty strategically managing and budgeting for such significant real property management issues as deteriorating federal buildings, disposal of underutilized and unneeded properties, and the protection of people and facilities. Consequently, we recommended, among other things, that the administrator of GSA exercise strong leadership and work with Congress, OMB, the Department of the Treasury (Treasury), and real property- holding agencies to design a cost-effective strategy for developing and implementing a reliable, timely, and useful governmentwide real property database. GSA agreed with the report’s recommendations. Because there is a concern that GSA lacks specific statutory authority to compile the inventory, we also asked Congress to consider enacting legislation requiring GSA to maintain an accurate and up-to-date governmentwide inventory of real property assets and requiring real property-holding agencies to submit reliable data on their real property assets to GSA. This would give GSA added leverage in obtaining the data it needs from other federal agencies. GSA recognizes the problems associated with the worldwide inventory and has proposed several legislative initiatives in recent years to help correct the problems. This provision in H.R. 3947, if effectively implemented, can help GSA make the worldwide inventory a valuable resource. However, it is important to recognize that even if this provision is enacted, GSA will face formidable challenges in compiling reliable, timely, and useful data on federal real property. GSA will be challenged to identify and compile this data in a manner that the many real property- holding agencies, Congress, the Treasury, and OMB, agree is cost effective. Another challenge for GSA would be to work with participating agencies to make their real property databases capable of producing the common data that are needed to make the worldwide inventory an effective and valued resource. H.R. 3947 would also provide agencies with enhanced asset management tools and incentives for better property management. These proposed changes would give agencies the flexibility to establish real property portfolios that most appropriately, effectively, and efficiently meet the agencies’ mission requirements. The bill provides four new enhanced asset management tools for effective management of federal property: (1) interagency transfers or exchanges, (2) sales to or exchanges with nonfederal sources, (3) subleases, and (4) outleases and public-private partnerships. In addition, H.R. 3947 provides incentives for agencies to use these enhanced asset management tools and dispose of excess property by allowing them to retain proceeds generated to pay expenses associated with the property and fund other capital needs. Currently, the law for most federal agencies requires that proceeds from the sale of federal land and buildings go either to the general treasury or the Land and Water Conservation Fund. Within the last year we have issued two reports that addressed issues related to one of the enhanced management tools proposed in H.R. 3947— public-private partnerships. In our report on repairs and alterations, we said that GSA faced long-standing obstacles, including limited funding, in reducing its multibillion-dollar inventory of repair and alteration needs. In this report, we asked Congress to consider providing the administrator of GSA the authority to experiment with funding alternatives, such as exploring public-private partnerships when they reflect the best economic value available for the federal government. The other report identified the potential benefits of allowing federal agencies to enter into public-private partnerships. A public-private partnership allows the federal government to lease federal property to a nongovernmental entity to develop, rehabilitate, or renovate the facilities on that property for use by federal agencies and/or private sector tenants. We hired consultants to develop and analyze hypothetical partnership scenarios for 10 judgmentally selected GSA properties. Appendix I contains a flowchart that shows how a public-private partnership may be structured. This work showed that 8 of these properties were potential candidates for a public-private partnership, and 2 did not appear to be viable candidates. We identified several potential net benefits to the federal government of entering into these public-private partnerships. These potential benefits included improved space, lower operating costs, and the conversion of buildings that are currently a net cost to GSA into net revenue producers. Location in a strong office real estate market with demand for federal and nonfederal office space and untapped value in underperforming assets were two key factors when considering properties for partnership opportunities. However, public- private partnerships will not necessarily be the best option available to address all real property issues. Ultimately, public-private partnerships and all other alternatives such as federal financing through appropriations or sales or exchanges of property would need to be carefully evaluated to determine which option offers the best economic value for the government. Public-private partnership arrangements are not new to some federal agencies. Congress has previously provided statutory authority for some specific public-private partnership projects. In addition, Congress has enacted legislation that gives VA and the Department of Defense (DOD) specific statutory authority to enter into such partnerships. We are currently evaluating issues related to DOD’s implementation of the military housing privatization initiative. H.R. 3947 would give the administrator of GSA the sole discretion to review and disapprove any transaction by agencies proposing to use enhanced asset management tools. The bill would require agencies to consult with GSA when developing their business plans for specific properties when they intend to use any enhanced asset management tools specified in the bill. A business plan outlines the scope of the project from an output and cost perspective, analyzes the cost and benefits associated with the project, and demonstrates that it has net benefit. In addition, a business plan should include an overview of the structure of the proposed arrangements as well as other elements. Consequently, the business plan is the key step in the decision-making process. Given GSA’s role as the government’s real property manager, other agencies would naturally look to GSA to develop and provide specific written guidance on how to develop their business plans. We believe that federal asset managers need the proper tools, expertise, and knowledge to effectively manage and oversee federal assets. Given this, the tools provided in H.R. 3947 are steps in the right direction for agencies to begin exploring opportunities to better utilize federal assets. However, it is important to recognize that enhanced asset management tools may result in complex real property transactions. For example, in structuring public-private partnerships for individual properties, it must be remembered that each property is unique and thus will have unique issues that will need to be negotiated and addressed as the partnership is formed. In addition, great care will need to be taken in structuring partnerships to protect the interests of both the federal government and the private sector partner. The senior real property officers will need to have access to individuals with the appropriate knowledge, skills, and expertise when they decide to explore more complex real estate transactions authorized by the bill. The proposed enhanced asset management tools and other asset management tools currently available for real property management will also need to be carefully evaluated to ensure that they provide the best economic value and outcome for the government. As I discussed before, H.R. 3947 would allow agencies to retain proceeds generated from the transfer or disposition of their property. Under the bill, agencies would be authorized reimbursement for their costs of disposing of their property. The remaining proceeds would be deposited in agencies’ capital asset accounts that would be authorized by the bill and could be used to fund capital asset expenditures, including expenses related to capital acquisitions, improvements, and dispositions. These accounts would remain available until expended. In our April and July 2001 reports, we asked Congress to consider allowing GSA to retain the funds it received from real property transactions. Accordingly, we support the intent of these provisions. However, it is important to have effective congressional oversight over any receipts retained by agencies from real property transactions. In considering whether to allow federal agencies to retain the proceeds from real property transactions, it is important for Congress to ensure that it retains appropriate control and oversight over these funds, including the ability to redistribute the funds to accommodate changing needs if necessary. Congress has done this by using the appropriations process to review and approve agencies’ proposed use of the proceeds from real property transactions. Another approach could be for Congress to require agencies to submit plans on how they intend to use the proceeds in their capital accounts and report on the actual use of the proceeds. H.R. 3947 makes no distinction between facilities and land in permitting agencies to retain asset sales proceeds. Since our work has focused on facilities, our conclusions regarding sales proceeds are limited to facility sales. Specific issues related to the retention of land sales proceeds may need to be studied further and separately addressed. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you or other members of the Subcommittee may have. For information about this testimony, please contact Bernard L. Ungar, Director, Physical Infrastructure Issues, on (202) 512-8387 or at ungarb@gao.gov. Individuals making key contributions to this testimony included Ron King, Maria Edelstein, Susan Michal-Smith, David Sausville, Gerald Stankosky, and Lisa Wright-Solomon.

The Federal Property Asset Management Reform Act of 2002, will enhance federal real and personal property management and bring the policies and business practices of federal agencies into the 21st century. Available data show that the federal government owns hundreds of thousands of properties worldwide, including military installations, office buildings, laboratories, courthouses, embassies, postal facilities, national parks, forests, and other public lands, estimated to be worth billions of dollars. Most of this government-owned real property is under the custody and control of eight agencies--the Department of Agriculture, Defense, Energy, the Interior, and Veterans Affairs; General Services Administration; the Tennessee Valley Authority; and the U.S. Postal Service. Federal property managers have a large deferred maintenance backlog, obsolete and underutilized properties, and changing facility needs due to rapid advances in technology. It is important that real property-holding agencies link their real property strategic plans to their missions and related capital management and performance plans; ensure that senior real property officers have the knowledge, skills, and expertise needed to effectively perform their duties; are accountable for the reliability, usefulness, and timeliness of their data; and adopt an effective process to monitor and evaluate any management tool authorized by the bill. It is equally important that GSA provides written guidance to agencies on the development of their business and asset management plans and that Congress provide appropriate control and oversight of intended and actual use of the funds retained from real property transactions.

In the three years since its creation, DHS realized some successes among its various acquisition organizations in opening communication through its strategic sourcing and small business programs. Both efforts have involved every principal organization in DHS, along with strong involvement from the CPO, and both have yielded positive results. DHS’ disparate acquisition organizations quickly collaborated on leveraging spending for various goods and services, without losing focus on small businesses. This use of strategic sourcing—formulating purchasing strategies to meet departmentwide requirements for specific commodities, such as office supplies, boats, energy, and weapons—helped DHS leverage its buying power, with savings expected to grow. At the time of our March 2005 review, DHS had reported approximately $14 million in savings across the department. We also found that the small business program, whose reach is felt across DHS, was off to a good start. In fiscal year 2004, DHS reported that 35 percent of its prime contract dollars went to small businesses, exceeding its goal of 23 percent. Representatives have been designated in each DHS procurement office to help ensure that small businesses have opportunities to compete for DHS’ contract dollars. However, some officials responsible for carrying out strategic sourcing initiatives have found it challenging to balance those duties with the demands and responsibilities of their full-time positions within DHS. Officials told us that strategic sourcing meetings and activities sometimes stall because participants must shift attention to their full-time positions. Our prior work on strategic sourcing shows that leading commercial companies often establish full-time commodity managers to more effectively manage commodities. Commodity managers help define requirements with internal clients, negotiate with potential vendors, and resolve performance or other issues arising after a contract is awarded and can help maintain consistency, stability, and a long-term strategic focus. DHS continues to faces challenges in creating a unified, accountable acquisition organization due to policies that create ambiguity as to accountability for acquisition decisions, inadequate staffing to conduct department-wide oversight, and heavy reliance on interagency contracting in the Office of Procurement Operations, which is responsible for a large portion of DHS’ contracting activity. Achieving a unified and integrated acquisition system is hampered because an October 2004 policy directive relies on a system of dual accountability between the CPO and the heads of the department’s principal organizations. Although the CPO has been delegated the responsibility to manage, administer, and oversee all acquisition activity across DHS, in practice, performance of these activities is spread throughout the department, reducing accountability for acquisition decisions. This system of dual accountability results in unclear working relationships between the CPO and heads of DHS’ principal organizations. For example, the policy leaves unclear how the CPO and the director of Immigration and Customs Enforcement are to share responsibility for recruiting and selecting key acquisition officials, preparing performance ratings for the top manager of the contracting office, and providing appropriate resources to support CPO initiatives. The policy also leaves unclear what enforcement authority the CPO has to ensure that initiatives are carried out because heads of principal organizations are only required to “consider” the allocation of resources to meet procurement staffing levels in accordance with the CPO’s analysis. Agreements had not been developed on how the resources to train, develop, and certify acquisition professionals in the principal organizations would be identified or funded. While the October 2004 policy directive emphasizes the need for a unified, integrated acquisition organization, achievement of this goal is further hampered because the directive does not apply to the U.S. Coast Guard and U.S. Secret Service. The Coast Guard is one of the largest organizations within DHS, with obligations accounting for about $2.2 billion in fiscal year 2005, nearly 18 percent of the department’s total. The directive maintains that these two organizations are exempted from the directive by statute. We disagreed with this conclusion, as we are not aware of any explicit statutory exemption that would prevent the application of the DHS acquisition directive to either organization. We raised the question of statutory exemption with the DHS General Counsel, who shared our assessment concerning the explicit statutory exemptions. He viewed the applicability of the management directive as a policy matter. DHS’ goal of achieving a unified, integrated acquisition organization is in part dependent on its ability to provide effective oversight of component activities. We reported in March 2005 that the CPO lacked sufficient staff to ensure compliance with DHS’ acquisition oversight regulations and policies. To a great extent, the various acquisition organizations within the department were still operating in a disparate manner, with oversight of acquisition activities left primarily up to each individual organization. In December 2005, DHS implemented a department wide management directive that establishes policies and procedures for acquisition oversight. The CPO has issued guidance providing a framework for the oversight program and, according to DHS officials, as of May 2006, five staff were assigned to oversight responsibilities. We have ongoing work in this area and will be reporting on the department’s progress in the near future. The challenge DHS faces overseeing its various components’ contracting activities is significant. For example, in May 2004 we reported that TSA had not developed an acquisition infrastructure, including organization, policies, people, and information that would facilitate successful management and execution of its acquisition activities. The development of those areas could help ensure that TSA acquires quality goods and services at reasonable prices, and makes informed decisions about acquisition strategy. To support the DHS organizations that lacked their own procurement support, the department created the Office of Procurement Operations. In 2005, we found that, because this office lacked sufficient contracting staff, it had turned extensively to interagency contracting to fulfill its responsibilities. At the time of our review, we found that this office had transferred almost 90 percent of its obligations to other federal agencies through interagency agreements in fiscal year 2004. For example, DHS had transferred $12 million to the Department of the Interior’s National Business Center to obtain contractor operations and maintenance services at the Plum Island Animal Disease Center. Interior charged DHS $62,000 for this assistance. We found that the Office of Procurement Operations lacked adequate internal controls to provide oversight of its interagency contracting activity. For example, it did not track the fees it was paying to other agencies for contracting assistance. Since our report was issued, the office has added staff and somewhat reduced its reliance on interagency contracting. Recently, DHS officials told us that the office has increased its staffing level from 42 to 120 employees, with plans to hire additional staff. As reported by DHS, the Office of Procurement Operations’ obligations transferred to other agencies had decreased to 72 percent in fiscal year 2005. To protect its major, complex investments, DHS has put in place a review process that adopts many acquisition best practices—proven methods, processes, techniques, and activities—to help the department reduce risk and increase the chances for successful investment outcomes in terms of cost, schedule, and performance. One best practice is a knowledge-based approach to developing new products and technologies pioneered by successful commercial companies, which emphasizes that program managers need to provide sufficient knowledge about important aspects of their programs at key points in the acquisition process, so senior leaders are able to make well-informed investment decisions before an acquisition moves forward. While DHS’ framework includes key tenets of this approach, in March 2005 we reported that it did not require two critical management reviews. The first would help ensure that resources match customer needs before any funds are invested. The second would help ensure that the design for the product performs as expected prior to moving into production. We also found that some critical information is not addressed in DHS’ investment review policy or the guidance provided to program managers. In other cases, it is made optional. For example, before a program is approved to start, DHS policy requires program managers to identify an acquisition’s key performance requirements and to have technical solutions in place. This information is then used to form cost and schedule estimates for the product’s development to ensure that a match exists between requirements and resources. However, DHS policy does not establish cost and schedule estimates for the acquisition based on knowledge from preliminary designs. Further, while DHS policy requires program managers to identify and resolve critical operational issues before proceeding to production, initial reviews—such as the system and subsystem review—are not mandatory. In addition, while the review process adopts other important acquisition management practices, such as requiring program managers to submit acquisition plans and project management plans, a key practice— contractor tracking and oversight—is not fully incorporated. We have cited the need for increased contractor tracking and oversight for several large DHS programs. While many of DHS’ major investments use commercial, off-the-shelf products that do not require the same level of review as a complex, developmental investment would, DHS is investing in a number of major, complex systems, such as TSA’s Secure Flight program and the Coast Guard’s Deepwater program, that incorporate new technology. Our work on these two systems highlights the need for improved oversight of contractors and greater adherence to a best practices approach to management review. Two examples follow. We reported in February 2006 that TSA, in developing and managing its Secure Flight program, had not conducted critical activities in accordance with best practices for large scale information technology programs. Program officials stated that they used a rapid development method that was intended to enable them to develop the program more quickly. However, as a result of this approach, the development process has been ad hoc, with project activities conducted out of sequence. TSA officials have acknowledged that they have not followed a disciplined life cycle approach in developing Secure Flight, and stated that they are currently rebaselining the program to follow their standard systems development life cycle process, including defining system requirements. TSA officials also told us they are taking steps to strengthen contractor oversight for the Secure Flight program. For example, the program is using one of TSA’s support contractors to help track contractors’ progress in the areas of cost, schedule, and performance and the number of TSA staff with oversight responsibilities for Secure Flight contracts has been increased. TSA reports it has identified contract management as a key risk factor associated with the development and implementation of Secure Flight. The Coast Guard’s ability to meet its responsibilities depends on the capability of its deepwater fleet, which consists of aircraft and vessels of various sizes and capabilities. In 2002, the Coast Guard began a major acquisition program to replace or modernize these assets, known as the Deepwater program. Deepwater is currently estimated to cost $24 billion. We have reported that the Coast Guard’s acquisition strategy of relying on a prime contractor (“system integrator”) to identify and deliver the assets needed carries substantial risks. We found that well into the contract’s second year, key components for managing the program and overseeing the system integrator’s performance had not been effectively implemented. As we recently observed, the Coast Guard has made progress in addressing our recommendations, but there are aspects of the Deepwater program that will require continued attention. The program continues to face a degree of underlying risk, in part because of the unique, system-of-systems approach with the contractor acting as overall integrator, and in part because it is so heavily tied to precise year-to year funding requirements over the next two decades. Further, a project of this magnitude will likely continue to experience other concerns and challenges beyond those that have emerged so far. It will be important for Coast Guard managers to carefully monitor contractor performance and to continue addressing program management concerns as they arise. In closing, I believe that DHS has taken strides toward putting in place an acquisition organization that contains many promising elements. However, the steps taken so far are not enough to ensure that the department is effectively managing the acquisition of the multitude of goods and services it needs to meet its mission. More needs to be done to fully integrate the department’s acquisition function, to pave the way for the CPO’s responsibilities to be effectively carried out in a modern-day acquisition organization, and to put in place the strong internal controls needed to manage interagency contracting activity and large, complex investments. DHS’ top leaders must continue to address these challenges to ensure that the department is not at risk of continuing to exist with a fragmented acquisition organization that provides stopgap, ad hoc solutions. DHS and its components, while operating in a challenging environment, must have in place sound acquisition plans and processes to make and communicate good business decisions, as well as a capable acquisition workforce to assure that the government receives good value for the money spent. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information regarding this testimony, please contact Michael Sullivan at (202) 512-4841 or sullivanm@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Homeland Security (DHS) has some of the most extensive acquisition needs within the U.S. government. In fiscal year 2005, the department reported that it obligated almost $17.5 billion to acquire a wide range of goods and services. DHS's acquisition portfolio is broad and complex, including procurements for sophisticated screening equipment for air passenger security; technologies to secure the nation's borders; trailers to meet the housing needs of Hurricane Katrina victims; and the upgrading of the Coast Guard's offshore fleet of surface and air assets. This testimony summarizes GAO reports and testimonies, which have reported on various aspects of DHS acquisitions. It addresses (1) areas where DHS has been successful in promoting collaboration among its various organizations, and (2) challenges it still faces in integrating the acquisition function across the department; and (3) DHS' implementation of an effective review process for its major, complex investments. The information in this testimony is based on work that was completed in accordance with generally accepted government auditing standards. Since its establishment in March 2003, DHS has been faced with assembling 23 separate federal agencies and organizations with multiple missions and cultures into one department. This mammoth task involved a variety of transformational efforts, one of which is to design and implement the necessary management structure and processes for the acquisition of goods and services. We reported in March 2005 that DHS had opened communication among its acquisition organizations through its strategic sourcing and small business programs. With strategic sourcing, DHS' organizations quickly collaborated to leverage spending for various goods and services--such as office supplies, boats, energy, and weapons--without losing focus on small businesses, thus leveraging its buying power and increasing savings. Its small business program, whose reach is felt across DHS, is also off to a good start. Representatives have been designated in each DHS procurement office to ensure small businesses can compete effectively for the agency's contract dollars. We also reported that DHS' progress in creating a unified acquisition organization has been hampered by policy decisions that create ambiguity about who is accountable for acquisition decisions. To a great extent, we found that the various acquisition organizations within DHS were still operating in a disparate manner, with oversight of acquisition activities left primarily up to each individual organization. DHS continues to face challenges in integrating its acquisition organization. Specifically, dual accountability for acquisitions exists between the Chief Procurement Officer (CPO) and the heads of each DHS component; a policy decision has exempted the Coast Guard and Secret Service from the unified acquisition organization; the CPO has insufficient capacity for department-wide acquisition oversight; and staffing shortages have led the Office of Procurement Operations, which handles a large percentage of DHS's contracting activity, to rely extensively on outside agencies for contracting support--often for a fee. We found that this office lacked the internal controls to provide oversight of this interagency contracting activity. This last challenge has begun to be addressed with the hiring of additional contracting staff. Some of DHS's organizations have major, complex acquisition programs that are subject to a multi-tiered investment review process intended to help reduce risk and increase chances for successful outcomes in terms of cost, schedule, and performance. While the process includes many best practices, it does not include two critical management reviews, namely a review to help ensure that resources match customer needs and a review to determine whether a program's design performs as expected. Our prior reports on large DHS acquisition programs, such as the Transportation Security Administration's Secure Flight program and the Coast Guard's Deepwater program, highlight the need for improved oversight of contractors and adherence to a rigorous management review process.

The Homeland Security Act of 2002 combined 22 federal agencies specializing in various missions under DHS. Numerous departmental offices and seven key operating components are headquartered in the NCR.components were not physically consolidated, but instead were dispersed across the NCR in accordance with their history. As of July 2014, DHS employees were located in 94 buildings and 50 locations, accounting for approximately 9 million gross square feet of government-owned and - leased office space. When DHS was formed, the headquarters functions of its various DHS began planning the consolidation of its headquarters in 2005. According to DHS, increased colocation and consolidation were critical to (1) improve mission effectiveness, (2) create a unified DHS organization, (3) increase organizational efficiency, (4) size the real estate portfolio accurately to fit the mission of DHS, and (5) reduce real estate occupancy costs. Between 2006 and 2009, DHS and GSA developed a number of capital planning documents to guide the DHS headquarters consolidation process. For example, DHS’s National Capital Region Housing Master Plan identified a requirement for approximately 4.5 million square feet of office space on a secure campus. In addition, DHS’s 2007 Consolidated Headquarters Collocation Plan summarized component functional requirements and the projected number of seats needed on- and off- campus for NCR headquarters personnel. From fiscal year 2006 through fiscal year 2014, the St. Elizabeths consolidation project had received $494.8 million through DHS appropriations and $1.1 billion through GSA appropriations, for a total of over $1.5 billion. However, from fiscal year 2009—when construction began—through the time of the fiscal year 2014 appropriation, the gap between requested and received funding was over $1.6 billion. According to DHS and GSA officials, this gap created cost escalations of over $1 billion and schedule delays of over 10 years. In our September 2014 report, we found that DHS and GSA planning for the DHS headquarters consolidation did not fully conform with leading capital decision-making practices intended to help agencies effectively plan and procure assets. Specifically, we found that DHS and GSA had not conducted a comprehensive assessment of current needs, identified capability gaps, or evaluated and prioritized alternatives that would help officials adapt consolidation plans to changing conditions and address funding issues as reflected in leading practices. DHS and GSA officials reported that they had taken some initial actions that may facilitate consolidation planning in a manner consistent with leading practices. For example, DHS has an overall goal of reducing the square footage allotted per employee across the department in accordance with current workplace standards, such as standards for telework and hoteling.and GSA officials acknowledged that new workplace standards could create a number of new development options to consider, as the new standards would allow for more staff to occupy the current space at St. Elizabeths than previously anticipated. DHS and GSA officials also reported analyzing different leasing options that could affect consolidation efforts. However, we found that the consolidation plans, which were finalized between 2006 and 2009, had not been updated to reflect these actions. GAO/AIMD-99-32 and OMB Capital Programming Guide. our September 2014 report, we recommended that DHS and GSA conduct (1) a comprehensive needs assessment and gap analysis of current and needed capabilities that takes into consideration changing conditions, and (2) an alternatives analysis that identifies the costs and benefits of leasing and construction alternatives for the remainder of the project and prioritizes options to account for funding instability. DHS and GSA concurred with these recommendations and stated that their forthcoming draft St. Elizabeths Enhanced Consolidation Plan would contain these analyses. Finally, we found that DHS had not consistently applied its major acquisition guidance for reviewing and approving the headquarters consolidation project. Specifically, we found that DHS had guidelines in place to provide senior management the opportunity to review and approve its major projects, but DHS had not consistently applied these guidelines to its efforts to work with GSA to plan and implement headquarters consolidation. DHS had designated the headquarters consolidation project as a major acquisition in some years but not in others. In 2010 and 2011, DHS identified the headquarters consolidation project as a major acquisition and included the project on DHS’s Major Acquisitions Oversight List. Thus, the project was subject to the oversight and management policies and procedures established in DHS major acquisition guidance; however, the project did not comply with major acquisition requirements as outlined by DHS guidelines. For example, we found that the project had not produced any of the required key acquisition documents requiring department-level approval, such as life-cycle cost estimates and an acquisition program baseline, among others. In 2012, the project as a whole was dropped from the list. In 2013 and 2014, DHS included the information technology (IT) acquisition portion of the project on the list, but not the entire project. DHS officials explained that they considered the St. Elizabeths project to be more of a GSA acquisition than a DHS acquisition because GSA owns the site and the majority of building construction is funded through GSA appropriations. We recognize that GSA has responsibility for managing contracts associated with the headquarters consolidation project. However, a variety of factors, including the overall cost, scope, and visibility of the project, as well as the overall importance of the project in the context of DHS’s mission, make the consolidation project a viable candidate for consideration as a major acquisition. By not consistently applying this review process to headquarters consolidation, we concluded that DHS management risked losing insight into the progress of the St. Elizabeths project, as well as how the project fits in with its overall acquisitions portfolio. Thus, in our September 2014 report, we recommended that the Secretary of Homeland Security designate the headquarters consolidation program a major acquisition, consistent with DHS acquisition policy, and apply DHS acquisition policy requirements. DHS concurred with the recommendation. In our September 2014 report, we found that DHS and GSA cost and schedule estimates for the headquarters consolidation project at St. Elizabeths did not conform or only minimally or partially conformed with leading estimating practices, and were therefore unreliable. Furthermore, we found that in some areas, the cost and schedule estimates did not fully conform with GSA guidance relevant to developing estimates. We found that DHS and GSA cost estimates for the headquarters consolidation project at St. Elizabeths did not reflect leading practices, which rendered the estimates unreliable. For example, we found that the 2013 cost estimate—the most recent available—did not include (1) a life- cycle cost analysis of the project, including the cost of repair, operations, and maintenance; (2) was not regularly updated to reflect significant changes to the program including actual costs; and (3) did not include an independent estimate to assist in tracking the budget. In addition, a sensitivity analysis had not been performed to assess the reasonableness of the cost estimate. We have previously reported that a reliable cost estimate is critical to the success of any program. Specifically, we have found that such an estimate provides the basis for informed investment decision making, realistic budget formulation and program resourcing, meaningful progress measurement, proactive course correction when warranted, and accountability for results. Accordingly, we concluded that DHS and GSA would benefit from maintaining current and well- documented estimates of project costs at St. Elizabeths—even if project funding is not fully secured—and these estimates should encompass the full life cycle of the program and be independently assessed. In addition, we found that the 2008 and 2013 schedule estimates did not include all activities for both the government and its contractors necessary to accomplish the project’s objectives and did not include schedule baseline documents to help measure performance as reflected in leading practices and GSA guidance. For the 2008 schedule estimate, we also found that resources (such as labor, materials, and equipment) were not accounted for and a risk assessment had not been conducted to predict a level of confidence in the project’s completion date. In addition, we found the 2013 schedule estimate was unreliable because, among other things, it was incomplete in that it did not provide details needed to understand the sequence of events, including work to be performed in fiscal years 2014 and 2015. We concluded that developing cost and schedule estimates consistent with leading practices could promote greater transparency and provide decision makers needed information about the St. Elizabeths project and the larger DHS headquarters consolidation effort. However, in commenting on our analysis of St. Elizabeths cost and schedule estimates, DHS and GSA officials said that it would be difficult or impossible to create reliable estimates that encompass the scope of the entire St. Elizabeths project. Officials said that given the complex, multiphase nature of the overall development effort, specific estimates are created for smaller individual projects, but not for the campus project as a whole. Therefore, in their view, leading estimating practices and GSA guidance cannot reasonably be applied to the high-level projections developed for the total cost and completion date of the entire St. Elizabeths project. GSA stated that the higher-level, milestone schedule currently being used to manage the program is more flexible than the detailed schedule GAO proposes, and has proven effective even with the highly variable funding provided for the project. We found in our September 2014 report, however, that this high-level schedule was not sufficiently defined to effectively manage the program. For example, our review showed that the schedule did not contain detailed schedule activities that include current government, contractor, and applicable subcontractor effort. Specifically, the activities shown in the schedule only address high-level agency square footage segments, security, utilities, landscape, and road improvements. While we understand the need to keep future effort contained in high-level planning packages, in accordance with leading practices, near-term work occurring in fiscal years 2014 and 2015 should have more detailed information. We recognize the challenges of developing reliable cost and schedule estimates for a large-scale, multiphase project like St. Elizabeths, particularly given its unstable funding history and that incorporating GAO’s cost- and schedule-estimating leading practices may involve additional costs. However, unless DHS and GSA invest in these practices, Congress risks making funding decisions and DHS and GSA management risk making resource allocation decisions without the benefit that a robust analysis of levels of risk, uncertainty, and confidence provides. As a result, in our September 2014 report, we recommended that, after revising the DHS headquarters consolidation plans, DHS and GSA develop revised cost and schedule estimates for the remaining portions of the consolidation project that conform to GSA guidance and leading practices for cost and schedule estimation, including an independent evaluation of the estimates. DHS and GSA concurred with the recommendation. In our September 2014 report, we also stated that Congress should consider making future funding for the St. Elizabeths project contingent upon DHS and GSA developing a revised headquarters consolidation plan, for the remainder of the project, that conforms with leading practices and that (1) recognizes changes in workplace standards, (2) identifies which components are to be colocated at St. Elizabeths and in leased and owned space throughout the NCR, and (3) develops and provides reliable cost and schedule estimates. Mr. Chairman and members of the Subcommittee, this concludes my prepared statement. I look forward to responding to any questions that you may have. For questions about this statement, please contact David C. Maurer, Director, Homeland Security and Justice Issues, (202) 512-9627 or maurerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include David J. Wise (Director), Adam Hoffman (Assistant Director), John Mortin (Assistant Director), Karen Richey (Assistant Director), Juana Collymore, Daniel Hoy, Tracey King, Abishek Krupanand, Jennifer Leotta, David Lutter, and Jan Montgomery. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony summarizes the information contained in GAO's September 2014 report, entitled: Federal Real Property: DHS and GSA Need to Strengthen the Management of DHS Headquarters Consolidation ( GAO-14-648 ). The Department of Homeland Security (DHS) and General Services Administration (GSA) planning for the DHS headquarters consolidation does not fully conform with leading capital decision-making practices intended to help agencies effectively plan and procure assets. DHS and GSA officials reported that they have taken some initial actions that may facilitate consolidation planning in a manner consistent with leading practices, such as adopting recent workplace standards at the department level and assessing DHS's leasing portfolio. For example, DHS has an overall goal of reducing the square footage allotted per employee across DHS in accordance with current workplace standards. Officials acknowledged that this could allow more staff to occupy less space than when the campus was initially planned in 2009. DHS and GSA officials also reported analyzing different leasing options that could affect consolidation efforts. However, consolidation plans, which were finalized between 2006 and 2009, have not been updated to reflect these changes. According to DHS and GSA officials, the funding gap between what was requested and what was received from fiscal years 2009 through 2014, was over $1.6 billion. According to these officials, this gap has escalated estimated costs by over $1 billion--from $3.3 billion to the current $4.5 billion--and delayed scheduled completion by over 10 years, from an original completion date of 2015 to the current estimate of 2026. However, DHS and GSA have not conducted a comprehensive assessment of current needs, identified capability gaps, or evaluated and prioritized alternatives to help them adapt consolidation plans to changing conditions and address funding issues as reflected in leading practices. DHS and GSA reported that they have begun to work together to consider changes to their plans, but as of August 2014, they had not announced when new plans will be issued and whether they would fully conform to leading capital decision-making practices to help plan project implementation. DHS and GSA did not follow relevant GSA guidance and GAO's leading practices when developing the cost and schedule estimates for the St. Elizabeths project, and the estimates are unreliable. For example, GAO found that the 2013 cost estimate--the most recent available--does not include a life-cycle cost analysis of the project, including the cost of operations and maintenance; was not regularly updated to reflect significant program changes, including actual costs; and does not include an independent estimate to help track the budget, as required by GSA guidance. Also, the 2008 and 2013 schedule estimates do not include all activities for the government and its contractors needed to accomplish project objectives. GAO's comparison of the cost and schedule estimates with leading practices identified the same concerns, as well as others. For example, a sensitivity analysis has not been performed to assess the reasonableness of the cost estimate. For the 2008 and 2013 schedule estimates, resources (such as labor and materials) are not accounted for and a risk assessment has not been conducted to predict a level of confidence in the project's completion date. Because DHS and GSA project cost and schedule estimates inform Congress's funding decisions and affect the agencies' abilities to effectively allocate resources, there is a risk that funding decisions and resource allocations could be made based on information that is not reliable or is out of date.

The national park system has 376 units. These park units have over 16,000 permanent structures, 8,000 miles of roads, 1,500 bridges and tunnels, 5,000 housing units, about 1,500 water and waste systems, 200 radio systems, over 400 dams, and more than 200 solid waste operations. According to the Park Service, these facilities are valued at over $35 billion. Needless to say, the proper care and maintenance of the national parks and their supporting infrastructure is essential to the continued use and enjoyment of our great national treasures by this and future generations. However, for years Park Service officials have highlighted the agency’s inability to keep up with its maintenance needs. In this connection, Park Service officials and others have often cited a continuing buildup of unmet maintenance needs as evidence of deteriorating conditions throughout the national park system. The accumulation of these unmet needs has become commonly referred to by the Park Service as its “maintenance backlog.” The reported maintenance backlog has increased significantly over the past 10 years—from $1.9 billion in 1987 to about $6.1 billion in 1997. Recently, concerns about the maintenance backlog situation within the National Park Service, as well as other federal land management agencies, have led the Congress to provide significant new sources of funding. These additional sources of funding were, in part, aimed at helping the agencies address their maintenance problems. It is anticipated that new revenues from the 3-year demonstration fee program will provide the Park Service over $100 million annually. In some cases, the new revenues will as much as double the amount of money available for operating individual park units. In addition, funds from a special one-time appropriation from the Land and Water Conservation Fund may also be available for use by the Park Service in addressing the maintenance backlog. These new revenue sources are in addition to the $300 million in annual operating appropriations which are used for maintenance activities within the agency. In 1997, in support of its fiscal year 1998 budget request, the Park Service estimated that its maintenance backlog was about $6.1 billion.Maintenance is generally considered to be work done to keep assets—property, plant, and equipment—in acceptable condition. It includes normal repairs and the replacement of parts and structural components needed to preserve assets. However, the composition of the maintenance backlog estimate provided by the Park Service includes activities that go beyond what could be considered maintenance. Specifically, the Park Service’s estimate of its maintenance backlog includes not only repair and rehabilitation projects to maintain existing facilities, but also projects for the construction of new facilities. Of the estimated $6.1 billion maintenance backlog, most of it—about $5.6 billion, or about 92 percent—are construction projects. These projects, such as building roads and utility systems, are relatively large and normally exceed $500,000 and involve multiyear planning and construction activities. According to the Park Service, the projects are intended to meet the following objectives: (1) repair and rehabilitation; (2) resource protection issues, such as constructing or rehabilitating historic structures and trails and erosion protection activities; (3) health and safety issues, such as upgrading water and sewer systems; (4) new facilities in older existing parks; and (5) new facilities in new and developing parks. Appendix I of this testimony shows the dollar amounts and percentage of funds pertaining to each of the project objectives. The Park Service’s list of projects in the construction portion of the maintenance backlog reveals that over 21 percent, or $1.2 billion, of the $5.6 billion is for new facilities. We visited four parks to review the projects listed in the Park Service’s maintenance backlog estimates for those parks and found that the estimates included new construction projects as part of the backlog estimate. For example: Acadia National Park’s estimate included $16.6 million to replace a visitor center and construct a park entrance. Colonial National Historical Park included $24 million to build a Colonial Parkway bicycle and walking trail. Delaware Water Gap National Recreation Area included $19.2 million to build a visitor center and rehabilitate facilities. Rocky Mountain National Park included $2.4 million to upgrade entrance facilities. While we do not question the need for any of these facilities, they are directed at either further development of a park or modifications of and improvements to existing facilities in parks to meet the visions that park managers wish to achieve for their parks. These projects are not aimed at addressing the maintenance of existing facilities within the parks. As a result, including these types of projects in the maintenance backlog contributes to confusion about the actual maintenance needs of the national park system. In addition to projects clearly listed as new construction, other projects on the $5.6 billion list that are not identified as new construction, such as repair and rehabilitation of existing facilities, also include substantial amounts of new construction. Our review of the projects for the four parks shows that each included large repair and rehabilitation projects that contained tasks that would not be considered maintenance. These projects include new construction for adding, expanding, and upgrading facilities. For example, at Colonial National Historical Park, an $18 million project to protect Jamestown Island and other locations from erosion included about $4.7 million primarily for new construction of such items as buildings, boardwalks, wayside exhibits, and an audio exhibit. Beyond construction items, the remaining composition of the $6.1 billion backlog estimate—about 8 percent, or about $500 million—consists of smaller maintenance projects that include such items as rehabilitating campgrounds and trails and repairing bridges, and other items that recur on a cyclic basis, such as reroofing or repainting buildings. Excluded from the Park Service’s maintenance backlog figures is the daily, park-based operational maintenance to meet routine park needs, such as janitorial and custodial services, groundskeeping, and minor repairs. The Park Service compiles its maintenance backlog estimates on an ad hoc basis in response to requests from the Congress or others; it does not have a routine, systematic process for determining its maintenance backlog. The January estimate of the maintenance backlog—its most recent estimate—was based largely on information that was compiled over 4 years ago. This fact, as well as the absence of a common definition of what should be included in the maintenance backlog, contributed to an inaccurate and out-of-date estimate. Although documentation showing the maintenance backlog estimate of $6.1 billion was dated January 1997, for the most part, the Park Service’s data were compiled on the basis of information received from the individual parks in December 1993. A Park Service official stated that the 1993 data were updated by headquarters to reflect projects that had been subsequently funded during the intervening years. However, at each of the parks we visited in preparing for today’s testimony, we found that the Park Service’s most recent maintenance backlog estimate for each of the parks was neither accurate nor current. The four parks’ estimates of their maintenance backlog needs ranged from about $40 million at Rocky Mountain National Park to $120 million at Delaware Water Gap National Recreation Area. Our analysis of these estimates showed that they varied from the headquarters estimates by about $3 million and $21 million, respectively. The differences occurred because the headquarters estimates were based primarily on 4-year old data. According to officials from the four parks, they were not asked to provide specific updated data to develop the 1997 backlog estimate. The parks’ estimates, based on more current information, included such things as updated lists reflecting more recent projects, modified scopes, and more up-to-date cost estimates. For example, Acadia’s estimate to replace the visitor center and construct a park entrance has been reduced from $16.6 million to $11.6 million; the Delaware Water Gap’s estimate of $19.2 million to build a visitor center and rehabilitate facilities has been reduced to $8 million; and Rocky Mountain’s $2.4 million project to upgrade an entrance facility is no longer a funding need because it is being paid for through private means. In addition, one of the projects on the headquarters list had been completed. The Park Service has no common definition as to what items should be included in an estimate of the maintenance backlog. As a result, we found that officials we spoke to in Park Service headquarters, two regional offices, and four parks had different interpretations of what should be included in the backlog. In estimating the maintenance backlog, some of these officials would exclude new construction; some would include routine, park-based maintenance; and some would include natural and cultural resource management and land acquisition activities. In addition, when the Park Service headquarters developed the maintenance backlog estimate, it included both new construction and maintenance-type items in the estimate. For example, nonmaintenance items, such as adding a bike path to a park where none now exists or building a new visitor center, are included. The net result is that the maintenance backlog estimate is not a reliable measure of the maintenance needs of the national park system. In order to begin addressing its maintenance backlog, the Park Service needs (1) accurate estimates of its total maintenance backlog and (2) a means for tracking progress so that it can determine the extent to which its needs are being met. Currently, the agency has neither of these things. Yet, the need for them is more important now than ever before because in fiscal year 1998, over $100 million in additional funding is being made available for the Park Service that it could use to address its maintenance needs. This additional funding comes from the demonstration fee program. Also, although the exact amount is not yet known, additional funding may be made available from the Land and Water Conservation Fund. Park Service officials told us that they have not developed a precise estimate of the total maintenance backlog because the needs far exceed the funding resources available to address them. In their view, the limited funds available to address the agency’s maintenance backlog dictate that managers focus their attention on identifying only the highest priority projects on a year-to-year basis. Since the agency does not focus on the total needs but only on priorities for a particular year, it cannot determine whether the maintenance conditions of park facilities are improving or worsening. Furthermore, without information on the total maintenance backlog, it is difficult to fully measure what progress is being made with available resources. The recent actions by the Congress to provide the Park Service with substantial additional funding, which could be used to address its maintenance backlog, further underscores the need to ensure that available funds are being used to address those needs and to show progress in improving the conditions of the national park system. The Park Service estimates that the demonstration fee program could provide over $100 million a year to address the parks’ maintenance and other operational needs. In some parks, revenue from new and increased fees could as much as double the amount of money that has been previously available for operating individual park units. In addition to the demonstration fee program, fiscal year 1998 was the first year that appropriations from the Land and Water Conservation Fund could be used to address the maintenance needs of the national park system. However, according to Park Service officials, the exact amount provided from this fund for maintenance will not be determined until sometime later this month. Two new requirements that have been imposed on the Park Service, and other federal agencies, should, if implemented properly, help the agency to better address its maintenance backlog. These new requirements involve (1) changes in federal accounting standards and (2) the Government Performance and Results Act (the Results Act). Recent changes in federal accounting standards require federal agencies, including the Park Service, to develop better data on their maintenance needs. The standards define deferred maintenance and require that it be disclosed in agencies’ financial statements beginning with fiscal year 1998. To implement these standards, the Park Service is part of a facilities maintenance study team that has been established within the Department of the Interior to provide the agency with deferred maintenance information as well as guidance on standard definitions and methodologies for improving the ongoing accumulation of this information. In addition, as part of this initiative, the Park Service is doing an assessment of its assets to show whether they are in poor, fair, or good condition. This condition information is essential to providing the Park Service with better data on its overall maintenance needs. Furthermore, it is important to point out that as part of the agency’s financial statements, the accuracy of the Park Service’s deferred maintenance estimates will be subjected to annual audits. This audit scrutiny is particularly important given the long-standing concerns reported by us and others about the validity of the data on the Park Service’s maintenance backlog estimates. The Results Act should also help the Park Service to better address its maintenance backlog. In carrying out the Results Act, the Park Service is requiring its park managers to measure progress in meeting a number of key goals, including whether and to what degree the conditions of park facilities are being improved. If properly implemented, this requirement should make the Park Service as a whole, as well as individual park managers, more accountable for how it spends maintenance funds to improve the condition of park facilities. Once in place, this process should permit the Park Service to better demonstrate what is being accomplished with its funding resources. This is an important step in the right direction since our past work has shown that the Park Service could not hold park managers accountable for their spending decisions because they did not have a good system for tracking progress and measuring results. Mr. Chairman, this completes my statement. I would be happy to answer questions from you or any other Members of the Subcommittee. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO discussed: (1) the Park Service's estimate of the maintenance backlog and its composition; (2) how the agency determined the maintenance backlog estimate and whether it is reliable; and (3) how the agency manages the backlog. GAO noted that: (1) the Park Service's estimate of its maintenance backlog does not accurately reflect the scope of the maintenance needs of the park system; (2) the Park Service estimated, as of January 1997, that its maintenance backlog was about $6.1 billion; (3) most of this amount--about $5.6 billion, or about 92 percent--was construction projects; (4) of this amount, over 21 percent or $1.2 billion was for the construction of new facilities; (5) while GAO does not question the need for these facilities, including these kinds of new construction projects or projects that expand or upgrade park facilities in an estimate of the maintenance backlog is not appropriate because it goes beyond what could reasonably be viewed as maintenance; (6) as a result, including these projects in the maintenance backlog contributes to confusion about the actual maintenance needs of the national park system; (7) the Park Service's estimate of its maintenance backlog is not reliable; (8) its maintenance backlog estimates are compiled on an ad hoc basis in response to requests from Congress or others; (9) the agency does not have a routine, systematic process for determining its maintenance backlog; (10) the most recent estimate, as of January 1997, was based largely on information that was compiled by the Park Service over 4 years ago and has not been updated to reflect changing conditions in individual park units; (11) this fact, as well as the absence of a common definition of what should be included in the maintenance backlog, contributes to an inaccurate and out-of-date estimate; (12) the Park Service does not use the estimated backlog in managing park maintenance operations; (13) as such, it has not specifically identified its total maintenance backlog; (14) since the backlog far exceeds the funding resources being made available to address it, the Park Service has focused its efforts on identifying the highest-priority maintenance needs; (15) however, given that substantial additional funding resources can be used to address maintenance--over $100 million starting in fiscal year (FY) 1998--the Park Service should more accurately determine its total maintenance needs and track progress in meeting them so that it can determine the extent to which they are being met; (16) the Park Service is beginning to implement the legislatively mandated management changes in FY 1998; and (17) these changes could, if properly implemented, help the Park Service develop more accurate data on its maintenance backlog and track progress in addressing it.

When selecting contractors, the FAR requires agencies to consider past performance as one evaluation factor in most competitive procurements. During the source selection process, contracting officials often rely on various sources of past performance information, such as the prospective contractor’s prior government or industry contracts for efforts similar to the government’s requirements, and the past performance information housed in the government-wide PPIRS database. Once a contract is awarded, the agency should monitor the contractor’s performance throughout the performance period. At the time the work is completed, the FAR requires agencies to prepare an assessment of the contractor’s performance for contracts or orders that exceed the simplified acquisition threshold. DOD has dollar thresholds that are generally higher than the simplified acquisition threshold for contractor assessments, which vary based on business sector. To document and manage contractor performance information internally, DOD has used CPARS since 2004. The system, which was developed by the Navy, incorporates processes and procedures for drafting and finalizing assessments, which are described in the CPARS Guide. The assessing official rates the contractor based on various elements such as quality of product or service, schedule, cost control, business relations, small business utilization, and management of key personnel. For each applicable rating element, the assessing official determines a rating based on definitions in the CPARS Guide that generally relates to how well the contractor met the contract requirements and responded to problems. In addition, for each rating element, a narrative is required to provide examples and support for the assessment. Once draft assessments are completed by the assessing official, the contractor is notified that the assessment is available for their review and comment through CPARS. The comment process includes the following: Contractors are allowed a minimum of 30 days to provide comments, rebuttals, or additional information. The assessing official has the discretion to extend the comment period. The contactor can request a meeting with the assessing official to discuss the assessment or request a review by the reviewing official. After receiving and reviewing a contractor’s comments and any additional information, the assessing official may revise the assessment and supporting narrative. If there is disagreement with the assessment, the reviewing official— generally a government official one level above the assessing official organizationally—will review and finalize the assessment. After contractor comments are considered, or if the contractor elects not to provide comments, the assessment is finalized and submitted to PPIRS, where it is available government-wide for source selection purposes for 3 years after the contract performance completion date. Section 806 of the NDAA for Fiscal Year 2012 required DOD to develop a strategy for improving contractor past performance information to include standards for timeliness and completeness, assigning responsibility and accountability for completing assessments, and ensuring assessments are consistent with award fee evaluations. In addition, the section requires the DFARS to be revised to require contractor assessments to be posted to databases used for making source selection decisions no later than 14 days after delivery of the draft assessment to the contractor. DOD’s strategy to improve reporting of contractor past performance information and respond to section 806 of the NDAA for Fiscal Year 2012 is to provide training on past performance to acquisition officials, develop tools and metrics to track compliance and enhance oversight, and continue to rely on the CPARS Guide. Some elements of this strategy are in place already, while others are still in progress. In order to improve compliance with past performance reporting requirements and the quality of assessments, the CPARS program office provides training opportunities and assessment tools for acquisition officials. As a result of increased emphasis on training, the number of contracting officials trained on contractor past performance more than doubled from fiscal year 2010 to fiscal year 2012, as shown in figure 1. Training included on-site classes; instructor-led, web-based training; and most recently, automated on-line training. Courses include overviews, and training on how to write quality narratives supporting contractor assessments. In addition, the CPARS program office provides tools to facilitate completing assessments, including a quality checklist which includes best practices and guidance for writing sufficiently detailed narratives. We did not assess the quality of assessment narratives in this review. To increase management oversight of contractor performance assessments, the CPARS program office in 2010, in conjunction with OFPP, developed system tools and metrics within PPIRS to track compliance with the reporting requirements. This allows managers to track compliance at the department, component, or contracting office level. For example, contracting managers can identify overall compliance for their office and identify specific non-compliant contracts with this new tracking tool. Officials at DOD components told us that having the ability to track completion of required assessments through PPIRS has greatly improved the ability to effectively oversee and manage compliance, and has also improved accountability for completing assessments. In an effort to increase accountability, the Director of Defense Procurement and Acquisition Policy issues quarterly compliance reports to senior procurement executives. Senior procurement executives at DOD components have required reporting of actions taken by individual contracting activities, set goals for compliance, and encouraged or required training. In addition, DOD officials told us contractor past performance is now discussed at senior level acquisition quarterly and monthly meetings. DOD plans to continue implementing existing policies contained in the CPARS Guide, which addresses most of the required elements specified in section 806. Specifically, the CPARS Guide aligns with section 806 through the following: Contractor performance assessment must be finalized within 120 days after the end of the evaluation period. For contracts and orders with performance exceeding one year, annual interim assessments are required and a final assessments is required when the work is completed. Roles and responsibilities for documenting contractor performance: The assessing official, usually the contracting officer, is responsible for preparing and finalizing the assessment. The reviewing official reconciles any disagreements between the assessing official and the contractor. The CPARS Focal Point provides overall support for the CPARS process for a particular organization and assigns key roles for each contract requiring an assessment based on information from the contracting officer, program, or project manager. Provides sources of data to consider, including earned incentive and award fee determinations. In addition, DOD provided additional guidance on translating award fee determinations into past performance assessments. Although the CPARS Guide does not currently specify standards for completeness, one of the elements specified in section 806, a recent proposed change to the FAR will address completeness by providing minimum government-wide standards for past performance rating elements. Specifically, the proposed rule requires that all assessments address, at a minimum, quality of product or service, timeliness, and management or business relations. PPIRS compliance metrics show the percentage of required assessments completed increased from 56 percent in 2011 to 74 percent in 2013. In addition, the number of assessments completed overall more than doubled from 2010 to 2012. DOD still faces challenges, however, in completing assessments on time. An increased focus on completing past performance assessments, both within the components and among individual contracting activities, has resulted in more required assessments being completed and submitted to PPIRS. As of April 2013, PPIRS’s metrics show compliance with the reporting requirement of about 74 percent—an increase of 18 percentage points since October 2011. Based on our review of government-wide PPIRS compliance metrics, DOD compliance with the reporting requirement is generally much higher than other federal agencies. For example, as of April 2013, more than half of federal agencies had no required contractor assessments in PPIRS. Among DOD’s major components, most showed significant improvement, as shown in table 1 below. Although compliance with the reporting requirements for performance assessments has increased, DOD still faces challenges with completing assessments on time. As shown in figure 2, the total number of assessments completed more than doubled from 2010 to 2012. In addition, the number of assessments completed on time also increased significantly—from about 5,600 to almost 14,000. However, the majority of assessments completed each year exceeded the 120-day standard for timeliness. In part, the number of assessments completed after the specified time frame may be the result of increased emphasis on working down the backlog of past-due assessments. For example, about 31,000 assessments became due during fiscal year 2012, but DOD completed over 33,000 during that year. DOD officials told us that department-wide acquisition workforce shortages and turnover, as well as difficulty obtaining contractor performance information remain as challenges to completing contractor performance assessments on time. For example, completing contractor assessments is considered a joint responsibility between the contracting and program office and, the assessing official often relies on others to provide information needed to complete the assessment, and in some cases may have difficulty obtaining the information. In addition, assessments are not finalized until the contractor has an opportunity to provide comments, and the 120-day standard for finalizing assessments includes the contractor comment period. The FAR currently requires that all federal contractors be given a minimum of 30 days to submit comments, rebutting statements, or additional information to performance assessments. As shown in Table 2, DOD received comments from contractors on over 80 percent of all assessments from fiscal years 2010 through 2012, and most were received within the current 30-day minimum requirement for responding. Section 806 would limit the comment period to 14 days before the assessment is submitted to PPIRS, which should help DOD meet the 120-day standard for submitting past performance assessments. DOD is currently working with the rest of the FAR Council to implement this change. We are not making recommendations in this report. We provided a draft of this report to DOD and OFPP for their review and comment. DOD informed us by email that it concurred with our findings and the information presented in this report and would not be providing written comments. DOD officials provided technical comments, which we incorporated as appropriate. OFPP informed us by email that the office had no comments. We are sending copies of this report to appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense for Acquisition, Technology, and Logistics, the Director of the Office of Management and Budget, and other interested parties. This report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or woodsw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I. In addition to the contact named above, LaTonya Miller, Assistant Director; John Neumann, Assistant Director; Dani Green; Julia Kennon; John Krump; and Bradley Terry made key contributions to this report.

DOD relies on contractors to perform a broad array of activities. Having complete, timely, and accurate information on contractor performance is critical so officials responsible for awarding new federal contracts can make informed decisions. Agencies are required to document contractor performance for contracts exceeding certain dollar thresholds. In 2009, GAO found that contractor past performance information was incomplete, citing low priority and lack of system tools and metrics to track compliance. In 2011, the Office of Federal Procurement Policy (OFPP) reported that DOD assessments often lacked sufficiently detailed narratives. Section 806 of the NDAA for 2012 required DOD to develop a strategy to ensure that contractor performance assessments are complete, timely, and accurate. Section 806 also required GAO to report on DOD's actions and their effectiveness. GAO (1) identified actions taken by DOD to improve the quality and timeliness of past performance information and implement provisions of the act, and (2) assessed the effectiveness of those actions. GAO reviewed DOD policy and guidance, and interviewed DOD and OFPP officials. GAO also reviewed available data on compliance with reporting requirements from 2011-2013 and timeliness data for fiscal years 2010-2012. GAO did not independently assess the quality of assessment narratives. GAO is not making any recommendations in this report. DOD concurred with GAO's findings and OFPP had no comments. The Department of Defense (DOD) strategy for improving the reporting of contractor past performance information consists of providing additional training to its acquisition workforce and developing tools and metrics to improve oversight. The number of personnel trained more than doubled since 2010 to more than 7,000, and DOD oversight officials now have the ability to track compliance with reporting requirements down to the level of individual contracting offices. DOD continues to utilize existing past performance guidance, which generally aligns with requirements specified in the National Defense Authorization Act (NDAA) for Fiscal Year 2012. Compliance metrics show that the submission of required assessments has increased. Specifically, the percentage of required assessments submitted increased from 56 to 74 percent from October 2011 to April 2013. Officials at DOD said the ability to track completion of assessments has greatly improved oversight and accountability. Despite this progress, DOD faces challenges completing assessments on time. DOD officials attribute the lack of timeliness to acquisition workforce shortages, turnover, and the difficulty in obtaining needed information. DOD is working with other agencies on a regulatory change, consistent with a requirement in the NDAA for 2012, that would reduce the time allowed for contractors to submit comments on draft assessments. This change should help officials submit final assessments on a more timely basis.

SBA’s need to monitor activities of lenders that help deliver its programs has increased significantly in recent years. One reason is that the reported volume of loans processed by lenders almost doubled between 1992 and 1997, from about $24 billion to about $46 billion. A second reason is that SBA shifted to lenders the responsibility for key loan origination, servicing, and liquidation functions during this same time period. In 1993, SBA district offices reviewed the creditworthiness of about 84 percent of lenders’ requests for loan guarantees, with the remainder being processed under a preferred lender program. At that time, SBA also serviced and liquidated all loans that went into default. By 1997, preferred lenders processed about 52 percent of the loans and, starting in 1998, lenders became responsible for servicing and liquidating all loans they make under the 7(a) program, which constitutes about 80 percent of SBA’s loan portfolio. To improve its ability to monitor lenders’ loan servicing and liquidation actions, SBA asked for $18 million in its fiscal year 1998 budget request. According to SBA, these funds were to be used for (1) recruiting expertise in lender oversight, (2) establishing financial performance goals for private-sector partners, (3) creating a database for lender and portfolio management, and (4) developing an information system for timely and accurate reporting to agency management. “perform and complete the planning needed to serve as the basis for funding the development and implementation of the computerized loan monitoring system, including— (1) fully defining the system requirement using on-line, automated capabilities to the extent feasible; (2) identifying all data inputs and outputs necessary for timely report generation; (3) benchmark loan monitoring business processes and systems against comparable industry processes and, if appropriate, simplify or redefine work processes based on these benchmarks; (4) determine data quality standards and control systems for ensuring information accuracy; (5) identify an acquisition strategy and work increments to completion; (6) analyze the benefits and costs of alternatives and use to demonstrate the advantage of the final project; (7) ensure that the proposed information system is consistent with the agency’s information architecture; and (8) estimate the cost to system completion, identifying the essential cost element.” The act also required SBA, within 6 months of enactment, to submit a report to the Congress and to us on its progress in carrying out these mandated actions. As required, SBA submitted its report on June 2, 1998. We were required by the act to evaluate and report on SBA’s compliance with the act within 28 days of receipt of SBA’s report. On June 30, 1998, we reported that SBA had formed a team for the loan monitoring system in December 1997, but it had not yet completed any of the eight mandated actions. We noted that SBA’s report included a project plan, laying out its approach for addressing these actions. Work on the first of the required planning actions was begun in May 1998 and, according to the project plan, SBA will complete work on the last of the eight mandated actions in August 1999. In conducting our review, we analyzed SBA’s systems development and related information resources management policies and procedures, reviewed SBA’s activities to prepare for undertaking the required planning actions, and reviewed and analyzed SBA’s June 2, 1998, report to the Congress on its progress in carrying out the eight required actions that was issued pursuant to the Small Business Reauthorization Act of 1997. Our work was performed from December 1997 through June 1998, in accordance with generally accepted government auditing standards. SBA’s project plan provides information in many key areas to explain how it intends to complete the mandated actions. The plan delineates the project’s goals and objectives, resource requirements, quality standards and control systems, assumptions, methodologies, work breakdown structure with a timetable for completion of tasks, and estimated costs. SBA established four goals for the loan monitoring system project: Have high-quality, timely data necessary to perform roles such as the management of risk, collection of fees from recipients, and reporting to internal and external entities. Enforce uniform practices for loan making and reporting that will result in equal access by all eligible small businesses. Have business processes that support a streamlined workforce, use appropriate work flows, use best practices of both the government and private sectors, and include the ability to cope with both upward and downward changes in demand and resource availability. Have a computer infrastructure that supports efficient and user friendly information exchanges within SBA and among SBA and external entities, and that can enhance SBA’s program delivery and its ability to carry out its oversight functions. According to the project plan, SBA’s strategy for achieving these goals is to build on “best industry practices,” reengineer inefficient business processes, and implement contemporary technologies. In support of these goals, SBA also established objectives for the loan monitoring system; they include the following functionality: on-line update by lenders of disbursements, payments, unilateral servicing actions, and requests for SBA approvals, as necessary; waiting-to-be-processed queues for action by service center personnel; electronic (digital) signatures to identify and verify who takes and electronic notification of actions via external e-mail or lender notification on-line exception reporting to notify SBA of potential problems, such as “neglected” loans, poor credit analysis, and slow lender servicing or reporting; data analysis tools for management information, such as lender and loan trend identification, and end-user query and reporting; a centralized electronic file to replace on-site paper loan folders; integrated interactive voice response allowing borrowers and lenders to receive status data; on-line electronic collateral file with a centralized storage site for paper centralized, automated generation of uniform commercial code filing expanded use of auto-dial for collections; and sophisticated industry models to analyze and manage credit risk and portfolio performance. SBA included estimates of the personnel resources that it would need to execute the project plan. It estimated that 18 staff would be needed for the first phase of the project, which addresses the completion of the mandated actions, and that an additional three staff would be needed for the development phase. The project plan also describes the types of skills needed—such as programming, systems architecture, and database administration—to manage and execute the project. To address the quality standards and controls to be used for the loan monitoring system project, the plan includes work elements to establish systems development standards and procedures and process change control procedures. The plan also describes the quality control process that SBA plans to use to identify compliance with standards, and defines how the compliance findings will be reported. The plan recognizes that the project includes a number of assumptions that may affect its success. It identifies seven key assumptions that SBA made but will need to validate during the project. For example, SBA assumed that the agency’s information technology architecture will be completed before it is needed to support this project, and that agreements with benchmarking partners will be timely and structured to meet SBA’s needs. The project plan also cites the methodologies that SBA plans to use or is considering for key areas of the project. These include methodologies for project planning and management, benchmarking, reengineering, systems development, software acquisition, risk management, and development of an information technology architecture. In some areas, such as software acquisition, SBA is comparing its current methodologies with industry best practices to select the methodologies that will be used for the project. In other areas, such as benchmarking, SBA did not have a methodology; it has now either selected a new methodology or is in the process of selecting one for these areas. Included in the project plan is a work breakdown structure that lists the work elements from the start of the project through completion. These elements include the individual steps necessary to complete the mandated actions and the steps planned for the subsequent system design, development or acquisition, and implementation. The work elements for completing the mandated actions are sequenced, beginning with benchmarking and ending with the identification of an acquisition strategy to support a make-or-buy decision. The project plan recognizes that the project will not have enough information to fully evaluate the make or buy issue until it has completed benchmarking, business process reengineering, requirements gathering and analysis, and benefits and costs analyses. According to the project plan, SBA estimates that the loan monitoring system will cost about $20 million to complete. In addition to the automated system, this estimate includes the costs of staffing; developing training; developing lender performance standards; establishing subsidy rate analysis processes; and making infrastructure improvements, such as buying communications hardware and software. The project plan specifies that SBA will refine the cost estimates after the systems requirements have been defined and the alternatives analyzed. While developing the project plan is a good start, SBA must still successfully execute it to complete the eight mandated actions. In executing the plan, SBA will face formidable technical and management challenges and risks, including establishing software project management capability while undertaking its largest information technology project ever; using methodologies and practices for the first time while conducting a large, complex project; and implementing the loan monitoring system project without having an information technology architecture in place. SBA recognizes the need to establish defined processes for software project management and use them on this project. Research by the Software Engineering Institute has shown that defined and repeatable processes for managing software acquisition or development are critical to an organization’s ability to consistently deliver high-quality information systems on time and within budget. These critical management processes include project planning, requirements management, software project tracking and oversight, software quality assurance, software configuration management, and change control management. If SBA cannot implement disciplined software development and acquisition processes for this project, it risks building or buying a system that does not effectively meet its requirements, is delivered late or over budget, or does not perform as specified. The loan monitoring system project team will be using, for the first time, methodologies it has selected for benchmarking, business process reengineering, information technology architecture development, project management, and systems development. Each of these methodologies is complex and will require staff with the necessary skills and abilities for rigorous implementation. The staff currently on the project management team will need to develop the skills and abilities to use the new methodologies as they execute this large undertaking. SBA may also need to hire staff with the necessary skills and abilities to use the new methodologies, and hire contractors with the necessary expertise to support the project team. Successfully learning and employing several new methodologies simultaneously will present a considerable technical and management challenge. If the team is not up to the task, the project may not achieve its intended results. SBA plans to work concurrently on an information technology architecture and the loan monitoring system as separate projects. The act requires SBA to ensure that the loan monitoring system is consistent with the architecture. An information technology architecture provides a comprehensive “construction plan” or “blueprint” that systematically details the breadth and depth of an organization’s mission-based mode of operation. An architecture provides details first in logical terms, such as defining business functions, providing high-level descriptions of information systems and their interrelationships, and specifying information flows; and second in technical terms, such as specifying hardware, software, data, communications, security, and performance characteristics. By enforcing an information technology architecture to guide and constrain a modernization program, an agency can preclude inconsistent systems design and development decisions, and the resulting suboptimal performance and added cost. SBA has started developing an information technology architecture by documenting its current computing environment. It plans to continue developing the architecture while the loan monitoring system project is underway. As stated earlier, SBA assumes that the information technology architecture will be completed before it is needed to support this project. If both logical and technical components of the architecture are not completed as scheduled, the loan monitoring system project will likely be delayed and plans may need to be revised because, as required by the act, the plans must be consistent with the information technology architecture. In conclusion, the extent to which SBA meets these challenges and manages these risks will determine how well business processes and systems requirements are defined, and the quality of support for decision-making on the purchase or development of the needed system. Because this system is a critical part of SBA’s modernization, its senior officials must closely monitor progress in implementing the project plan and ensure that appropriate steps are taken to mitigate the significant risks involved. SBA should complete all of the eight actions mandated by the Small Business Reauthorization Act of 1997 before buying hardware or systems. In particular, SBA should ensure that (1) the project has the active participation and support of senior program managers and staff, (2) a disciplined software development and acquisition processes is implemented for this project, (3) project staff are adequately trained and supported by contractors with expertise in the methodologies used for this project, and (4) the information architecture is adequately developed and used to guide the requirements for the loan monitoring system. Mr. Chairman, this concludes my statement. 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GAO discussed the Small Business Administration's (SBA) activities to complete planning for its loan monitoring system, as required by the Small Business Reauthorization Act of 1997, focusing on SBA's project plan for completing the mandated actions. GAO noted that: (1) SBA's project plan provides information in many key areas to explain how it intends to complete the mandated actions; (2) the plan delineates the project's goals and objectives, resource requirements, quality standards and control systems, assumptions, methodologies, work breakdown structure with a timetable for completion of tasks, and estimated costs; (3) according to the project plan, SBA's strategy for achieving these goals is to build on best industry practices, reengineer inefficient business processes, and implement contemporary technologies; (4) in support of these goals, SBA also established objectives for the loan monitoring system; (5) SBA included estimates of the personnel resources that it would need to execute the project plan; (6) it estimated that 18 staff would be needed for the first phase of the project, which addresses the completion of the mandated actions, and that an additional three staff would be needed for the development phase; (7) to address the quality standards and controls to be used for the loan monitoring system project, the plan includes work elements to establish systems development standards and procedures and process change control procedures; (8) the plan recognizes that the project includes a number of assumptions that may affect its success; (9) it identifies seven key assumptions that SBA made but will need to validate during the project; (10) the project plan also cites the methodologies that SBA plans to use or is considering for key areas of the project; (11) according to the project plan, SBA estimates that the loan monitoring system will cost about $20 million to complete; (12) while developing the project plan is a good start, SBA must still successfully execute it to complete the eight mandated actions; (13) in executing the plan, SBA will face formidable technical and management challenges and risks; (14) SBA recognizes the need to establish defined processes for software project management, and use them on this project; (15) the loan monitoring system project will be using, for the first time, methodologies it has selected for benchmarking, business process reengineering, information technology architecture development, project management, and systems development; (16) SBA plans to work concurrently on an information technology architecture and the loan monitoring system as separate projects; and (17) the extent to which SBA meets these challenges and manages these risks will determine how well business processes and systems requirements are defined, and the quality of support for decisionmaking on the purchase or development of the needed system.

Other transaction authority was created to enhance the federal government’s ability to acquire cutting-edge science and technology by attracting nontraditional contractors that have not typically pursued government contracts. Other transactions are agreements other than government contracts, grants, or cooperative agreements and may take a number of forms. These agreements are generally not subject to the FAR. This authority originated in 1958 when Congress gave the National Aeronautics and Space Administration (NASA) the authority to enter into contracts, leases, cooperative agreements, or “other transactions.” In 1989, Congress granted the Defense Advanced Research Projects Agency (DARPA) temporary authority to use other transactions for advanced research projects. In 1991, Congress made this authority permanent and extended it to the military services. In 1993, Congress temporarily expanded DARPA’s other transaction authority, allowing the agency to use the agreements for prototype projects. The Homeland Security Act of 2002 created DHS and granted the agency the authority to enter into other transactions for research and development and prototype projects for a period of 5 years. Congress granted DHS this authority to attract nontraditional firms that have not worked with the federal government, such as high-tech commercial firms that have resisted doing business with the government because of the requirements mandated by the laws and regulations that apply to traditional FAR contracts. The Consolidated Appropriations Act for 2008 extended this authority until September 30, 2008. DHS began operations in March 2003 incorporating 22 federal agencies to coordinate and centralize the leadership of many homeland security activities under a single department. Since then, DHS has become the third largest agency for procurement spending in the U.S. government. DHS’s acquisition needs range from basic services to complex investments, such as sophisticated screening equipment for air passenger security and upgrading the Coast Guard’s offshore fleet of surface and air assets. In fiscal year 2006, according to agency data, the department obligated $15.9 billion for goods and services to support its broad and complex acquisition portfolio. DHS’s S&T Directorate supports the department’s mission by serving as its primary research and development arm. In fiscal year 2006, according to S&T data, S&T obligated over $1.16 billion dollars to fund and develop technology in support of homeland security missions. The directorate has funded technology research and development in part through the use of other transaction authority. According to agency officials, S&T is the only component within DHS that uses this authority. Because of their flexibility, other transactions give DHS considerable latitude in negotiating with contractors on issues such as intellectual property, reporting on cost, and data rights. In addition, it may relieve the parties from certain contract administration requirements that nontraditional contractors find burdensome. The number and value of DHS’s other transaction agreements has decreased since 2005. Its recent other transaction agreements represent just a small portion of its total procurement spending. Most of the department’s use of other transaction authority to date occurred between fiscal years 2004 and 2005. Though it has since used this authority less frequently, it continues to obligate funds for its earliest agreements. About 77 percent of the $443 million spent on DHS’s agreements has been on 7 of the 37 agreements. S&T contracting representatives reported that all of these agreements were for prototype projects. In fiscal year 2006, other transactions accounted for almost $153 million of DHS’s reported $15.9 billion in procurement obligations, approximately 1 percent (see fig. 1). In addition, other transactions represent only a small portion of S&T spending. For example, the department estimates that from fiscal years 2004 through 2007, S&T spent 13 percent of its total obligations on its other transaction agreements. DHS reported a total of 37 other transaction agreements, 30 of which were entered into in fiscal years 2004 and 2005. Accordingly, 88 percent of total spending was for agreements reached in fiscal years 2004 and 2005 (see fig. 2). While the total number of new agreements has decreased since 2005, the total obligations under these agreements have generally increased because funds are obligated for agreements made in prior years (see fig. 3). About 77 percent of obligations was for the seven largest other transaction agreements (see appendix I). According to S&T, all of these agreements included at least one nontraditional contractor, most commonly as a subcontractor. Though the acquisition outcomes related to DHS’s use of other transaction authority have not been formally assessed, the department estimates that at least some of these agreements have resulted in time and cost savings. According to an S&T contracting representative, all of its current agreements are for development of prototypes, but none of the projects have yet reached production. Therefore, it is too soon to evaluate the results. However, the department believes that some of these agreements have reduced the time it takes to develop its current programs, as compared to a traditional FAR-based contract. In addition, DHS has stated that its two cost-sharing agreements for development of its Counter- MANPADS technology have resulted in savings of over $27 million and possibly more. However, the extent to which these savings accrue to the government or to the contractor is unclear. Soon after DHS established the S&T Directorate, S&T issued other transaction solicitations using some commonly accepted acquisition practices and knowledge-based acquisition principles. For example, DHS used integrated product teams and contractor payable milestone evaluations to manage other transaction agreements. To quickly implement its early projects, S&T relied on experienced staff from DARPA, other government agencies, and industry to help train S&T program and contracting staff in using other transactions and help DHS create and manage the acquisition process. S&T also brought in program managers, scientists, and experts from other government agencies on a temporary basis to provide assistance in other areas. Beyond these efforts, GAO found some areas for improvement and recommended that: DHS provide guidance on when to include audit provisions in agreements; provide more training on creating and managing agreements; capture knowledge gained from current agreements for future use; and take measures to help rotational staff avoid conflicts of interest. DHS has implemented some measures to address many of these recommendations; however, it has not addressed all of them. Provide guidance: We recommended that DHS develop guidance on when it is appropriate to include audit provisions in other transaction agreements. Subsequently, DHS modified its management directive to add guidance on including GAO audit provisions in agreements. However, the guidance only addresses prototype agreements over $5 million. While S&T contracting officials recently told us that they have only issued other transaction agreements for prototypes, they noted that the department intends to issue agreements for research projects in the future. In addition, it is unclear how the $5 million threshold is to be applied. In at least one agreement, the audit provision did not apply to subcontractors unless their work also exceeded the $5 million threshold. Provide additional training: We recommended that DHS develop a training program for staff on the use of other transactions. DHS has developed a training program on other transactions, and S&T contracting representatives said they have plans to conduct additional sessions in 2008. The training includes topics such as intellectual property rights, acquisition of property in other transactions, and foreign access to technology created under other transaction authority. An S&T contracting representative told us the Directorate currently has three staff with other transaction warrants and has additional in-house expertise to draw on as needed, and they said S&T no longer needs to rely on other agencies for contracting assistance. Capture lessons learned: We recommended that DHS capture knowledge obtained during the acquisition process for use in planning and implementing future other transaction projects. In 2005, DHS hired a consultant to develop a “lessons learned” document based on DOD’s experience using other transactions. This is included in DHS’s other transaction training. However, it was not evident based on our follow- up work that DHS has developed a system for capturing knowledge from its own experience regarding other transaction agreements the directorate has executed since it was created. Ethics: We made a number of recommendations regarding conflicts of interest and ethics within S&T. When the S&T Directorate was established in 2003, it hired scientists, engineers, and experts from federal laboratories, universities, and elsewhere in the federal government for a limited time under the Intergovernmental Personnel Act (IPA) with the understanding that these staff would eventually return to their “home” institution. This created potential conflicts of interest for those staff responsible for managing S&T portfolios as these staff could be put in a position to make decisions on their “home” institutions. We recommended that DHS help the portfolio managers assigned through IPA comply with conflict of interest laws by improving the S&T Directorate’s management controls related to ethics. DHS has complied with these recommendations to define and standardize the role of these portfolio managers in the research and development process; provide regular ethics training for these portfolio managers; and determine whether conflict of interest waivers are necessary. The only outstanding recommendation concerns establishing a monitoring and oversight program of ethics-related management controls. Furthermore, an S&T official told us the use of rotational portfolio managers has largely been eliminated with the exception of one portfolio manager who is currently serving a two-year term. With federal agencies' increased reliance on contractors to perform mission related functions comes an increased focus on the need to manage acquisitions in an efficient, effective, and accountable manner. The acquisition function is one area GAO has identified as vulnerable to fraud, waste, abuse, and mismanagement. An unintended consequence of the flexibility provided by other transaction authority is the potential loss of accountability and transparency. Accordingly, management controls are needed to ensure intended acquisition outcomes are achieved while minimizing operational challenges. Operational challenges to successfully making use of other transaction authority include: attracting and ensuring the use of non-traditional contractors; acquiring intellectual property rights; financial control; and maintaining a skilled acquisition workforce. Nontraditional Contractors: One of the goals of using other transactions is to attract firms that traditionally have not worked with the federal government. S&T contracting officials confirmed that at least one nontraditional contractor participated in each other transaction agreement, generally as a partner to a traditional contractor. We have not assessed the extent of the involvement of nontraditional contractors or what portion of the funding they receive. However, we have reported in the past that DOD had a mixed record in attracting nontraditional contractors. Intellectual Property Rights: One reason companies have reportedly declined to contract with the government is to protect their intellectual property rights. Alternatively, insufficient intellectual property rights could hinder the government’s ability to adapt developed technology for use outside of the initial scope of the project. Limiting the government’s intellectual property rights may require a trade-off. On the one hand, this may encourage companies to work with the government and apply their own resources to efforts that advance the government’s interests. However, it also could limit the government’s production options for items that incorporate technology created under an other transaction agreement. For example, we previously reported that DARPA received an unsolicited proposal from a small commercial firm to develop and demonstrate an unmanned aerial vehicle capable of vertical take-off and landing based on the company’s existing proprietary technology. DARPA agreed not to accept any technical data in the $16.7 million agreement. To obtain government purpose rights, DOD would have to purchase 300 vehicles or pay an additional $20 million to $45 million. Therefore, using an other transaction agreement could potentially limit competition and lead to additional costs for follow-on work. Financial Controls and Cost Accounting: Other transactions are exempt from CAS. While other transaction recipients have flexibility in tracking costs, they still need to provide cost information and demonstrate that government funds are used responsibly. This is particularly true for traditional contractors that are performing work under both FAR-based contracts as well as other transaction agreements. For example, contractors may use in-kind donations to satisfy cost-sharing requirements; therefore, it is important that DHS has a means to ensure that companies do not satisfy their other transaction cost-sharing requirements with work funded under a FAR-based contract. Maintaining a Skilled Acquisition Workforce: Other transactions do not have a standard structure based on regulatory guidelines and therefore can be challenging to create and administer. Prior GAO work has noted the importance of maintaining institutional knowledge sufficient to maintain government control. The unique nature of other transaction agreements means that federal government acquisition staff working with these agreements should have experience in planning and conducting research and development acquisitions, strong business acumen, and sound judgment to enable them to operate in a relatively unstructured business environment. Retaining a skilled acquisition workforce has been a continual challenge at DHS, and we have ongoing work in this area for this Committee. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information regarding this testimony, please contact John Needham at (202) 512-4841 or (needhamjk1@gao.gov). Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this product. Staff making key contributions to this statement were Amelia Shachoy, Assistant Director; Brandon Booth; Justin Jaynes; Tony Wysocki; Karen Sloan; Laura Holliday; and John Krump. American Airlines and ABX Air Inc. U.S. Genomics, Inc. National Institute for Hometown Security, Inc. Science Applications International Corp (SAIC) Genomic HealthCare (GHC) 15.4 This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Other transaction authority was created to enhance the federal government's ability to acquire cutting-edge science and technology by attracting nontraditional contractors that have not typically pursued government contracts. The Homeland Security Act of 2002 granted the department the temporary authority to enter into other transactions for research and prototype projects for a period of 5 years. The Consolidated Appropriations Act of 2008 extended this authority until September 30, 2008. This testimony discusses (1) the extent to which DHS has used its other transaction authority, (2) the status of DHS's implementation of GAO's previous recommendations, and (3) the accountability challenges associated with the use of these agreements. DHS entered into 37 other transaction agreements between fiscal years 2004 and 2007, most of which were entered into in the first 2 years. Though it has since used this authority less frequently, it continues to obligate funds for its earliest agreements. Furthermore, about 77 percent of the dollars spent on these agreements have been for 7 of DHS's 37 agreements. Contracting representatives also told us that all of the agreements to date were for prototype projects and that each agreement included at least one nontraditional contractor. GAO plans further review of DHS's use of other transaction agreements as required by the Homeland Security Act of 2002. DHS has made efforts to improve its use of other transaction agreements and to prevent conflicts of interest. The department has taken the following steps to address prior GAO recommendations including: (1) creating guidance on when to include audit provisions in other transaction agreements; (2)creating a training program on using these agreements; (3) and improving controls over conflicts of interest. GAO also recommended that DHS capture knowledge gained from the agreements it has entered into. The department has compiled lessons learned from the Department of Defense, but the document is not related to DHS's experience. Furthermore, while DHS created guidance on when to include audit provisions in agreements, its guidance only applies to certain prototype projects and only in certain circumstances. Risks inherent with the use of other transaction agreements create several accountability challenges. These challenges include attracting and ensuring the use of nontraditional contractors, acquiring intellectual property rights, ensuring financial control, and maintaining a skilled acquisition workforce with the expertise to create and maintain these agreements.

We have suggested that the Congress consider providing the Administrator of GSA with the authority to experiment with funding alternatives, including public-private partnerships, when they reflect the best economic value available for the federal government. Congress has enacted legislation that provides certain other agencies with a statutory basis to enter into joint ventures with the private-sector. This additional property management tool has been provided to VA and DOD. Furthermore, in an effort to provide more agencies with a broader range of property management tools, the Federal Asset Management Improvement Act (H.R. 2710) was recently reintroduced. The term public-private partnership can be used to describe many different types of partnership arrangements. When we refer to public- private partnerships, we are referring to partnerships in which the federal government contributes real property and a private entity contributes financial capital and borrowing ability to redevelop or renovate the real property. Regarding the structure of the hypothetical partnerships developed for our study, the federal government and the private sector entity negotiate to agree on how the specifics of the partnership will work, including how the cash flow will be shared to form the partnership. The private partners will generally require a preferred return to compensate it for the risks it is taking in the partnership. This preferred return is generally a percentage of the cash flow; for our study, the contractors used 11 percent for the Washington, D.C. properties and 9 percent for the other properties. The net cash flow is then divided between the private partner and the federal government at an agreed-upon percentage. Attachment III shows graphically how the hypothetical partnerships in our study were structured. In structuring partnerships for individual properties, it must be remembered that each property is unique and will thus have unique issues that will need to be negotiated and addressed as the partnership is formed. Great care will need to be taken in structuring partnerships to protect the interests of both the federal government and the private sector. In conducting this study, the contractors assumed that certain conditions would govern a public-private partnership. For example, the property must be available for use, in whole or in part, by federal executive agencies, and agreements must not guarantee occupancy by the United States. In addition, the government would not be liable for any actions, debts, or liabilities of any person under an agreement, and the leasehold interests of the United States would be senior to any lender of the nongovernmental partner. There are various factors that indicate whether a property is a potential candidate for a public-private partnership. There must be not only a federal need for space, but also a private-sector demand for space, since the government is not guaranteeing that it will occupy the property. The stronger the market for rental space, both federal and nonfederal, the more likely that the space will be rented and thus producing income. The property must have the ability to provide a sufficient financial return to attract and utilize private-sector resources and expertise. A property in a strong rental market and at a good location is more likely to attract private-sector interest than a property without these characteristics. Another factor is the existence of an unutilized or underutilized asset on the property, which could be used to increase the value of the property. Several of the properties we studied had vacant land. The existence of excess land on the property that could be used to increase the amount of office space by expanding or building a new building, could increase the opportunity for an income-generating partnership. The property in Seattle, WA, has a deepwater port that the government is not using to its potential but that could be very valuable to another user. Any partnership would have to conform with budgetary score-keeping rules. Federal budget scoring is the process of estimating the budgetary effects of pending and enacted legislation and comparing them to limits set in the budget resolution or legislation. Scorekeeping tracks data such as budget authority, receipts, outlays, and the surplus or deficit. Office of Management and Budget (OMB) staff indicated that where there is a long- term need for the property by the federal government, it is doubtful that a public-private partnership would be more economical than directly appropriating funds for renovation. In addition, depending on how OMB scores these transactions, some of the scenarios could trigger capital lease-scoring requirements due to the implicit long-term federal need for the space. Our study designed a conceptual framework for public-private partnerships in order to identify potential benefits of these partnerships. Our contractors developed and analyzed hypothetical public-private partnerships for 10 specific GSA properties. Multiple potential benefits to the federal government were identified. These potential benefits include the utilization of the untapped value of real property, conversion of buildings that are currently a net cost to GSA into net attainment of efficient and repaired federal space, reduction of costs incurred in functionally inefficient buildings, protection of public interests in historic properties, and creation of financial returns for the government. Our study did not identify or address all the issues of partnerships that will need to be considered by the decisionmakers and policymakers as partnerships are developed. Before any partnerships are developed, in- depth feasibility studies would have to be done to evaluate partnership opportunities and other options, such as appropriations, to determine which could provide the best economic value for the government. When deciding whether to enter into a partnership, the government will need to weigh the expected financial return and other potential benefits against the expected costs, including potential tax consequences, associated with the partnership. Any cost associated with vacating buildings during renovation work would also have to be considered in any alternative evaluated. In addition, any actual partnerships involving the properties in our study may be very different from the scenarios developed by our contractors. For a public-private partnership to be a viable option, there must be interest from the private sector in partnering with the government on a selected property. A private-sector partner would generally enter a partnership as a financial business decision. While the private-sector entity would consider numerous factors to determine the viability of a public- private partnership, the financial return from the partnership is the critical factor in the decision on whether to partner with the federal government. According to our contractors, about a 15-percent internal rate of return (IRR) would likely elicit strong interest from the private sector in a partnership. However, this is only one factor, and the circumstances and conditions of each partnership are unique and would have to be evaluated on a case-by-case basis by both the private sector and the federal government. For example, a somewhat lower IRR could be attractive if other conditions, such as the risk level, are favorable. In addition, when our contractors discussed possible partnership scenarios with local developers, the developers said that, to participate, they would want at least a 50-year master ground lease. A public-private partnership would generally be a financial undertaking for the private-sector entity, and the main benefit to it would be financial. With regard to some properties, the private sector may believe it is a benefit to be associated with a particular project if a developer believes that a project is prestigious and might open future opportunities. According to our contractors, the analysis of the hypothetical partnerships for many of the properties in our study showed a sufficient potential financial return to attract private-sector interest in a partnership arrangement. Our contractors determined that 8 of the 10 GSA properties in our study were strong to moderate candidates for public-private partnerships. This determination was based on the (1) estimated IRR for the private- sector partner in year 10 of the project, which ranged from 13.7 to 17.7 percent; (2) level of federal demand for the space; and (3) level of nonfederal demand for space. The level of demand for space, both federal and nonfederal, affects the level of risk that the space will be vacant and thus non-income-producing. The stronger the local market is for rental space, the more likely the space will be rented and thus produce income for the partnership. The properties that were strong candidates for partnerships were located in areas with a strong federal and nonfederal demand for space, and many had untapped value that the partnership could utilize, such as excess land on which a new or expanded building could be built. Leasing authority is available to VA and DOD. Under VA’s enhanced use leasing (EUL) authority, an EUL must enhance the use of the property and provide some space for an activity that contributes to VA’s mission or otherwise improves services to veterans. VA receives fair consideration, monetary or in-kind, as determined by the Secretary and the lease term is not to exceed 75 years. For DOD, terms must promote national defense or be in the public interest, and the lease term may not exceed 5 years without the Service Secretary’s approval. The lease proceeds may be used to fund facility maintenance and repair or environmental restoration at the military installation where the property is located and elsewhere. According to VA and DOD, their ventures yield both financial and nonfinancial benefits. Financial benefits include receiving below market rental rates and the receipt of cash revenue in some cases. Nonfinancial benefits include maximizing the use of capital assets as well as in-kind benefits such as the use of a child care center at reduced rates. In 1999, we reported on two projects under the VA’s EUL authority. In Texas, a private developer constructed a VA regional office building on VA’s medical campus. VA then leased land to the developer on the medical campus and the developer constructed buildings on the land and rented space in them to commercial businesses. In Indiana, the state leased underutilized land and facilities from VA to use as a psychiatric care facility. The leasing revenue that VA receives from both sites is to be used to fund veterans programs. Aside from the work we did in connection with our 1999 report, it is important to note that we did not explore these authorities in depth, nor did we examine the budget scoring implications for projects undertaken based on these authorities. Currently, we are examining DOD’s implementation of its authority to lease non-excess property and how the military services are using this and other special legislative authorities to reduce base operating support costs. We expect this work to be completed early next year. This concludes my prepared statement. I would be happy to respond to any questions you may have. For information about this testimony, please contact Bernard Ungar, Director, Physical Infrastructure Issues, on (202) 512-8387. Individuals making key contributions to this testimony included Ron King, Maria Edelstein, and Lisa Wright-Solomon. Notes Army Corps of Engineers believes that it must relocate to a facility that meets seismic standards $(207,980) Delegated building—IRS pays its operating costs $(1,003,372) To identify the potential benefits to the federal government and private sector of allowing federal agencies to enter into public-private partnerships, we hired contractors to develop and analyze hypothetical partnership scenarios for 10 selected GSA buildings. GSA’s National Capital Region had previously contracted for a study to analyze the financial viability of public-private partnership ventures for three buildings in Washington, D.C. Because the majority of the work for these properties had already been done, we had the contractor update its work on these 3 buildings and selected them as 3 of the 10 GSA properties. To help us select the other 7 properties for our study, GSA provided a list of 36 properties that it considered good candidates for public-private partnerships. In preparing this list of properties, GSA officials said that they considered factors such as the strength of the real estate market in each area, the extent to which the property was currently utilized or had land that could be utilized, and the likelihood of receiving appropriations to rehabilitate the property in the near future. We judgmentally selected seven properties from this list to include properties (1) from different geographic areas of the country, (2) of different types and sizes, and (3) with historic and nonhistoric features. To analyze the potential viability of public-private partnerships for each of the 10 selected GSA properties, the contractors analyzed the local real estate markets, created a hypothetical partnership scenario and redevelopment plan, and constructed a cash flow model. In the contractor’s judgment, the partnership scenarios were structured to meet current budget-scoring rules and provisions in H.R. 3285, introduced in the 106th Congress. These provisions included the requirements that the property must be available for lease, in whole or in part, by federal agreements do not guarantee occupancy by the federal government; the government will not be liable for any actions, debts, or liabilities of any person under an agreement; and leasehold interests of the federal government are senior to those of any lender of the nongovernmental partner. However, a determination on how the partnerships would be treated for budget-scoring purposes would have to be made after more details are available on the partnerships. We accompanied the contractor on visits to the seven GSA properties that had not been previously studied. We interviewed, or participated in discussions with, developers and local officials in the areas where the properties were located as well as officials from GSA. We reviewed the contractors’ work on the 10 properties for reasonableness but did not verify the data used by the contractors. The partnership viability scenarios developed for this assignment are hypothetical, and were based on information that was made readily available by representatives of the local real estate markets, city governments, and GSA. Any actual partnerships involving these properties may be very different from these scenarios. In-depth feasibility studies must be done to evaluate partnership opportunities before they are pursued. There may be other benefits and costs that would need to be considered, such as the possible federal tax consequences and the costs of vacating property during renovation in some cases. This study only looked at the potential benefits to the federal government and private sector of public-private partnerships as a management tool to address problems in deteriorating federal buildings. We did not evaluate the potential benefits of other management tools that may be available for this purpose. We did, however, discuss the implications of using public- private partnerships with OMB representatives. We did our work between November 2000 and June 2001 in accordance with generally accepted government auditing standards.

This testimony describes the benefits to the federal government of public-private partnerships on real property. Under these partnerships, the private sector finances the renovation or redevelopment of real property contributed by the federal government. Each partner then shares in the net cash flow. Key factors typically considered in public-private partnerships are whether the properties are in areas with a strong real estate market or strong demand for office space. As a result of these partnerships, the federal government can potentially gain efficient, repaired space, and properties that were once a net cost to the government can become revenue producers. This testimony summarized a July report (GAO-01-906).

After the collapse of the World Trade Center and the accompanying spread of dust resulting from the collapse, EPA, other federal agencies, and New York City and New York State public health and environmental authorities focused on numerous outdoor activities, including cleanup, dust collection, and air monitoring. In May 2002, New York City formally requested federal assistance to clean and test building interiors in the vicinity of the WTC site for airborne asbestos. Such assistance may be made available to state and local governments under the Stafford Act and the National Response Plan, which establishes the process and structure for the federal government to provide assistance to state and local agencies when responding to threats or acts of terrorism, major disasters, and other emergencies. FEMA, which coordinates the federal response to requests for assistance from state and local governments, entered into interagency agreements with EPA to develop and implement the first and second indoor cleanup programs for residents in Lower Manhattan. In response to recommendations from the Inspector General and expert panel members, EPA’s second program incorporates some additional testing elements. For example, EPA is testing for a wider range of contaminants. In addition to asbestos, EPA will test for man-made vitreous fibers, which are in such materials as building and appliance insulation; lead; and polycyclic aromatic hydrocarbons, a group of over 100 different chemicals that are formed during the incomplete burning of coal, oil, gas, and garbage. EPA will also test dust as well as the air. In order to test the dust for these contaminants, EPA had to develop cleanup standards. However, EPA’s second program does not incorporate the following other recommendations: (1) broadening the geographic scope of the testing effort, (2) testing HVACs and “inaccessible” locations, and (3) expanding the program to include workplaces. Broadening the geographic scope of testing. EPA did not expand the scope of testing north of Canal Street, as well as to Brooklyn, as advisory groups had recommended. EPA reported that it did not expand the scope of testing because it was not able to differentiate between normal urban dust and WTC dust, which would have enabled it to determine the geographic extent of WTC contamination. Some expert panel members had suggested that EPA investigate whether it was feasible to develop a method for distinguishing between normal urban dust and WTC dust. EPA ultimately agreed to do so. Beginning in 2004—almost 3 years after the disaster—EPA conducted this investigation. EPA officials told us that because so much time had passed since the terrorist attack, it was difficult to distinguish between WTC dust and urban dust. EPA ultimately abandoned this effort because peer reviewers questioned its methodology; EPA decided not to explore alternative methods that the peer reviewers had proposed. Instead, EPA will test only in an area where visible contamination has been confirmed by aerial photography conducted soon after the WTC attack. However, aerial photography does not reveal indoor contamination, and EPA officials told us that they knew that some WTC dust was found immediately after the terrorist attacks outside the area eligible for its first and second program, such as in Brooklyn. Testing HVACs and in inaccessible areas. In its November 2005 draft plan for the second program, EPA had proposed collecting samples from a number of locations in HVACs. In some buildings HVACs are shared, and in others each residence has its own system. In either case, contaminants in the HVAC could re-contaminate the residence unless the system is also professionally cleaned. However, EPA’s second program will not provide for testing in HVACs unless tests in common areas reveal that standards for any of four contaminants have been exceeded. EPA explains in the second plan that it will not sample within HVACs because it chose to offer more limited testing in a greater number of apartments and common areas rather than provide more comprehensive testing in a smaller number of these areas. Similarly, EPA had proposed sampling for contaminants in “inaccessible” locations, such as behind dishwashers and rarely moved furniture within apartments and common areas. Again, because it was unable to differentiate between normal urban dust and WTC dust, EPA stated that it would not test in inaccessible locations in order to devote its resources to as many requests as possible. In fact, EPA only received 295 requests from residents and building owners to participate in the second program, compared with 4,166 eligible participants in the first program. Expanding the program to include workers/workplaces. According to EPA’s second program plan, the plan is “the result of ongoing efforts to respond to concerns of residents and workers.” Workers were concerned that workplaces in Lower Manhattan experienced the same contamination as residences. In its second program, EPA will test and clean common areas in commercial buildings, but will do so only if an individual property owner or manager requests the service. EPA stated that employees who believe their working conditions are unsafe as a result of WTC dust may file a complaint with OSHA or request an evaluation by HHS’s National Institute of Occupational Safety and Health. Concerns remain, however, because these other agencies do not have the authority to conduct cleanup in response to contaminant levels that exceed standards. In addition, OSHA’s standards are designed primarily to address airborne contamination, while EPA’s test and clean program is designed to address contamination in building spaces, whether the contamination is airborne or in settled dust. Thus, OSHA can require individual employers to adopt work practices to reduce employee exposure to airborne contaminants, whereas EPA’s test and clean program is designed to remove contaminants from affected spaces. EPA did not provide sufficient information in its second plan so that the public could make informed choices about their participation. Specifically, EPA did not fully disclose the limitations in the testing results from its first program. While EPA stated that the number of samples in its first program exceeding risk levels for airborne asbestos was “very small,” it did not fully explain that this conclusion was limited by the following factors. Participation. Participation in the program came from about 20 percent of the residences eligible for participation. In addition, participation was voluntary, which may suggest that the sample of apartments was not representative of all the residences eligible for the program. Those who chose to participate may not have been at greatest risk. Contaminants tested. EPA’s cleanup decisions were based only on tests for asbestos, rather than other contaminants, and the decisions focused on airborne contamination rather than contamination in dust inside residences. Sampling protocol. EPA took over 80 percent of the samples after professional cleaning was complete. Therefore it is not surprising that EPA found few samples exceeding its asbestos standard. EPA also did not explain in its second program plan that its first program’s test results excluded samples that were discarded because they were “not cleared”—that is, could not be analyzed because the filter had too many fibers to be analyzed under a microscope. However, EPA’s final report on its first program stated that residences with more than one inconclusive result, such as filter overload, were encouraged to have their residences re-cleaned and re-tested. EPA did not explain the impact of excluding these samples or other data limitations from its conclusion that the number of samples exceeding asbestos standards was very small. Without providing complete explanations of the data, residents who could have elected to participate might have been discouraged from doing so. EPA did not take steps to ensure that resources would be adequate to achieve the second program’s objectives. Instead, EPA is implementing this program with the funding remaining after its first program— approximately $7 million. EPA could not provide us with any basis for determining whether this funding level is appropriate. EPA officials told us that they were unable to determine the cost of the program without knowing the number of participants. However, we note that funds available for the second program are less than 20 percent of the first program’s funding, despite an increase in the number and type of contaminants being sampled. Almost two-thirds of the panel members told us they did not believe the $7 million for the sampling and cleanup was sufficient. According to one of the expert panel’s chairmen—a former EPA Assistant Administrator—the $7 million was sufficient for initial sampling in the second program, but not for sampling and cleanup. If demand had exceeded available resources, EPA would have simply limited participation by ranking program applicants on the basis of their proximity to the WTC site. Shortcomings in EPA’s second program to test and clean residences for WTC contamination raise questions about the agency’s preparedness for addressing indoor contamination resulting from future disasters. The effectiveness of this program may be limited because some important recommendations were not incorporated, and because program implementation will not begin until later this year—more than 5 years after the World Trade Center collapsed. Furthermore, owing to these factors, the majority of panel members do not support EPA’s second program, noting that it was not responsive to the concerns of residents and workers harmed by the collapse of the WTC towers, it was scientifically and technically flawed, or it was unacceptable because it would not identify the extent of contamination. Some panel members questioned the value of participating in EPA’s program, and even stated that they would discourage participation. Madam Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact John B. Stephenson, Director, Natural Resources and Environment (202) 512-3841, or stephensonj@gao.gov. Key contributors to this testimony were Janice Ceperich, Katheryn Summers Hubbell, Karen Keegan, Omari Norman, Diane B. Raynes, Carol Herrnstadt Shulman, and Sandra Tasic. Additional assistance was provided by Katherine M. Raheb. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The September 11, 2001, terrorist attack on the World Trade Center (WTC) turned Lower Manhattan into a disaster site. As the towers collapsed, Lower Manhattan was blanketed with building debris and combustible materials. This complex mixture created a major concern: that thousands of residents and workers in the area would now be exposed to known hazards in the air and in the dust, such as asbestos, lead, glass fibers, and pulverized concrete. In May 2002, New York City formally requested federal assistance to address indoor contamination. The Environmental Protection Agency (EPA) conducted an indoor clean and test program from 2002 to 2003. Several years later, after obtaining the views of advisory groups, including its Inspector General and an expert panel, EPA announced a second test and clean program in December 2006. Program implementation is to begin later in 2007, more than 5 years after the disaster. GAO's testimony, based on preliminary work evaluating EPA's development of its second program, addresses (1) EPA's actions to implement recommendations from the expert panel and its Inspector General, (2) the completeness of information EPA provided to the public in its second plan, and (3) EPA's assessment of available resources to conduct the program. We discussed the issues we address in this statement with EPA. EPA has taken some actions to incorporate recommendations from the Inspector General and expert panel members into its second program, but its decision not to incorporate other recommendations may limit the overall effectiveness of this program. For example, EPA's second program incorporates recommendations to expand the list of contaminants it tests for, and to test for contaminants in dust as well as the air. However, it does not incorporate a recommendation to expand the boundaries of cleanup to better ensure that WTC contamination is addressed in all locations. EPA reported that it does not have a basis for expanding the boundaries because it cannot distinguish between normal urban dust and WTC dust. EPA did not begin examining methods for differentiating between normal urban dust and WTC dust until nearly 3 years after the disaster, and therefore the process for finding distinctions was more difficult. In addition, EPA's second program does not incorporate recommendations to sample heating, ventilation, and air conditioning (HVAC) systems. According to EPA's plan, the agency chose to offer limited testing in a greater number of apartments and common areas rather than provide more comprehensive testing (such as in HVACs) in a smaller number of these areas. EPA's second plan does not fully inform the public about the results of its first program. EPA concluded that a "very small" number of samples from its first program exceeded risk levels for airborne asbestos. However, EPA did not explain that this conclusion was to be expected because it took over 80 percent of the samples after residences were professionally cleaned. Without this additional information, residents who could have participated might have opted not to do so because of EPA's conclusion. EPA did not assess the adequacy of available resources for the second program. EPA stated that it plans to spend $7 million on this program, which is not based on any assessment of costs, but is the funding remaining from the first program. Without careful planning for future disasters, timely decisions about data collection, and thorough communication of sampling results, an evaluation of the adequacy of cleanup efforts may be impossible.

As was the case when we reported to this Subcommittee in July 1997, we again found that INS had not identified all potentially deportable imprisoned criminal aliens. As a result, INS did not fully comply with the legal requirements that it (1) place criminal aliens who had committed aggravated felonies in removal proceedings while they are incarcerated or (2) take those aggravated felons into custody upon their release from prison. In 1995, INS’ database of deportable aliens did not have records on about 34 percent (5,884 of 17,320) of the released inmates included in our analysis who had been identified by the states and BOP as foreign born. About 32 percent of these (1,899) were subsequently determined by INS’ Law Enforcement Support Center (LESC) to be potentially deportable criminal aliens. In 1997, INS had no records on 36 percent of such aliens (7,144 of 19,639), of whom 27 percent (1,903) were determined by LESC to be potentially deportable criminal aliens. Although some of these inmates were citizens and some were ordered removed through means other than IHP, a substantial number were aliens on whom INS did not have records. In 1995, about 33 percent (635) of these potentially deportable criminal aliens for whom INS did not have records were aggravated felons at the time of the analysis, as determined by LESC. In our analysis of 1997 data, 63 percent (1,198) of the potentially deportable criminal aliens for whom INS did not have records were identified by LESC as being aggravated felons. According to INS, this increase may be due to the additional crimes classified as aggravated felonies in the 1996 Act. This is important because federal law requires INS to initiate removal proceedings for aggravated felons while they are incarcerated and, to the extent possible, complete deportation proceedings for these felons before their release from prison. According to the INS and EOIR databases, none of the 1,903 potentially deportable criminal aliens had been in removal proceedings while they were in prison or afterward, had been taken into INS custody, or had been deported. LESC provided information on the post-release criminal activities of the 1,198 aggravated felons as follows: 80 of the 1,198 criminal aliens were rearrested, 19 of the 80 aliens were charged with committing additional felonies, and 15 of the 19 were convicted of the felony charges. We asked LESC to provide us with information on the nature of the crimes for which the 80 criminal aliens were rearrested. These included crimes such as assault, robbery, and drug offenses. The types of felonies for which the 15 aliens were convicted included crimes mostly involving drug possession, burglary, theft, and robbery. Our analysis of data from the first 6 months of 1997 revealed that 12,495 released inmates were, according to INS and EOIR databases, potentially deportable. We found that about 45 percent of these inmates were released from prison with a final deportation order (having completed the IHP), about 3 percent were released from prison without a deportation order but with INS’ having completed the removal hearing process, and about 36 percent were released from prison before INS completed the process. For the remaining 15 percent of inmates, there was no indication that hearings were completed either before or after prison release. In comparison, our analysis of data for a 6-month period in 1995 revealed that 40 percent of 11,436 potentially deportable released inmates completed the IHP with a final deportation order, 3 percent completed the IHP with no deportation order, and 41 percent were released from prison before INS completed the process. There was no evidence of hearings being completed for the remaining 16 percent. Not completing removal proceedings during incarceration means that INS has to use its limited detention space to house released criminal aliens rather than using the space to detain other aliens. INS has acknowledged that it incurs detention costs for housing these aliens; costs that our analyses showed could be avoided. Our analysis of fiscal year 1995 data showed that detention costs of about $37 million could have been avoided for criminal aliens who completed the hearing process after prison release and were deported within 9 months of release. Our analysis of fiscal year 1997 data showed that INS could have avoided over $40 million in detention costs for such cases. At least some of the savings in detention costs that INS could realize by processing more criminal aliens through the IHP would be offset by any additional funding that might be required to provide additional resources for the IHP. At the 1997 hearing, the Chairman urged INS to fully implement GAO’s recommendations for improving the IHP. As of July 1998, INS had made limited progress in doing so. We stated in our July 1997 testimony that INS needed better information about prison inmates--more specifically, information about which inmates are eligible for the IHP and which of these inmates have been and have not been included in the program. Our work at that time showed that INS’ databases did not contain complete and current information on the IHP status of individual foreign-born inmates at any given point in time. INS could use this information to determine which of the released foreign-born inmates had been screened for the IHP, identified as deportable, or placed in the hearing process. We recommended that the Commissioner of INS establish a nationwide data system containing the universe of foreign-born inmates reported to INS by BOP and the state departments of corrections and use this system to track the IHP status of each inmate. As of September 1998, INS had begun to establish an automated system for tracking potentially deportable criminal aliens in BOP facilities, but it had not determined whether it will be able to use this system to track potentially deportable criminal aliens in state prison systems. The law requires INS to take certain actions regarding criminal aliens who have been convicted of aggravated felonies beyond those actions required for other criminal aliens. As previously mentioned, INS is required by law to initiate and, to the extent possible, complete removal proceedings against aggravated felons while they are incarcerated and to take these felons into custody upon their release. Our work shows, as it did in July 1997, that INS had not complied fully with the required provisions of the law. In 1997, we recommended that the Commissioner of INS give priority to aliens serving time for aggravated felonies by establishing controls to ensure that these aliens (1) are identified from among the universe of foreign-born inmates provided by BOP and the states, (2) are placed into removal proceedings while in prison, and (3) are taken into custody upon their release. By September 1998, INS had not taken specific actions to ensure that aggravated felons are placed in removal proceedings while they are incarcerated and then taken into custody upon their release from prison. In its May 1998 performance review, INS stated that priority is given to aliens with early release dates—as opposed to aggravated felons—to ensure that deportable aliens are not released into the community. We previously reported to this Subcommittee that INS had established IHP performance goals without having a systematic basis for determining the performance results it could accomplish with various resource levels. We reported that INS had not developed a uniform method for projecting the resources it would need--taking into consideration the level of cooperation from BOP and the states--to achieve its overall goal of completing removal proceedings for every eligible foreign-born inmate before release from prison. We recommended that the Commissioner of INS (1) develop a workload analysis model to identify the IHP resources needed in any period to achieve overall program goals and the portion of those goals that would be achievable with alternative levels of resources and (2) use the model to support its IHP funding and staffing requests. Such a model was to consider several factors, including the number of foreign-born inmates, number of prisons that must be visited, number and types of IHP staff, length of time to process cases, and travel time and costs. We also reported in our July 1997 testimony that INS had a 30-percent attrition rate for immigration agents, which was significantly higher than the 11-percent average attrition rate for all INS staff. We recommended that the Commissioner identify the causes of immigration agent attrition and take steps to ensure that staffing was adequate to achieve IHP program goals. INS completed a draft workload analysis model in June 1998 that IHP managers intend to use to determine what resources are needed to accomplish program goals. INS had not resolved the problem of high attrition among immigration agents, who are considered the backbone of the IHP. We reported to this Subcommittee in July 1997 that INS’ top management (1) had not formally communicated to the district directors how additional staff (e.g., newly hired immigration agents) should be used in the IHP, (2) did not ensure that specific operational goals were established for each INS district director with IHP responsibilities, and (3) did not respond with specific corrective actions when it became apparent that the program would not achieve its goals for fiscal year 1996. Therefore, we recommended that INS establish and effectively communicate a clear policy on the role of special agents in the IHP (e.g., whether immigration agents were replacements for or supplements to special agents). We also said that INS should use a workload analysis model to set IHP goals for district directors with IHP responsibilities. Furthermore, we said that if it appeared that IHP goals would not be met, INS should document actions taken to correct the problem. However, our work last year showed that INS had not (1) clarified whether immigration agents were replacements for or supplements to special agents in doing IHP work, (2) set IHP goals for district directors in either fiscal years 1997 or 1998 and for regional directors in fiscal year 1998, and (3) specifically addressed the recommendation to document actions taken by the agency when it appeared that the IHP goals would not be met. Despite its assertions at last year’s hearing, INS generally showed limited improvement in its IHP performance based on our analysis of INS’ 1997 program performance. This, coupled with INS’ slow response to our recommendations, suggests that INS still does not know whether it has identified all potentially deportable criminal aliens in the BOP and state prison systems. More importantly, INS still is not doing all it should to ensure that it is initiating removal proceedings for aggravated felons and taking them into custody upon their release from prison. We continue to believe that the recommendations we made in our 1997 testimony are valid and that INS should fully implement them as soon as possible. Mr. Chairman, this completes my statement. I would be happy to respond to your questions at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO discussed the Immigration and Naturalization Service's (INS) efforts to initiate and complete removal proceedings for criminal aliens in state and federal prisons through its Institutional Hearing Program (IHP). GAO noted that: (1) the IHP is a cooperative program involving the INS, the Executive Office of Immigration Review (EOIR), and federal and state correctional agencies; (2) it was formally established in 1988 to enable INS and EOIR to complete removal proceedings for criminal aliens while they were still serving their sentences, thus eliminating the need for INS agents to locate aliens after their release, and freeing up INS detention space for other cases; (3) with the proceedings complete, expeditious removal of criminal aliens upon completion of their sentences can occur; (4) federal law requires the Attorney General to initiate and, to the extent possible, complete removal proceedings for aggravated felons before their release from incarceration; (5) INS has been delegated the authority to enforce immigration laws; (6) in 1997, GAO reported that INS needed to improve its efforts to identify potentially deportable criminal aliens in federal and state prisons and complete the IHP for the aliens before they were released; (7) this conclusion is based on GAO's analysis of data provided by the Federal Bureau of Prisons and five states on foreign-born inmates who were released from prison between April and September, 1995; (8) INS' Executive Associate Commissioner for Programs told the House Committee on the Judiciary, Subcommittee on Immigration and claims that INS had improved program operations since 1995; (9) in response, the Subcommittee asked GAO to review program performance during 1997; (10) although GAO's results indicated that INS' performance had shown some improvement, GAO continues to have the same concerns about the IHP; (11) in 1997, INS still had not identified many potentially deportable aliens while they were in prison; (12) the majority of these released criminal aliens were aggravated felons, some of whom were reconvicted for new felonies; (13) INS completed the IHP for about half of the released criminal aliens it identified as potentially deportable while they were in prison; (14) because INS had to detain aliens who did not complete the hearing process in prison, INS incurred approximately $40 million in avoidable detention costs; and (15) in addition, INS had not fully implemented the recommendations GAO made in the 1997 report to improve the IHP.

The Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in 1980 to clean up hazardous waste sites. The act gives EPA the authority to compel the parties responsible for these sites to clean them up. The act also created a $1.6 billion trust fund, known as Superfund, for EPA to implement the program and pay for cleanups. The Superfund program has two basic types of cleanups: (1) remedial cleanups, which are long-term cleanup actions at sites on the National Priorities List (NPL), EPA’s list of the nation’s worst hazardous waste sites, and (2) removal cleanups, which mitigate more immediate threats at both NPL and non-NPL sites. EPA’s removal cleanups include (1) emergency removals for threats requiring immediate action, (2) time-critical removals for threats requiring action within 6 months, and (3) NTC removals for threats where action can be delayed for at least 6 months in order to adequately plan for cleanups. In March 1995, EPA surveyed site managers in the regions to obtain their estimates of the benefits and lessons learned from conducting NTC removals. EPA had initiated 81 such actions by then, and 40 were beyond the study phase. Our testimony today is based on the results of that survey and interviews of EPA headquarters and regional officials in charge of removals, state cleanup managers, private parties that used the NTC process, and representatives of environmental advocacy organizations. We did not independently validate EPA’s survey results. We performed our work from September 1995 through March 1996 in accordance with generally accepted government auditing standards. Compared to traditional remediation, NTC removals significantly accelerate the study and design steps of cleanups at portions of sites, thereby reducing overall cleanup costs and more quickly protecting human health and the environment. However, increasing the use of NTC removals may increase the amount of EPA staff time required to oversee contractors. Also, using these removals could shift a portion of the cleanup costs from the states to EPA. According to the site managers EPA surveyed, using the NTC program instead of the remedial program reduced the overall time spent on cleaning up portions of sites from about 4 years to 2 years, on average. In many cases, site managers reported time savings of more than 3 years. These savings occur primarily because NTC actions take much less time than remedial actions to study the contamination and design a cleanup method. According to EPA technical and regional staff who manage cleanups, they use NTC actions when they are relatively certain about the nature of the contamination that is present and the type of cleanup method they should use. For such cleanups, they do not need to use the extensive study and design steps that the remedial program calls for. Like remedial actions, NTC actions also include steps, although abbreviated, for the public and the state to participate in planning the cleanup. Also, because EPA’s guidance requires that NTC removals generally meet states’ cleanup standards, the level of cleanup achieved with these removals is not expected to be significantly different from the level achieved with remedial cleanups. The streamlined NTC process also results in reduced cleanup costs. According to EPA’s survey, conducting an NTC action costs, on average, about $3.6 million, or about $0.5 million less than a similar remedial action would have cost. In many cases, larger savings have been reported. For example, one private party estimated that conducting the cleanup as an NTC action instead of a remedial action reduced the cleanup costs by about $2 million—at least half of the total cleanup costs. Savings of more than $1 million have also been reported for federally funded cleanups. Faster cleanups through the use of NTC removals also mean better protection of human health and the environment. According to EPA site managers, NTC removals can be used to clean up the portions of Superfund sites where contaminants pose a current risk to human health or could spread further in the environment. For example, EPA used the NTC process to accelerate a cleanup by more than 4 years at a chemical processing plant where contaminants in the soil were migrating toward a schoolyard. In another case, a private party used the NTC process to accelerate a cleanup by more than 4 years, removing contaminants from the soil and shallow groundwater before they could spread to deep groundwater, which is difficult and costly to clean up. While NTC removals demonstrate valuable benefits, they may also present some disadvantages, including the need for more staff time to monitor NTC cleanups, less ability for EPA to enforce cleanup agreements with private parties, and a potential for states to decrease their funding of a portion of the cleanup costs. Opinions vary about the significance of these disadvantages. Under a remedial cleanup contract, EPA pays a contractor to conduct a fixed set of actions that both parties have agreed to at the start of the cleanup. In contrast, under an NTC cleanup contract, EPA pays a contractor for the company’s time and materials, but an EPA site manager directs the contractor’s actions. EPA technical and regional staff involved in NTC removals agree that time and materials contracts require almost daily on-site supervision, whereas remedial cleanup contracts do not. However, EPA site managers argue that close supervision of the contractor offers EPA greater control over the work and more flexibility to make adjustments. Under its NTC removal authority, EPA may have more difficulty enforcing private party cleanup agreements than it would under its remedial authority. For a remedial action, EPA uses a consent decree issued by a court, whereas, for an NTC removal, it uses an administrative order issued by its regional management. EPA headquarters and regional officials involved in both processes are concerned about the potential for a private party to default on an NTC removal because an administrative order does not provide EPA with immediate penalties for enforcing a cleanup agreement. If a party does default, EPA may then have to fund the rest of the cleanup while the matter is being resolved in the courts. Private parties have told us, however, that even with the consent decree for remedial agreements, a default will also likely have to be resolved in the courts. Finally, NTC cleanups may shift some portion of the cleanup costs from the states to the federal government. Under CERCLA and EPA’s regulations, a federally funded remedial action cannot proceed until the state in which the site is located agrees to pay 10 percent of the cleanup costs and to handle most of the follow-on operations and maintenance activities. Because the law generally does not require such state participation in removals, including NTC removals, the federal government may have to bear the costs of NTC removals without state support. However, some states already have voluntarily shared the cost of NTC removals and assumed the responsibility for operations and maintenance in exchange for quicker and less costly cleanups. Also, EPA removal guidance advises regions to obtain such state participation. The variety of sites, media, and actions addressed under the NTC process to date indicate a strong potential for using NTC removals to clean up portions of most Superfund sites, especially the high-risk portions. However, the remaining portions of many of these sites may still require some long-term action, such as groundwater restoration, which is more appropriately conducted under the full remedial process. Like Superfund sites in general, NTC sites include manufacturing sites, landfills, mining sites, and chemical processing sites, among others. NTC removals have been used on relatively small and large areas, some exceeding 20 acres. While these actions have primarily addressed contaminated soil and shallow sources of groundwater, they have also been used to clean up sediment, surface water, and site debris. NTC removals have employed many of the same kinds of permanent cleanup actions as have the remedial program, including extracting contaminants from soil and shallow groundwater and treating contaminants. NTC removals have also relied on engineering controls to contain contamination. NTC removals have been performed at so many different kinds of sites that, according to several site managers, they could be used for portions of almost any Superfund site. Currently, about 1,000 NPL sites await cleanup and about another 1,400 to 2,300 sites are estimated to be contaminated enough to be listed in the future. If we assume that NTC removals could be performed at all of these sites and that cost savings could average $0.5 million per site, the federal government and private parties could save from $1.2 to $1.7 billion over the life of the Superfund program by using NTC removals instead of remedial actions. Site managers expected that for about one-third of the sites in the survey, no further action would be required beyond the NTC removal. The remaining sites most likely have portions that contain more complex contamination. Such sites would warrant a full remedial study and design, according to EPA cleanup managers. For example, contaminated groundwater may require decades of treatment and millions of dollars in cleanup costs. Such an investment would justify more extensive planning. Several factors have constrained the use of NTC removals, including the difficulty regions encounter in funding these actions and the current statutory limits on the time and costs that can be spent on NTC removals. According to regional cleanup managers, funding inflexibility limits the number of NTC removals they can conduct. Although spending for removals has increased gradually since 1992, it has represented only 9 to 17 percent of the total Superfund spending. Of this percentage, most must go to fund the hundreds of emergency and time-critical removals that regions conduct, leaving little for NTC removals. Although regions may have unobligated funds in their remedial budgets, EPA headquarters does not permit the regions to transfer these funds to their removal budgets. According to EPA budget officials in headquarters, the agency must allocate funds among many competing activities within the Superfund program and has an obligation to focus on the longer-term remedial program. Also, since the agency reports quarterly to the Congress on its Superfund expenditures, EPA has to account separately for its remedial and removal activities. CERCLA limits the cost of removal actions financed by the trust fund to $2 million. Furthermore, the law states that a removal action cannot take more than 12 months to complete. EPA can justify a waiver of these limits if it demonstrates either that the situation is an emergency—unlikely for an NTC removal—or that the action is “consistent with the remedial action to be taken.” EPA’s regions have interpreted this latter requirement inconsistently. For example, according to a site manager in San Francisco, the regional counsel advised that an NTC removal be used only if a remedial cleanup plan had been signed. This region had conducted only one of the NTC actions in EPA’s survey. Also, according to the site manager in Boston, the regional counsel advised that an NTC removal be used only at an NPL site. That region had conducted five of the NTC removals. More than half of the NTC removals in EPA’s survey had exceeded either the time or the cost limits. Proposed legislation to reauthorize Superfund, H.R. 2500 and S. 1285, would raise the limits on removals and relax the consistency requirements. Mr. Chairman, this completes our prepared statement. We would be pleased to respond to any questions you or other Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the Environmental Protection Agency's (EPA) use of non-time-critical removals for hazardous waste cleanups, focusing on: (1) the advantages and disadvantages of non-time-critical removals; (2) the potential use of non-time-critical removals in Superfund cleanups; and (3) factors that inhibit the use of non-time-critical removals. GAO noted that: (1) on average the use of non-time-critical removals could expedite environmental cleanups by 2 years and reduce costs by about $500,000 over similar cleanup actions using the remedial removal process; (2) non-time-critical removals are successful because they have a streamlined planning process; (3) non-time-critical removals would require EPA to spend more time overseeing cleanup contracts and shift costs from states to EPA; (4) non-time-critical removals are a potentially useful tool in cleaning up portions of most of the 3,000 sites in the EPA Superfund inventory; (5) non-time-critical removals have not been used for a wide variety of cleanups because most Superfund funding has been spent on emergency removals; (6) additional factors that have limited non-time-critical removal use include EPA inability to shift funds between accounts and regions, and statutory limits on the duration and cost of non-time-critical removals; and (7) the proposed Superfund reauthorization legislation would ease the statutory limitations on non-time-critical removals.

Although the exact number of rogue Internet pharmacies is unknown, most operate from abroad. According to LegitScript, an online pharmacy verification service that applies NABP standards to assess the legitimacy of Internet pharmacies, there were over 36,000 active rogue Internet pharmacies as of February 2014. Federal officials and other stakeholders we interviewed consistently told us that most rogue Internet pharmacies operate from abroad, and many have shipped drugs into the United States that are not approved by FDA, including counterfeit drugs. In doing so, they violate Federal Food, Drug and Cosmetic Act (FDCA) provisions that require FDA approval prior to marketing prescription drugs to U.S. consumers, as well as customs laws that prohibit the unlawful importation of goods, including unapproved drugs. Many rogue Internet pharmacies sell counterfeit, misbranded, and adulterated drugs, in violation of FDCA provisions. Counterfeiting and trafficking or selling counterfeit drugs also violate laws that protect intellectual property rights. Many also illegally sell certain medications without a prescription that meets federal and state requirements. Indeed, nearly 10 years ago, we made sample purchases from a variety of rogue sites without a prescription and we subsequently received several drugs that were counterfeit or otherwise not comparable to the product we ordered. To sell drugs to their U.S. customers, foreign rogue Internet pharmacies use sophisticated methods to evade scrutiny by customs officials and smuggle their drugs into the country. For example, rogue Internet pharmacies have misdeclared the contents of packages, in violation of customs laws. Rogue Internet pharmacies have disguised or hidden their drugs in various types of packaging; for example, CBP has found drugs in bottles of lotion and in tubes of toothpaste. Some of the drugs we obtained when conducting work for our 2004 report were shipped in unconventional packaging, including in a plastic compact disc case and in a sealed aluminum can that was mislabeled as dye and stain remover In addition, rogue Internet pharmacies also often violate other wax.federal laws, including those related to fraud and money laundering. Rogue Internet pharmacies are often complex, global operations, and federal agencies face substantial challenges investigating and prosecuting those involved. According to federal agency officials, piecing together rogue Internet pharmacy operations can be difficult because they may be composed of thousands of related websites, and operators take steps to disguise their identities. The ease with which operators can set up and take down websites also makes it difficult for agencies to identify, track, and monitor rogue websites and their activities, as websites can be created, modified, and deleted in a matter of minutes. Officials also face challenges investigating and prosecuting operators because they are often located abroad, with components of the operations scattered in several countries. For example, as displayed in figure 1, one rogue Internet pharmacy registered its domain name in Russia, used website servers located in China and Brazil, processed payments through a bank in Azerbaijan, and shipped its prescription drugs from India. Even when federal agencies are able to identify rogue Internet pharmacy operators, agency officials told us that they face jurisdictional challenges investigating and prosecuting them. Agencies may need assistance from foreign regulators or law enforcement in order to obtain information and gather evidence. However, rogue Internet pharmacies often deliberately and strategically locate components of their operations in countries that are unable or unwilling to aid U.S. agencies. In addition, foreign law enforcement authorities that are willing to aid investigations can be slow in responding to requests for help, according to officials from several federal agencies. As a result of competing priorities and the complexity of rogue Internet pharmacies, federal prosecutors may not always prosecute these cases. Such cases are often resource intensive and often involve the application of specialized investigative techniques, such as Internet forensics and undercover work. Components of DOJ routinely prioritize cases for prosecution by applying minimum thresholds associated with illicit activities in order to focus their limited resources on the most serious crimes. Accordingly, agencies may not pursue cases if it appears that such cases do not meet relevant thresholds. In addition, basing a prosecution on violations of the FDCA can be challenging, which may contribute to prosecutors declining to pursue rogue Internet pharmacy cases. Though rogue Internet pharmacy activity clearly violates the FDCA, proving violations of the act’s misbranding and counterfeiting provisions can be difficult, according to a DOJ official. In addition, violations of these provisions of the FDCA are subject to relatively light criminal penalties, which may limit prosecutors’ interest. When federal prosecutors pursue charges against rogue Internet pharmacy operators, they often charge them for violating other laws, such as smuggling, mail fraud, wire fraud, or money laundering, since such violations can be less onerous to prove and carry stronger penalties. Despite these challenges, federal agencies and others have taken actions to combat rogue Internet pharmacies. Federal agencies have conducted investigations that have led to convictions, fines, and asset seizures from rogue Internet pharmacies as well as from companies that provide services to them. Agencies have investigated rogue Internet pharmacies independently and conducted collaborative investigations with other federal agencies through ICE’s National Intellectual Property Rights Coordination Center. Since our report was published in July 2013, DOJ has continued to pursue those that import and traffic in counterfeit drugs, as well as those that purchase from them. In addition, FDA formed a Cyber Crimes Investigation Unit in 2013, and in 2014, the agency announced its plans to expand its law enforcement presence overseas by placing its first permanent agent at Europol—the European Union’s law enforcement agency. Agencies have also collaborated with law enforcement agencies around the world to disrupt rogue Internet pharmacy operations. For example, FDA and other federal agencies have participated in Operation Pangea, an annual worldwide, week-long initiative in which regulatory and law enforcement agencies from around the world work together to combat rogue Internet pharmacies. In 2013, FDA took action against 1,677 rogue Internet pharmacy websites during Operation Pangea. FDA officials told us that the effect of such shutdowns is primarily disruptive since rogue Internet pharmacies often reopen after their websites get shut down; officials from federal agencies and stakeholders we spoke with likened shutting down websites to taking a “whack-a-mole” approach. One stakeholder noted that rogue Internet pharmacies own and keep websites in reserve so that they can redirect traffic and maintain operations if any of their websites get shut down. Federal agencies responsible for preventing illegal prescription drug imports have also interdicted rogue Internet pharmacy shipments. For example, from fiscal years 2010 through 2012, CBP reported seizing more than 14,000 illicit shipments of prescription drugs. However, FDA officials noted that the sheer volume of inbound international mail shipments makes it difficult to interdict all illicit prescription drug imports. FDA and others have taken steps to educate consumers about the dangers of buying prescription drugs from rogue Internet pharmacies. In September 2012, FDA launched a national campaign to raise public awareness about the risks of purchasing drugs online. The campaign provides information about the dangers of purchasing drugs from rogue Internet pharmacies, how to identify the signs of rogue Internet pharmacies, as well as how to find safe Internet pharmacies. Other federal agencies have also taken steps to educate consumers about the dangers of purchasing drugs online; for example, by posting information on their websites. NABP also posts information about its quarterly review of Internet pharmacies, which most recently showed that 97 percent of the over 10,000 Internet pharmacies that it reviewed were out of compliance with federal or state laws or industry standards. NABP also directs consumers to purchase medicines from legitimate Internet pharmacies that it has accredited. To assist consumers in more readily identifying legitimate online pharmacies, NABP is working to launch a new top-level domain name called .pharmacy. The association intends to grant this domain name to appropriately licensed, legitimate Internet pharmacies operating in compliance with regulatory standards—including pharmacy licensure, drug authenticity, and prescription requirements—in every jurisdiction that the pharmacy does business. LegitScript also helps consumers to differentiate between legitimate and rogue Internet pharmacies. It regularly scans the Internet and, using NABP’s standards, classifies Internet pharmacies into one of four categories: (1) legitimate, (2) not recommended, (3) rogue, or (4) pending review. When visiting its publicly available website, consumers can enter the website address of any Internet pharmacy and immediately find LegitScript’s classification. As of February 3, 2014, LegitScript had classified 213 Internet pharmacies as legitimate and therefore safe for U.S. consumers, on the basis of NABP standards. Despite these actions of agencies and stakeholders, consumer education efforts face many challenges. In particular, many rogue Internet pharmacies use sophisticated marketing methods to appear professional and legitimate, making it challenging for even well-informed consumers and health care professionals to differentiate between legitimate and rogue sites. For example, some Internet pharmacies may fraudulently display an NABP accreditation logo on their website, despite not having earned the accreditation, or may fraudulently display Visa, MasterCard, PayPal, or other logos on their website despite not holding active accounts with these companies or being able to process such payments. Figure 2 displays a screenshot of a rogue Internet pharmacy website that may appear to be legitimate to consumers, but whose operators pled guilty to multiple federal offenses, including smuggling counterfeit and misbranded drugs into the United States. Some rogue Internet pharmacies seek to assure consumers of the safety of their drugs by purporting to be “Canadian.” Canadian pharmacies have come to be perceived as a safe and economical alternative to pharmacies in the United States. Over the last 10 years, several local governments and consumer organizations have organized bus trips to Canada so that U.S. residents can purchase prescription drugs at Canadian brick-and- mortar pharmacies at prices lower than those in the United States. More recently, some state and local governments implemented programs that provided residents or employees and retirees with access to prescription drugs from Canadian Internet pharmacies. Despite FDA warnings to consumers that the agency could not ensure the safety of drugs not approved for sale in the United States that are purchased from other countries, the prevalence of such programs may have contributed to a perception among U.S. consumers that they can readily save money and obtain safe prescription drugs by purchasing them from Canada. Many rogue Internet pharmacies seek to take advantage of this perception by purporting to be located in Canada, or sell drugs manufactured or approved for sale in Canada, when they are actually located elsewhere or selling drugs sourced from other countries. Chairman Murphy, Ranking Member DeGette, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-7114 or crossem@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this statement include Geri Redican-Bigott, Assistant Director; Michael Erhardt; Patricia Roy; and Lillian Shields. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

While some Internet pharmacies are legitimate businesses that offer consumers a safe and convenient way to purchase their prescription drugs, the FDA and NABP have reported that thousands are fraudulent enterprises. Among other things, these rogue Internet pharmacies often sell counterfeit or otherwise substandard drugs. Consumers have experienced health problems as a result of purchasing drugs from rogue Internet pharmacies, and the proliferation and patronage of such entities has rendered them a public health threat. A number of federal and state agencies share responsibility for administering and enforcing laws related to Internet pharmacies, including FDA, DOJ, CBP, and ICE, as well as state boards of pharmacy. This statement is based on GAO's July 2013 report, entitled Internet Pharmacies: Federal Agencies and States Face Challenges Combating Rogue Sites, Particularly Those Abroad ( GAO-13-560 ). In this report, GAO identified (1) how rogue sites violate federal and state laws, (2) challenges federal agencies face in investigating and prosecuting operators, (3) efforts to combat rogue Internet pharmacies, and (4) efforts to educate consumers about the risks of purchasing prescription drugs online. To conduct this work, GAO interviewed officials from federal agencies, reviewed federal laws and regulations, and examined agency data and documents. GAO also interviewed officials from stakeholders including NABP, drug manufacturers, and companies that provide services to Internet businesses. Although the exact number of rogue Internet pharmacies is unknown, one estimate suggests that there were over 36,000 in operation as of February 2014, and these rogue sites violate a variety of federal laws. Most operate from abroad, and many illegally ship prescription drugs into the United States that have not been approved by the Food and Drug Administration (FDA), including drugs that are counterfeit or are otherwise substandard. Many also illegally sell prescription drugs without a prescription that meets federal and state requirements. Foreign rogue Internet pharmacies use sophisticated methods to evade scrutiny by customs officials and smuggle drugs into the country. Their operators also often violate other laws, including those related to fraud and money laundering. Rogue Internet pharmacies are often complex, global operations, and federal agencies face substantial challenges investigating and prosecuting those involved. According to federal agency officials, piecing together rogue Internet pharmacy operations can be difficult because they may be composed of thousands of related websites, and operators take steps to disguise their identities. Officials also face challenges investigating and prosecuting operators because they are often located abroad in countries that are unable or unwilling to aid U.S. agencies. The Department of Justice (DOJ) may not prosecute such cases due to competing priorities, the complexity of these operations, and challenges related to bringing charges under some federal laws. Despite these challenges, federal agencies have conducted investigations that have led to convictions, fines, and asset seizures from rogue Internet pharmacies as well as from companies that provide services to them. FDA and other federal agencies have also collaborated with law enforcement agencies around the world to disrupt rogue Internet pharmacy operations. For example, FDA took action against 1,677 rogue Internet pharmacy websites in 2013 as part of a worldwide enforcement initiative. Other federal agencies such as U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs Enforcement (ICE) have also taken actions—for example, by interdicting counterfeit drug shipments from rogue Internet pharmacies at the border. FDA and others have taken steps to educate consumers about the dangers of buying prescription drugs from rogue Internet pharmacies. FDA recently launched a national campaign to raise public awareness about the risks of purchasing drugs online, and the National Association of Boards of Pharmacy (NABP) posts information on its website about how to safely purchase drugs online. However, rogue Internet pharmacies use sophisticated marketing methods to appear legitimate, making it hard for consumers to differentiate between legitimate and rogue sites. NABP's recent analysis shows that 97 percent of the over 10,000 Internet pharmacies that it reviewed were out of compliance with laws or industry standards. Some rogue sites seek to assure consumers of the safety of their drugs by purporting to be “Canadian” despite being located elsewhere or selling drugs sourced from other countries.

Over the years, the Congress has enacted over a dozen environmental statutes to protect human health and the nation’s air, land, and water from pollutants. EPA is charged with implementing these statutes and their associated regulations. EPA, in turn, has delegated a growing number of its responsibilities to the states. Since the 1970s, states have expressed concerns about the burden of EPA’s oversight and reporting requirements and the lack of flexibility in federal requirements to deal with local problems. These concerns have been exacerbated as the states have been given greater responsibility without a commensurate increase in federal assistance. The statutes, regulations, and requirements that EPA places on the states are generally medium-specific. That is, a different set of statutory, regulatory, and EPA requirements is generally established to protect the air, water, and land, often without adequate consideration of the impact of one set of requirements on another. The integrated environmental management concept allows the states the flexibility to manage their activities across programs or media to establish priorities and achieve efficiencies. Our 1995 report called for EPA to address the states’ need for flexibility by working with individual states to, among other things, establish (1) how limited resources can be used most effectively and efficiently and (2) the level of oversight that takes into account the states’ ability to fulfill their environmental obligations. In addition, we recommended that EPA’s offices consult the states as early as possible before important policy decisions are made and share information on issues of interest and concern. NAPA’s principal recommendations for enhancing the EPA-state partnership also focused on increased flexibility for states. Specifically, NAPA recommended that EPA, among other things, revise its approach to oversight, rewarding high-performing states with grant flexibility, reduced oversight, and greater autonomy. NAPA also recommended that the Congress authorize EPA to consolidate program grants into an integrated environmental grant for those states whose performance warrants it. The grant’s purpose would be to make the greatest possible reductions in risks to human health and the environment. On May 17, 1995, EPA announced plans to create a National Environmental Performance Partnership System. This system is to fundamentally change the EPA-state relationship by setting new goals for environmental protection and giving the states broad flexibility to meet them. More specifically, the new system places greater emphasis on the use of environmental goals and indicators, calls for environmental performance agreements between EPA and individual states, provides opportunities for less oversight of state programs that exhibit high performance in certain areas, and establishes a greater reliance on environmental and programmatic self-assessments by the states. The plans were developed by a joint EPA-state task force. As we noted in our April 1995 report, EPA requires a good working relationship with the states because it relies upon them to manage most federal environmental programs. We believe that the historically poor EPA-state relationship has improved, but it continues to be strained, and program implementation suffers as a result. While state and federal program managers agree overwhelmingly that meeting the costs of environmental programs is their most important challenge, an improved EPA-state relationship could help by making program management more efficient and cost-effective. In addition, the states have criticized EPA’s oversight as micromanagement of state programs. EPA has taken positive, though tentative, steps toward improving its relationship with the states, in particular trying to provide the states with the flexibility to achieve cost efficiencies and to address the states’ priorities. However, one of the root causes of the agency’s past problems—a prescriptive, media-based legislative framework—remains firmly in place. The costs of implementing federal environmental requirements are significantly impacting the budgets of many state governments. For example, EPA estimated a nationwide $154 million shortfall in the National Pollutant Discharge Elimination System (NPDES) for fiscal year 1995. The financial gap between environmental programs’ needs and available resources has become the central issue in the states’ ability to meet the programs’ requirements and in the states’ relationship with EPA. This has become the central issue because prescriptive statutory, regulatory, and internal EPA requirements often exacerbate the resource problem by limiting the states’ flexibility to pursue cost-effective environmental strategies. To help the states make the best use of available program funds, in our 1995 report we recommended that EPA’s program offices work with the states—within the limitations of existing environmental law—to identify how each state’s resources can be most efficiently and effectively allocated within each program to address the state’s highest-priority environmental problems. Such an approach could be enhanced by integrating the statutory framework within which the states and EPA operate to allow the flexibility to set priorities across individual programs. In response to this problem, a major component of EPA’s National Environmental Performance Partnership System is a joint planning and priority-setting dialogue with the states that is intended to replace the current annual work plan process. This dialogue, known as Environmental Performance Partnership Agreements, is to be based on the analysis and strategic direction set by EPA’s national and regional program managers, as well as by the states. Among other things, it includes joint EPA-state planning and priority setting, which should increase the states’ input, and increased use of environmental goals and indicators, which could help provide some flexibility to program management. EPA plans for all states to have these agreements by fiscal year 1997. In theory, the use of these agreements to increase state input and flexibility could improve EPA’s relations with its state partners and reduce the costs of implementing federal environmental programs. It is difficult to assess the effectiveness of the Performance Agreements thus far because implementation began only recently. As of February 1996, 5 agreements have been completed; 12 others are under discussion. One problem that EPA and the states likely face with the agreements is that current law imposes requirements on EPA that, at times, are inconsistent with the states’ priorities. In our May 1995 testimony, we stated that providing EPA with greater flexibility to integrate environmental requirements represents a key approach to reconciling state and federal environmental concerns. As we pointed out in our April 1995 report, many state officials believe that EPA dominates the federal-state relationship, frequently imposing federal mandates over the states’ priorities, routinely second-guessing the states’ decisions, dictating the programs’ activities, and failing to involve the states in major policy decisions. As the states’ resources have grown ever tighter, disagreements over the various programs’ priorities have become more and more frequent. State program managers maintain that EPA’s inflexible approach is a major impediment to managing environmental programs efficiently. EPA officials maintain that legislative mandates and timetables frequently leave them with little or no latitude to explore what might be more cost-effective alternatives with the states. To improve EPA’s oversight of state programs, our report recommends that EPA’s regional offices negotiate with each state a level of oversight that takes into account the ability of the state to fulfill its environmental program obligations (e.g., its track record in meeting key requirements or its staffing and funding). As we recommended in our April 1995 report, as a general rule, EPA should focus on achieving improvements in environmental quality—as measured by reliable environmental indicators—without prescribing in detail how the states are to achieve these results. EPA’s National Environmental Performance Partnership System initiative embodies these recommendations by instituting differential levels of oversight based on the states’ conditions and performance. EPA’s oversight under the new system is supposed to focus on programwide, limited, after-the-fact reviews, rather than on case-by-case intervention. EPA plans for all states to participate in the new system by having Performance Agreements in place by fiscal year 1997. Although 17 states have indicated that they intend to negotiate these agreements with EPA this year, several states have opted not to participate because they are skeptical about EPA’s ability to implement such a plan as intended. While the Performance Agreements and other aspects of the National Environmental Performance Partnership System have the potential to create a more effective EPA and state working relationship, EPA has been trying for years, with only limited success, to make these types of improvements. And much work remains to reach agreement with the states on environmental goals and measures and how the states’ programs will be assessed and problems corrected. A larger concern is that during implementation of the new system or over time—especially in negotiating performance agreements with individual states—EPA program and regional officials will add back the types of controls and other requirements that the system is designed to eliminate. One of NAPA’s principal observations is that progress in protecting the environment depends on devolving responsibility to the states for administering environmental programs. NAPA concluded that EPA, in consultation with the Congress, should accomplish this goal by moving toward integrating its responsibilities under various statutes to provide the maximum flexibility needed by the states to meet their environmental priorities. As mentioned earlier, the states have long asserted that EPA places inflexible, overly prescriptive environmental requirements on them to control the amount of pollution released to the air, water, and land. EPA and the states have recently experimented, within the limits of environmental laws, with integrated environmental management, a concept under which a state focuses on a whole facility and all of its sources of pollution, rather than on a medium-specific source of pollution. For example, rather than performing multiple inspections for various environmental media, a state can incorporate inspections for all media into a single, facilitywide inspection that focuses on the production processes. The proponents of integrated management believe that the approach saves money by consolidating activities and reduces pollution by focusing on prevention rather than on various control methods, such as installing devices to treat waste after it has been produced. To determine the results being achieved under integrated management approaches, we recently completed a review of initiatives taken by Massachusetts, New York, and New Jersey to integrate their environmental inspection, permit, and enforcement regulatory activities. In summary, we found that these efforts, while generally successful, were hampered by EPA funding and reporting requirements linked to individual federal environmental statutes. In 1993, Massachusetts implemented a facilitywide inspection and enforcement approach; in 1992, New York adopted a facility management strategy under which a team directed by a state-employed manager is assigned to targeted plants to coordinate all environmental programs; and in 1991, New Jersey initiated a pilot study of using a single, integrated permit for releases of pollutants from industrial facilities, rather than separate permits for each medium. Massachusetts and New York believe that their integrated approaches have proven to be successful and are implementing them statewide. Because permits have only recently been issued as part of New Jersey’s integrated approach, officials in that state believe that it is too early to evaluate the results of the pilot study. Industry officials in the three states told us that they generally believe that integrated approaches are beneficial to the environment, achieve regulatory efficiencies, and reduce costs. For example, a New Jersey pharmaceutical manufacturer told us that its 5-year permit combines 70 air and water permits into a single permit, eliminating the need for the company to frequently renew each of the many permits. Although the states have had generally favorable experiences in their multimedia approaches, one sticking point has been coordinating the funding and reporting of these activities with EPA. Although there is some flexibility in EPA’s grant system to fund multimedia activities from EPA’s media-specific grant program, doing so has been difficult and has required the states to engage in extensive discussions and negotiations to obtain funds for these activities. For example, obtaining grant funds for a Massachusetts demonstration project required not only EPA’s approval but congressional authorization as well to shift funds from other activities. Furthermore, states can experience difficulty in reporting multimedia activities to EPA, as required under various environmental statutes. For example, while Massachusetts conducts facilitywide inspections and prepares comprehensive reports detailing the results, EPA requires the state to report the results to multiple medium-specific reporting systems, each of which has different formats, definitions, and reporting cycles. According to a Massachusetts environmental official, preparing these duplicative reports wastes resources and demoralizes staff. The new Performance Partnership grant program proposed in EPA’s fiscal year 1996 budget request could resolve the funding and reporting issues. Such grants are a step in the direction of NAPA’s recommendation that the Congress should authorize EPA to consolidate categorical grants into an integrated environmental grant for any state whose performance warrants it. EPA believes that its consolidated grants would provide the states with easier access to multimedia funding and promote the reporting of their activities to integrate the management of facilities. For example, the grants would allow the states to allocate funds to reflect local priorities, while continuing to pursue national policy objectives and fulfilling federal statutory requirements. They would also include new performance measures to simplify reporting requirements, while ensuring continued environmental protection. As long as environmental laws are media-specific and prescriptive and EPA personnel are held accountable for meeting the requirements of the laws, it will be difficult for the agency to fundamentally change its relationships with the states to reduce day-to-day control over program activities. This situation was manifested in the funding and reporting problems that resulted from the recent efforts of Massachusetts, New York, and New Jersey to integrate their environmental management activities. However, within the flexibility provided by existing environmental statutes, initiatives such as EPA’s National Environmental Performance Partnership System and its proposed Performance Partnership grants have the potential to ameliorate problems for those states interested in obtaining greater flexibility in carrying out their environmental responsibilities. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the Environmental Protection Agency's (EPA) initiatives in response to the National Academy of Public Administration's recommendations to change the nation's approach to environmental protection, focusing on EPA attempts to improve its relationship with states. GAO noted that: (1) EPA plans to create a National Environmental Performance Partnership System, which would fundamentally change the EPA-state relationship by setting new goals for environmental protection and giving states broad flexibility to meet them; (2) although this system should allow states more input in decisionmaking, provide for joint planning, and reduce EPA oversight of states that perform well, it is too soon to assess the effectiveness of these partnership agreements; (3) states' attempts to integrate their regulatory activities across programs show potential for reducing pollution and increasing regulatory efficiency; and (4) EPA believes that its proposed consolidated grants should alleviate problems caused by inflexible federal fund allocations and duplicative reporting requirements.

The Navy pilot allows servicemembers the option of either participating in the current program or of selecting their own carrier from a list of approved small business carriers. Key features of the servicemember arranged move include shipment location information, direct claims settlement with the carrier, full replacement value for lost or damaged household goods, and payment via the government charge card. Initiated in January 1998, the pilot included only shipments originating at Puget Sound, Washington, headed to San Diego, California; Norfolk, Virginia; New London, Connecticut; Pensacola, Florida; and Jacksonville, Florida. To increase participation, the pilot’s origin site was expanded from Puget Sound (including Whidbey Island and Everett, Washington) to include San Diego, Norfolk, and New London in July 1998. However, due to potential competition with another pilot that will also serve the Florida area, Pensacola and Jacksonville remain as destination sites only. The pilot does not have a specific end date; however, DOD established a target in the November 1997 Defense Reform Initiative Report to offer the Navy option to every servicemember by January 1, 2000. The Navy pilot is one of four quality-of-life initiatives DOD is pursuing to change the way it is currently doing business, adopt commercial business practices, and achieve quality moving services for military families. The other three pilots are described below. The Army’s pilot at Hunter Army Airfield, Savannah, Georgia, which was initiated in February 1996, is a quality-of-life effort to improve the relocation process and to test commercial practices in a military environment. Services provided by the contractor include point-to-point move management with a single point of contact for the member, assistance in buying/selling a residence, full replacement value for lost or damaged household goods, direct claims settlement with the servicemember, and visibility of the shipment for approximately 1,400 annual moves. The contract will end on September 30, 1999. In January 1999, the Military Traffic Management Command (MTMC), which manages the current personal property program, began a pilot involving 50 percent of the moves in North Carolina, South Carolina, and Florida, which will total approximately 18,500 moves annually. Key features of the pilot include the selection of carriers based on servicemember satisfaction and past performance rather than on price alone; achieving stronger carrier commitment through long-term contracts; offering full-value replacement protection and direct claims settlement to users. The pilot is planned to run for 3 years, ending September 2002. DOD announced on February 12, 1999, that it intended to begin the Full Service Moving Project as a fourth test. This pilot would be similar to the pilot at Hunter Army Airfield, with modifications based on the Army’s lessons learned, and it would involve a larger number of moves (approximately 45,000 annually). The pilot would be tested in the National Capital (Washington, D.C.) Region, Georgia, and North Dakota. Like the Army pilot, it is intended to replace the existing program by using a contractor or contractors to provide both transportation and move management services. No official start date has been set for this pilot program. Status of the Navy Pilot As of March 1999, 223 servicemembers have participated in the pilot. In its second year of operation, the pilot has been expanded from one to four shipment sites. Program results thus far show (1) participation has been relatively low compared to the other pilots that are under way or planned, (2) servicemembers are satisfied arranging their own move, according to limited survey data, and (3) workload would increase for personal property officials because this option adds an alternative to the current program. As of March 26, 1999, a total of 223 members have participated in the pilot and 132 moves have been completed. Participation has been low, in part, because of the pilot’s short duration and eligibility restrictions. Although the Puget Sound office began to offer this option in January 1998, the other three sites did not offer it until late July 1998, and then only for Navy military members moving to one of six destinations. The pilot’s eligibility restrictions exclude civilians and members of the other services. Also, only certain types of domestic household goods shipments are eligible. The pilot excludes shipments of boats and mobile homes as well as shipments from non-temporary storage or from a mini-warehouse. Shipments must weigh at least 3,000 pounds and are expected to cost between $2,500 and $25,000. As of the end of calendar year 1998, the participating personal property offices reported interviewing 1,083 Navy members that were moving to or from the six pilot sites to determine whether their shipments met pilot eligibility criteria. Some 573, or 53 percent, of them had eligible shipments and 133, or 23 percent, selected the option. Over 90 percent of those determined as ineligible had household goods not weighing at least 3,000 pounds. Site officials reported that about 70 percent of eligible members cited the effort involved in selecting a carrier as the primary reason that they did not use the option (see table 1 for participant information by site). Navy officials have recently modified eligibility requirements to increase participation in the pilot. The major changes would increase eligibility by (1) reducing the weight minimum from 3,000 pounds to 1,000 pounds, (2) allowing boats, and (3) eliminating current restrictions to allow shipments to any domestic destination. To measure customer satisfaction with the pilot, the Navy uses a nine-question customer survey that servicemembers are asked to fill out and return after the move is completed. The survey includes questions pertaining to pickup and delivery time, loss, damage, and overall satisfaction. The survey asks, among other things, if the move was of a better quality than the servicemembers’ prior move and if the customer would (1) choose the pilot again, (2) recommend it to someone else, and (3) use the same carrier again. As of February 1999, the Navy had received 30 customer satisfaction surveys. These surveys are predominantly from the Puget Sound personal property office because Puget Sound was the first site to offer the pilot. Of the 30 surveys, 23 indicate that the pilot was a better quality move than other military moves. Eighteen of the 30 shipments (60 percent) had no claims, and 12 had a claim. Of the 12 claims made, only 2 exceeded $500. One of these claims was for $1,900 for broken china. Despite this damage, the customer responded that this was a better quality move than prior ones and stated that they would use the same carrier and the pilot again (see table 2 for selected survey responses). While the pilot offers advantages to the servicemember, it would add to the workload of the personal property officials who are responsible for the bulk of day-to-day program management. Among their additional duties, or duties that were previously handled by MTMC, are negotiating agreements with participating small business carriers, providing individual counseling to potential participants, maintaining up-to-date carrier information and performance data, and tracking customer satisfaction survey results. These are additional duties not previously handled by the personal property office. Local contracting officers at each participating installation enter into agreements with companies that offer acceptable discounts off of commercial rates. The agreements are entered into with companies that are self-certified as small businesses and on MTMC’s approved list. These agreements provide for the use of a government charge card for simplified payment and for direct claims settlement with the carrier at full repair or replacement value at no additional cost to the government. In addition, carriers are required to provide information on a shipment’s location through the use of a toll-free help line and a pager for direct delivery notification, which are designed to improve service and reduce storage costs. The personal property office provides servicemembers with the names of participating movers that have been determined to have reasonable prices. The property offices also maintain carrier quality books that contain a carrier’s performance history, the returned customer satisfaction surveys, and the carrier’s marketing materials. Participating servicemembers are required to contact at least three moving companies and document the basis for their preference of one of the carriers. The contracting officer can then make the selection considering both price and the servicemember’s recommendation concerning non-price factors such as quality. The award is made to the firm selected under the simplified acquisition procedures contained in Federal Acquisition Regulation part 13. The Navy does not plan to conduct an evaluation of the pilot program separate from its own evaluation. The U.S. Transportation Command (USTRANSCOM) is currently in the process of developing and coordinating an evaluation plan with the services to evaluate the personal property pilot tests, and it will make a recommendation as to the follow-on course of action. In this regard, the Navy has modified its customer survey questions so that the survey questions match the USTRANSCOM survey questions. Navy officials are also accumulating pilot project transportation costs and developing a methodology to compare these costs with those that the government would have otherwise paid. Presently, the pilot has only been tested as an option to the current program at a few Navy sites and not as an option at the other pilot sites. The other pilots are designed to test an approach to replace the current program. However, the USTRANSCOM draft evaluation plan does not address the feasibility or potential benefits of incorporating the pilot option into the pilots that may replace the current program. Further, the evaluation plan does not directly assess the unique aspects of the pilot, which include limiting carrier selection to small business carriers and using the government charge card for payment. Consequently, DOD may not have the information it needs to craft a DOD-wide personal property program. Navy officials are concerned about several aspects of the USTRANSCOM evaluation plan. In March 1999, they stated that the data elements to be collected should be better defined, that a consistent evaluation time period should be established, and that expert advice should be sought. The officials also believe that cost comparisons of overhead will be difficult because the same personnel who administer the current program are implementing the Navy pilot. In our recent testimony and report on the Army’s Hunter pilot and in our comments on several draft evaluation plans, we have stated similar concerns about the current evaluation plan. These concerns include the need to (1) develop a comprehensive strategy for testing the unique characteristics and/or processes of each pilot and (2) use expert advice in finalizing a methodologically-sound evaluation plan. The Navy pilot program differs from other ongoing or proposed pilot programs because it adds an option to the current program; it is not intended to replace the current program. The pilot participation levels and results thus far provide general information about the program’s potential benefits and customer satisfaction compared to the current program— which DOD is proposing to replace. Since the Navy pilot option is not to be integrated and tested with the other pilots, information on the viability of providing this option will only be available in comparison to the current program. Further, the draft evaluation plan does not identify a specific method for assessing the pilot’s unique features. Consistent with the recommendation in our report on the Army’s Hunter pilot that the Secretary of Defense develop a comprehensive strategy for testing each of the approaches, we recommend that the Secretary of Defense, in developing this strategy, consider testing the Navy pilot and/or its unique features in conjunction with one or more of the other pilots. Doing so would test the Navy pilot in an environment that is more consistent with the changes being considered and likely to be implemented. DOD stated that it concurred with the report and its recommendations. Specifically, DOD stated that, as part of its plan to develop a comprehensive strategy for evaluating each of the pilots, it would determine—in concert with the services—how best to incorporate the features of the Navy pilot into the other pilots. DOD’s comments are reprinted in appendix I. To determine how the Navy plans to implement and evaluate the pilot program, we reviewed available program documents and met with program management officials at the Naval Supply Systems Command, Mechanicsburg, Pennsylvania. We discussed how the pilot is being implemented and managed, the contract terms and conditions, and the key characteristics of the pilot. Further, we discussed and reviewed the customer survey results and other data that will be provided to USTRANSCOM for its evaluation of the pilot. We also discussed with Navy Supply Systems Command and Naval Audit Service officials their concerns with the USTRANSCOM evaluation plan. We visited and interviewed officials at the Fleet and Industrial Supply Center, Puget Sound, Bremerton, Washington, to determine how the pilot was implemented at its first location. We discussed the process used to establish and manage the pilot at Puget Sound while continuing to operate the current system. Additionally, we discussed their experiences and observations with the pilot. We also visited and interviewed program, contracting, and government charge card officials at the Fleet and Industrial Supply Center, Norfolk, Virginia, to determine how implementation was progressing and to compare the pilot operations at Puget Sound to those of Norfolk. To provide information on the pilot’s progress, we visited and interviewed Naval Supply Systems Command officials to determine how sites were selected for expansion after the pilot was established at Puget Sound. Further, we attended a “lessons learned” conference that included personal property officials from all of the pilot sites as well as from the Navy Transportation Support Center, Bureau of Naval Personnel, and the Defense Finance and Accounting Service to understand the problems these organizations encountered with the pilot and possible solutions. To obtain information on pilot participation, we reviewed weekly reports summarizing the number of military members that were eligible and those that were selected to participate. We also discussed the reasons for their participation with site officials. To provide information on available cost data, we reviewed the cost comparisons developed by site officials that compare actual pilot transportation costs to estimated/constructed costs for the same move under the current system. We did not independently verify any data reported by pilot sites or Naval Supply Systems Command headquarters. Our review was conducted between October 1998 and April 1999 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Honorable William S. Cohen, Secretary of Defense; the Honorable Richard Danzig, Secretary of the Navy; General Charles T. Robertson, Jr., Commander in Chief, USTRANSCOM; Rear Admiral Donald E. Hickman, Commander, Naval Supply Systems Command; Major General Mario F. Montero, Jr., Commander, MTMC; and the Honorable Jacob J. Lew, Director, Office of Management and Budget. We will also make copies available to others upon request. Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. Daniel A. Omahen, Evaluator-in-Charge John R. Beauchamp, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a legislative requirement, GAO provided information on the Navy Personal Property Pilot. GAO noted that: (1) between January 1998 and March 1999, 223 servicemembers have used the pilot program to arrange their own move rather than use the current program; (2) participation has been relatively low compared to the other three pilots under way or planned, which involve substantially more shipments--approximately 1,400 to 45,000 shipments annually; (3) survey data indicate that participants are satisfied with the pilot and would use the option again; (4) because the pilot offers servicemembers a choice between the current program and arranging their own move, implementing the option increases the workload for local personal property officials; (5) the member arranged move option is not featured in any of the other pilots, which are broader in scope and are intended to replace the current program; (6) while the U.S. Transportation Command is responsible for evaluating all of the pilots to determine which one could provide better long-term results, its plan for doing so has not been finalized; and (7) in addition, the U.S. Transportation Command's draft evaluation plan proposes to collect information on the extent the Navy pilot works as an option within the current program at a few Navy sites, which may not provide adequate data to assess the Navy pilot's feasibility or its compatibility with the other pilots' results.

The Department of Labor and the National Labor Relations Board (NLRB) are responsible for enforcing many of the country’s most comprehensive federal labor laws ranging from occupational health and safety to minimum wage, overtime pay, and the rights of employees to bargain collectively with their employers. Most private sector firms—regardless of whether they are federal contractors—must comply with safety and health standards issued under the Occupational Safety and Health Act. The act was meant “to assure safe and healthful working conditions for working men and women.” The Secretary of Labor established OSHA in 1970 to carry out a number of responsibilities under the act, including developing and enforcing safety and health standards, educating workers and employers about workplace hazards, and establishing responsibilities and rights for both employers and employees for the achievement of better safety and health conditions. OSHA is authorized to conduct workplace inspections to determine whether employers are complying with safety and health standards, and to issue citations and assess penalties when an employer is not in compliance. OSHA characterizes violations as serious, willful, repeat, and other-than-serious, with civil penalties in specified amounts for these various types of violations. Table 1 describes the different violations and their associated penalties. WHD works to enhance the welfare and protect the rights of the nation’s workers through enforcement of the federal minimum wage, overtime pay, record keeping, and child labor requirements of the Fair Labor Standards Act; the Family and Medical Leave Act; and employment standards and worker protections provided in certain other laws. Additionally, WHD administers and enforces the prevailing wage requirements of the Davis- Bacon Act (DBA), the Service Contract Act (SCA), and other statutes applicable to federal contracts for construction and for the provision of goods and services. When WHD finds violations during enforcement actions, it computes and attempts to collect and distribute back wages owed to workers and, where permitted by law, also imposes penalties and other remedies. If employers refuse to pay the back wages and any penalties assessed, WHD officials, with the assistance of attorneys from Labor’s Office of the Solicitor, may pursue the cases in court. When WHD finds violations under the Government Contract statutes, which includes the SCA, DBA, and Contract Work Hours and Safety Standards Act, the agency may pursue administrative action to recover wage and benefit payments and to debar the contractor from future federal contracts. WHD may also request that the federal agency withhold contract payments to protect the back wages and benefits and may request that the federal agency terminate a contract. The National Labor Relations Act (NLRA) is the primary federal law governing relations between labor unions and employers in the private sector and is administered by the NLRB. Under Section 8 of the act, it is illegal for employers to interfere with workers’ right to organize or bargain collectively or for employers to discriminate in hiring, tenure, or condition of employment in order to discourage membership in any labor organization, and such behavior is defined as an unfair labor practice. After concluding that a violation has been committed, the board typically requires firms to cease and desist the specific conduct for which an unfair labor practice is found. The board may order a variety of remedies, including requiring the firm to reinstate unlawfully fired workers or restore wages and benefits to the bargaining unit. In some cases, the board will also issue a broad cease and desist order prohibiting the firm from engaging in a range of unlawful conduct. If an employer to whom the federal government owes money (such as a federal contractor) has failed to comply with an order by the board to restore wages or benefits, the government has the option of withholding from any amount owed to that employer (including payments under a federal contract) any equal or lesser amount that the contractor owes under the board order. By statute, federal agencies are required to award contracts only to “responsible” sources. This statutory requirement has been implemented in the Federal Acquisition Regulation (FAR). The FAR establishes “a satisfactory record of integrity and business ethics” as one of the general standards a prospective contractor must meet to be responsible. Also, contracting officers are required to query the excluded parties list system (EPLS) to determine whether the prospective contractor has been debarred or suspended from federal contracts. The federal government has awarded contracts to companies that had been cited for large back-wage liabilities by Labor. Restricting our analysis to the 50 largest WHD assessments from fiscal year 2005 through fiscal year 2009, we found that over 60 percent of these assessments were made against companies that subsequently received contracts in fiscal year 2009. Specifically, we found that 25 out of the 50 largest WHD assessments were charged to 20 federal contractors. WHD assessed these 20 federal contractors for over $80 million in back wages. According to FPDS-NG, the federal government awarded over $9 billion in federal contract obligations to these 20 contractors during fiscal year 2009. None of the 20 federal contractors had been debarred or suspended from federal contracts. Further, we do not know the extent, if any, that contracting officers considered WHD assessments in the awarding of the federal contracts. The federal government has also awarded contracts to companies that Labor has assessed large fines against for violating health and safety regulations. From our analysis of the 50 largest OSHA fines for health and safety violations for closed investigations from fiscal year 2005 through fiscal year 2009, we found that almost 40 percent of these fines were made against companies that subsequently received federal contracts in fiscal year 2009. Specifically, we found that 8 of the 50 largest OSHA fines were made against 7 other federal contractors for safety violations. Further, these 7 companies accounted for about $3.7 million in OSHA fines. According to FPDS-NG, the federal government obligated approximately $180 million in federal contracts to these contractors during fiscal year 2009. None of the 7 federal contractors had been debarred or suspended from federal contracts. Further, we do not know the extent, if any, that contracting officers considered OSHA fines in the awarding of the federal contracts. Currently, the inspection databases maintained by OSHA, WHD, and NLRB do not contain DUNS numbers for all their cases. The OSHA and WHD data primarily identify companies by their names and, for WHD, employer identification numbers, when they were available. These firms may incur violation citations under multiple names due to the existence of multiple subsidiaries and corporate mergers. As such, the full extent of the federal government’s contracts awarded to companies with wage, health and safety, and collective bargaining violations is unknown. Each of the 15 companies we reviewed were cited for failing to follow wage, health and safety, or collective bargaining laws enforced by WHD, OSHA, and NLRB, respectively. Seven of these companies also had other types of violations, such as hiring undocumented workers, violating environmental standards, fraudulently billing Medicare and Medicaid, and billing for services not rendered. Most of these 15 federal contractors had contracts with the Department of Defense (DOD), the largest contracting agency. Other federal agencies that contracted with these companies include the Departments of Agriculture, Homeland Security, and Justice; General Services Administration (GSA); and National Aeronautics and Space Administration (NASA). According to FPDS-NG, these 15 companies received over $6 billion in federal contract obligations in fiscal year 2009. See table 2 below for detailed information on our 15 cases. We provided a draft of this report to NLRB and Labor. NLRB did not have any comments on the draft report. We received technical comments from Labor, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 14 days from the report date. At that time, we will send copies to interested congressional committees, the Secretary of Labor, and the Chairman of the NLRB. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-6722 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.

In fiscal year 2009, the federal government obligated over $500 billion on government contracts. Some in Congress are concerned that private companies may be awarded federal contracts even though they had been cited for violating federal laws that are meant to ensure that employees receive proper wages, have the right to bargain collectively, and are not subject to work-site hazards. GAO was asked to (1) investigate the extent to which companies that received federal contracts during fiscal year 2009 had been assessed the 50 largest monetary penalties for closed inspections of occupational safety, health, and wage regulations for fiscal years 2005 through 2009, and (2) develop case studies of federal contractors that have been assessed occupational safety, health, wage, and collective bargaining penalties. To perform this work, GAO obtained and analyzed concluded wage and health and safety inspections from the Department of Labor's Wage and Hour Division (WHD) and Occupational Safety and Health Administration (OSHA) for fiscal years 2005 to 2009. GAO also obtained labor union organization and bargaining violations from the National Labor Relations Board (NLRB). To determine the value of contracts awarded to GAO's case-study companies, GAO analyzed Federal Procurement Data System-Next Generation (FPDS-NG) data for fiscal year 2009 The federal government awarded contracts to companies that previously had been cited for violating wage regulations enforced by WHD and health and safety regulations enforced by OSHA. GAO did not evaluate whether federal agencies considered or should have considered these violations in the awarding of federal contracts, thus no conclusions on that topic can be drawn from this analysis. Of the 50 largest WHD wage assessments during fiscal years 2005 through 2009, 25 wage assessments were made against 20 companies that received federal contracts in fiscal year 2009. From GAO's analysis of OSHA data, GAO also found that 8 of the 50 largest workplace health and safety penalties assessed during the same time frame of fiscal years 2005 through 2009 were assessed against 7 other companies that received federal contracts in fiscal year 2009. Because OSHA and WHD databases do not contain Data Universal Numbering System numbers, GAO's analysis was limited to the 50 largest WHD assessments and OSHA penalties, which GAO manually searched. Because of this, the full extent of the federal government's contracts awarded to companies cited for labor violations is not known. GAO investigated 15 federal contractors cited for violating federal labor laws enforced by WHD, OSHA, and NLRB. The federal government awarded these 15 federal contractors over $6 billion in government contract obligations during fiscal year 2009. Several of these companies also had other types of violations, such as hiring undocumented workers, violating environmental standards, and fraudulently billing Medicare and Medicaid.

By the end of fiscal year 2010, NTIA and RUS awarded grants and loans to 553 broadband projects across the country (see table 1). These projects represent almost $7.5 billion in funds awarded, which exceeds the $7.2 billion provided by the Recovery Act because an agency such as RUS that awards loans can award and obligate funds in excess of its budget authority. NTIA awarded more than $3.9 billion in grant funding to 233 projects for various purposes, including 123 broadband infrastructure projects, 66 public computer center projects, and 44 projects designed to encourage broadband adoption. NTIA reported that the vast majority of its broadband infrastructure projects were investments in middle-mile infrastructure projects, which are intended to provide a link from the Internet backbone to the networks of local broadband service providers, such as cable or phone companies. Based on a budget authority of more than $2.4 billion, RUS awarded funds to 320 projects, including more than $2.3 billion for grants and about $87 million for loans. According to RUS, the budget authority of $87 million for loans supports almost $1.2 billion in total loans, and a combined loan and grant award amount of more than $3.5 billion. According to RUS, the vast majority of its awards and funding amounts went to last-mile projects, which are intended to provide connections from Internet service providers to homes, businesses, or other users. NTIA and RUS awarded the BTOP and BIP grants, loans, and loan/grant combinations in two funding rounds. NTIA and RUS initially proposed using three separate funding rounds during the 18-month window to award the entire $7.2 billion. We reported that under this approach each funding round would operate under a compressed schedule that would impose challenges on applicants in preparing their project applications, as well as on the agencies in reviewing these applications to meet their statutory deadlines. NTIA and RUS subsequently revised their plans and issued the awards in two funding rounds. In the first funding round, which began in July 2009 and ended in April 2010, NTIA and RUS received more than 2,200 applications and awarded 143 grants, loans, and loan/grant combinations totaling almost $2.2 billion to a variety of entities in nearly every state and U.S. territory. In our review of the first funding round, we found that NTIA and RUS, with the help of the agencies’ contractors—Booz Allen Hamilton and ICF International, respectively—consistently substantiated information provided by award recipients in their applications during the first round of funding. We reviewed 32 award recipient applications and found that the agencies consistently reviewed the applications and substantiated the information as specified in the first funding notice. In each of the files, we observed written documentation that the agencies and their contractors reviewed and verified pertinent application materials, and requested additional documentation where necessary. In the second funding round, which began in January 2010 and ended in September 2010, NTIA and RUS received more than 1,700 applications and awarded approximately $5.3 billion in funding for 410 projects. To meet the Recovery Act’s September 30, 2010, deadline for awarding broadband funds, NTIA and RUS streamlined their application review processes by issuing separate funding notices that targeted different types of infrastructure projects and reduced the number of steps in the due- diligence review process. NTIA also reduced the basic eligibility factors for BTOP grants from five to three, moved from a largely unpaid to a paid reviewer model to ensure that reviews were conducted in a timely fashion, and decreased the number of reviewers per application from three to two. Although NTIA officials reported that these steps allowed the agency to complete the initial portion of its review ahead of schedule, we have not evaluated the thoroughness of the revised evaluation process used by the agencies in the second round of funding. We previously reported that NTIA and RUS face several challenges to successfully overseeing the broadband programs. These challenges include: Number and scale of projects. NTIA and RUS will need to monitor and oversee a combined total of 553 projects that are diverse in scale, scope, and technology. The agencies funded several types of broadband projects dispersed nationwide, with at least one project in every state. NTIA funded middle-mile broadband infrastructure projects for unserved and underserved areas, public computer centers, and sustainable broadband adoption projects. RUS funded both last- and middle-mile infrastructure projects in rural areas across the country. The agencies funded projects using multiple types of technology, including wireline, wireless, and satellite. In addition, the agencies awarded funds to many large projects, which may pose a greater risk for misuse of federal funds than smaller projects. One of RUS’s largest projects provided more than $81 million in grant funding and $10 million in loan funding to the American Samoa Telecommunications Authority to replace old copper infrastructure with a fiber-optic network to link the main islands of American Samoa; RUS reported that this project will make broadband services available to 9,735 households, 315 businesses, and 106 anchor institutions, and create an estimated 2,000 jobs. One of NTIA’s largest BTOP projects received more than $154 million, which was awarded to Los Angeles region public safety agencies to deploy a public safety mobile broadband network across Los Angeles County to enable services such as computer-aided dispatch, rapid law-enforcement queries, real-time video streaming, and medical telemetry and patient tracking, among others. Adding to these challenges, NTIA and RUS must ensure that the recipient constructs the infrastructure project in the entire project area, not just the area where it may be most profitable for the company to provide service. For example, the Recovery Act mandates that RUS fund projects where at least 75 percent of the funded area is in a rural area that lacks sufficient access to high-speed broadband service to facilitate rural economic development; these are often rural areas with limited demand, and the high cost of providing service to these areas make them less profitable for broadband providers. Companies may have an incentive to build first where they have the most opportunity for profit and leave the unserved parts of their projects for last in order to achieve the highest number of subscribers as possible. To ensure that Recovery Act funds reach hard-to- serve areas, recipients must deploy their infrastructure projects throughout the proposed area on which their award was based. Providing oversight after Recovery Act funding has ceased. BTOP and BIP projects must be substantially complete within 2 years of the award date and fully complete within 3 years of the award date. As a result, some projects are not expected to be completed until 2013. As we previously reported, NTIA and RUS officials maintain that site visits, in particular, are essential to monitoring progress and ensuring compliance. However, the Recovery Act did not provide specific funding for the administration and oversight of BTOP- and BIP-funded projects beyond September 30, 2010. To effectively monitor and oversee more than $7 billion in Recovery Act broadband funding, NTIA and RUS will have to devote sufficient resources, including staffing, to ensure that recipients fulfill their obligations. Because of these challenges, in our 2009 and 2010 reports, we recommended that NTIA and RUS take several actions to ensure that funded projects receive sufficient oversight: 1. NTIA and RUS should develop contingency plans to ensure sufficient resources for oversight of funded projects beyond fiscal year 2010. Furthermore, we recommended that the agencies incorporate into their risk-based monitoring plans, steps to address the variability in funding levels for postaward oversight beyond September 30, 2010. 2. NTIA and RUS should use information provided by applicants in the first funding round to establish quantifiable, outcome-based performance goals by which to measure program effectiveness. 3. NTIA should determine whether commercial entities receiving BTOP grants should be subject to an annual audit requirement. NTIA and RUS have taken several actions to address these recommendations and improve oversight of funded projects. These actions include: NTIA and RUS developed oversight plans. NTIA has developed and is beginning to implement a postaward framework to ensure the successful execution of BTOP. This framework includes three main elements: (1) monitoring and reporting, (2) compliance, and (3) technical assistance. As part of its oversight plans, NTIA intends to use desk reviews and on-site visits to monitor the implementation of BTOP awards and ensure compliance with award conditions by recipients. NTIA also plans to provide technical assistance in the form of training, Webinars, conference calls, workshops, and outreach for all recipients of BTOP funding to address any problems or issues recipients may have implementing the projects, as well as to assist in adhering to award guidelines and regulatory requirements. Additionally, RUS is putting into place a multifaceted oversight framework to monitor compliance and progress for recipients of BIP funding. Unlike NTIA, which is developing a new oversight framework for BTOP, RUS plans to use the same oversight framework for BIP that it uses for its existing grant and loan programs. The main components of RUS’s oversight framework are (1) financial and program reporting and (2) desk and field monitoring. According to RUS officials, no later than 30 days after the end of each calendar-year quarter, BIP recipients will be required to submit several types of information to RUS, including balance sheets, income statements, statements of cash flow, summaries of rate packages, and the number of broadband subscribers in each community. In addition, RUS intends to conduct desk and site reviews. RUS secured contractor support through fiscal year 2013. RUS extended its contract with ICF International to provide BIP program support through 2013. According to RUS, the agency fully funded the contract extension using Recovery Act funds and no additional appropriations are required to continue the contract through fiscal year 2013. In addition, RUS extended of the term of employment through fiscal year 2011 for 25 temporary employees assigned to assist with the oversight of BIP projects. NTIA established audit requirements for commercial awardees. On May 17, 2010, NTIA reported that for-profit awardees will be required to comply with program-specific audit requirements set forth by the Office of Management and Budget. This audit and reporting requirement will give NTIA the oversight tools it needs to help ensure that projects meet the objectives of the Recovery Act and guard against waste, fraud, and abuse. Even with these actions, NTIA and RUS have not fully addressed all our recommendations and we therefore remain concerned about the oversight of the broadband programs. First, NTIA’s oversight plan assumes the agency will receive additional funding for oversight. For fiscal year 2011, the President’s budget request includes nearly $24 million to continue oversight activities. NTIA reported that it is imperative that it receive sufficient funding to ensure effective oversight. In contrast, the President’s budget request does not include additional resources to continue RUS’s oversight activities, which the agency in part addressed through the extension of its contact with ICF International. However, should there be a reduction in RUS’s fiscal year 2011 budget, the agency will need to assess its impacts and the temporary employment of 25 staff members, as discussed previously. Therefore, we believe the agencies, especially NTIA, need to do more to ensure their oversight plans reflect current fiscal realities. Second, we continue to keep our recommendation regarding performance goals open. NTIA has taken some action on this recommendation, such as creating goals related to new network miles and workstations deployed, but it continues to establish additional goals. Mr. Chairman and Members of the subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the subcommittee might have. For questions regarding this statement, please contact Mark L. Goldstein at (202) 512-2834 or goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Relations can be found on the last page of this statement. Michael Clements, Assistant Director; Matt Barranca; Elizabeth Eisenstadt; Hannah Laufe; and Mindi Weisenbloom also made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Access to broadband service--a highspeed connection to the Internet--is seen as vital to economic, social, and educational development, yet many areas of the country lack access to, or their residents do not use, broadband. To expand broadband deployment and adoption, the American Recovery and Reinvestment Act of 2009 (Recovery Act) provided $7.2 billion to the Department of Commerce's National Telecommunications and Information Administration (NTIA) and the Department of Agriculture's Rural Utilities Service (RUS) for grants or loans to a variety of program applicants. The Recovery Act required the agencies to award all funds by September 30, 2010. This testimony addresses (1) NTIA's and RUS's efforts to award Recovery Act broadband funds and (2) the remaining risks that NTIA and RUS face in providing oversight for funded projects. To conduct this work, GAO reviewed and summarized information from prior GAO work. GAO also reviewed NTIA and RUS reports on the status of the agencies' programs and gathered information from the agencies on steps taken to respond to prior GAO recommendations. In past work, GAO recommended that the agencies take several actions, such as developing contingency plans to ensure sufficient resources for project oversight. NTIA and RUS have taken some steps to address GAO's recommendations. NTIA and RUS awarded grants and loans for several hundred broadband projects in two funding rounds. By the end of fiscal year 2010, NTIA and RUS awarded grants and loans to 553 broadband projects across the country. These projects represent almost $7.5 billion in awarded funds, which exceeds the $7.2 billion provided by the Recovery Act because RUS-- which awards loans that must be repaid to the government--has authority to provide funds in excess of its budget authority. In its review of the first funding round, GAO found that NTIA and RUS, with the help of the agencies' contractors, consistently substantiated information provided by award recipients' applications. GAO has not evaluated the thoroughness of the process used by the agencies in the second round of funding. Even with steps taken to address project oversight, risks to the success of the broadband programs remain. GAO previously reported that NTIA and RUS face several challenges to successfully overseeing the broadband programs. These challenges include (1) monitoring and overseeing a combined total of 553 projects that are diverse in scale, scope, and technology and (2) conducting project oversight activities after the expiration of Recovery Act funding on September 30, 2010. Because of these challenges, in two previous reports, GAO recommended that NTIA and RUS take several actions to ensure that funded projects receive sufficient oversight. For example, GAO recommended that NTIA and RUS develop contingency plans to ensure sufficient resources for oversight of funded projects beyond fiscal year 2010. The agencies have taken several actions to address GAO's recommendations and improve oversight of funded projects--both agencies developed oversight plans, RUS secured contractor support though fiscal year 2013, and NTIA established audit requirements for commercial awardees. Even with these actions, GAO remains concerned about the oversight of the broadband programs. In particular, GAO believes the agencies, and especially NTIA, need to do more to ensure their oversight plans reflect current fiscal realities.

The federal facilities inventory contains a diverse portfolio of assets that are used for a wide variety of missions. According to the fiscal year 2001 financial statements of the U.S. government, the federal government’s real property assets—including land— are worth about $328 billion. In terms of facilities, the latest available governmentwide data from GSA indicated that as of September 30, 2000, the federal government owned and leased approximately 3.3 billion square feet of building floor area worldwide. As shown in figure 1, the Department of Defense (DOD), U.S. Postal Service (USPS), General Services Administration (GSA), and Department of Veterans Affairs (VA) hold the majority of the owned facility space. Figure 1 also shows that DOD, the Department of State (State), GSA, and USPS lease the most space. A set of federal laws, regulations, executive orders, and executive memorandums direct federal facility managers to reduce the energy and environmental impacts of the buildings they manage. In enacting the Federal Energy Management Improvement Act of 1988 (FEMIA), Congress recognized, among other things, that the federal government is the largest single energy consumer in the nation, and that the cost of meeting the federal government’s energy requirements is substantial. The purpose of FEMIA, as amended, is “to promote the conservation and the efficient use of energy and water and the use of renewable energy sources by the federal government.” FEMIA, as amended, sets forth energy performance requirements for federal buildings, establishes the use of life cycle methods and procedures for application of energy conservation measures, and establishes an interagency energy management task force to coordinate the activities of the federal government in promoting energy conservation. The Energy Policy Act of 1992 (EPACT) was intended to further enhance federal energy management practices. In this regard, it requires the GSA Administrator to hold biennial conference workshops in each of the federal regions on energy management, conservation, efficiency, and planning strategy; requires agencies to conduct energy management training; requires the establishment of energy audit teams to perform energy audits of federal facilities; and requires agencies to identify energy efficient products in carrying out their procurement and supply functions. Several executive orders direct agencies to employ green practices in facility and fleet management, and executive memorandums encourage agencies to use energy saving performance contracts and environmentally friendly landscaping practices. In addition to facilities-related initiatives, EPACT establishes a minimum number of alternative fuel vehicles for federal agencies beginning in fiscal year 1993 and requires the Secretary of Energy to carry out an alterative fuel vehicle program. According to the most recently available data from GSA, the federal government operated 596,114 vehicles in fiscal year 2001. Alternative fuels include ethanol, methanol, natural gas, propane, and electricity. Alternative fuel vehicles operate on these fuels, although some of them can operate on gasoline. In total, the Energy Information Administration estimated that the federal government operated 68,890 alternative fuel vehicles in 2002. The primary program for promoting energy efficiency in the federal government is DOE’s Federal Energy Management Program (FEMP). Established in 1973, FEMP works to reduce the energy cost and environmental impact of federal government practices by advancing energy efficiency and water conservation, promoting the use of distributed and renewable energy, and improving utility management decisions at federal sites. FEMP provides a range of services to federal agencies aimed at helping facility managers achieve greater energy efficiency and cost- effectiveness in areas such as new construction, building retrofits, equipment procurement, and utility management. FEMP also advises agencies on establishing partnerships with the private sector to improve energy efficiency, using innovative technologies, and addressing energy- related policy matters as they pertain to federal facilities. For example, one way that FEMP helps agencies become more energy efficient is through utility energy services contracts. In these contracts, the utility company typically arranges financing and constructs the necessary capital improvements to the agencies’ building systems. In return, the utility is repaid over the term of the contract from the cost savings generated by the newly installed, energy-efficient improvements. This allows agencies to become more energy efficient while minimizing the up-front costs of the capital improvements. According to DOE, since 1995 more than 45 electric and gas utilities have provided project financing for energy and water efficiency upgrades at federal facilities, investing more than $600 million through these contracts. As part of its central management responsibilities in federal real property, GSA encourages agencies to use green or sustainable design approaches in federal construction and renovation projects. The objectives of sustainability are to reduce consumption of nonrenewable resources, minimize waste and impact on the environment, optimize site potential, minimize nonrenewable energy consumption, use environmentally preferable products, protect and conserve water, enhance indoor environmental quality, and optimize operational and maintenance practices. The end result of a sustainable design is a healthier working environment that costs less to maintain over time than traditional methods and is better for the environment. To measure sustainability efforts, GSA and other agencies have begun using the Leadership in Energy and Environmental Design (LEED) rating system. The U.S. Green Building Council—a coalition of leaders from across the building industry working to promote buildings that are environmentally responsible, profitable and healthy places to live and work—developed LEED to help apply principles of sustainable design and development to facilities projects. According to information from GSA, by using LEED, agencies can gauge the impact of design decisions on energy efficiency and other sustainability factors. By using the principles of sustainable, green design, agencies are trying to improve energy efficiency, reduce life-cycle costs, and reduce environmental impacts in the design, construction, and operation of federal facilities. Some examples of facilities where these approaches have been applied are the White House, the Pentagon, and the Zion Canyon National Park Visitor Center. According to information from DOE, in 1993 a team of experts from several federal agencies and private organizations helped create a “greening plan” for the White House to be implemented as part of ongoing facility maintenance and operation. Measures taken included changes to the building envelope to reduce energy loss through the roof, windows, and walls; and modifications to the lighting systems to increase efficiency and maximize natural lighting. In 1999, DOE estimated that these and other efforts resulted in cost savings of approximately $300,000 annually through reductions in energy, water, landscaping, and waste removal costs. More recently, according to information from the Office of the Federal Environmental Executive, the White House installed its first-ever solar electric system in late 2002. This included putting solar panels on the roof of the complex’s primary maintenance building and installing two solar thermal systems to heat the pool and spa and provide domestic hot water. According to information from DOE, DOD developed and implemented plans to reduce building energy use and incorporate environmentally sensitive materials, including materials that require the least energy to produce and that can be recycled after use, as part of an extensive $1.1 billion renovation of the Pentagon. As part of these efforts, DOD constructed a new state-of-the-art heating and ventilation plant, modified and insulated the building envelope to increase energy efficiency, and built irrigation systems that use water from the nearby Potomac River to irrigate areas around the building. DOD also built two solar electric systems to demonstrate the reliability and feasibility of using solar energy. One of the goals of the renovation project is to cut energy costs by up to 30 percent by fiscal year 2005, which according to DOD officials could save between $4 million and $5 million each year. Energy efficient design was used, according to information from DOE, in constructing the new Zion National Park Visitor Center and Transportation Center at Zion National Park in Utah that opened in May 2000. According to DOE, the National Park Service worked with DOE to create a design that preserves the natural beauty of the park while saving energy and money. Innovative features included systems that work to naturally cool or heat the facility, electricity producing solar panels, and efficient landscaping that complements the building and reduces the need for irrigation. Overall, DOE predicts that these features will save about $14,000 a year. Figure 2 shows the new Zion National Park Center. In addition to these examples, our work at the Government Printing Office (GPO) and GSA in recent years illustrated the potential cost benefits of investing in energy efficiency. For example: At GPO, the Potomac Electric Power Company (PEPCO) estimated that GPO could save over $400,000 a year on energy and maintenance costs by replacing its outdated air conditioning chillers with new, more energy efficient chillers. We also reported that PEPCO had recommended that GPO consider upgrading its energy inefficient lighting at an estimated cost of $1.6 million to achieve an estimated $800,000 in annual energy savings. According to GPO, it plans to have the chiller project completed in April 2003 and the lighting upgrade completed by May 2003. In our work on the backlog of repair and alteration needs in GSA- controlled federal buildings, we found that 44 buildings in GSA’s inventory each had $20 million or more in repair and alteration backlogs. Many of the repair and alteration needs in these buildings had a direct impact on the energy efficiency of the buildings, including aging and inefficient plumbing, heating, ventilation, and air conditioning systems. For example, the Dwight D. Eisenhower Building in Washington, D.C., had a repair and alteration backlog of $216 million, which included the need to address the building’s antiquated air conditioning system. GSA officials said that this system, which uses about 250 individual window units, is outdated and not efficient in cooling the building or conserving energy. Figure 3 shows an individual air-conditioning unit in a window in the Eisenhower building. Despite the possible benefits of using energy efficient, green approaches in federal construction and renovation projects, available data indicate that some agencies believe they face significant obstacles in implementing these approaches. In April 2001, the U.S. Green Building Council surveyed 11 federal real-property-holding agencies about their green building activities. Among other things, the survey asked the agencies to identify any obstacles they face in achieving green building goals and objectives. The obstacles identified by the agencies generally fell into the following areas: Many architects, engineers, agency stakeholders, contractors, and customers are not knowledgeable about green building practices and technology. The survey respondents generally said that this lack of knowledge and expertise made it difficult to design, build, and promote green buildings. Respondents noted that green projects might have higher initial costs, but actually can be more cost-effective over the life of the facility and have other benefits. The higher initial costs can be more difficult to justify to decisionmakers. Related to higher initial costs, respondents expressed concern that it can be difficult to get top agency leaders to make green buildings a management priority. Consequently, the respondents felt that funding decisions are sometimes made without adequate input from design and construction professionals. Some of the benefits of green buildings are difficult to quantify. For example, the respondents noted that good measures exist for energy and cost savings, but that many green projects also improve employee productivity and well-being. Further, they said that some higher-priced building materials are better for the environment, which is a benefit difficult to quantify. At a time when budget constraints will be pervasive, the higher up-front costs of energy efficient designs could prove to be an especially challenging obstacle. As a result, less costly approaches that are less energy efficient could “look cheaper” in a single year’s appropriation because life cycle costs—including the savings that would result from energy efficient designs—generally occur in later years. In addition to efforts to make federal facilities more energy efficient, other initiatives have attempted to reduce the nation’s consumption of petroleum fuels in transportation through the use of alternative fuels in the federal vehicle fleet. In particular, EPACT set broad goals for replacing the transportation sector’s use of petroleum fuels by at least 10 percent by the year 2000 and at least 30 percent by the year 2010. To help meet these goals, this act required that the federal government, as well as state governments and certain other fleet operators, purchase vehicles that run on alternative fuels, such as ethanol, methanol, natural gas, propane, and electricity, among others. Further, the act specified that, in 1996, 25 percent of the new vehicles purchased by the federal government should operate on alternative fuels, with the target percentage increasing to 33 percent in 1997, 50 percent in 1998, and 75 percent in 1999 and beyond. Based on our assessment in 2000, the federal government as a whole has made progress in acquiring alternative fuel vehicles, although it has not always met the act’s annual targets, as shown in table 1 below. Further, procurement of these vehicles has been inconsistent across federal agencies: Some agencies have exceeded their purchase mandates in a year when others acquired very few or no alternative fuel vehicles. For example, in 1998, USPS acquired 10,000 ethanol alternative fuel vehicles to deliver the mail. This purchase was the major reason why the federal government collectively met the mandated acquisition target of 50 percent (12,362 alternative fuel vehicles) for that year. The federal fleet’s acquisition of alternative fuel vehicles has not reduced gasoline consumption as much as hoped for several reasons. For example, the act does not establish targets for use of alternative fuels—just the acquisition of vehicles that can run on them. However, some of the alternative fuel vehicles that federal agencies have purchased can also run on gasoline, and fleet officials told us individuals driving the vehicles often refuel with gasoline because it is much more convenient to find gasoline refueling stations than refueling stations that supply alternative fuels. In addition, some drivers have been reluctant to use alternative fuel vehicles because of safety concerns or a lack of familiarity with the vehicles’ technology and so choose to use the agencies’ gasoline powered vehicles. According to officials at DOE, the act’s mandates for purchases of alternative fuel vehicles by federal and other fleets were designed to demonstrate the use of the vehicles and stimulate purchases of them by the general public. Some supporters of the mandates believed federal and other fleets would demand enough alternative fuel vehicles to create a general market for these vehicles. However, the vehicles in federal and other fleets represent a small proportion of the vehicles on the road. As a result, according to DOE, if all of these fleets met the act’s targets for alternative fuel vehicles, the use of alternative fuels by these vehicles would represent less than 1 percent of petroleum fuels used in 2010—far below the act’s goals of 10 and 30 percent replacement in 2000 and 2010, respectively. In addition, to reach the 10-percent goal, DOE estimates sales of alternative fuel vehicles nationwide would have to grow by about 1.5 to 1.9 million vehicles per year. By comparison, the entire production of Ford’s passenger cars in 1996 was slightly more than 1.4 million.

GAO testified that constructing and operating buildings requires enormous amounts of energy, water, and materials and creates large amounts of waste. How agencies manage their facilities, along with the vehicles they use to accomplish their missions, has significant cost implications and greatly affects the environment. According to the Department of Energy, energy management is one of the most challenging tasks facing today's federal facilities manager, and sound energy management includes using energy efficiently, ensuring reliable supplies, and reducing costs whenever possible. The federal role in energy conservation was also highlighted in the President's National Energy Policy, in which the President directed heads of executive departments and agencies to "take appropriate actions to conserve energy use at their facilities to the maximum extent consistent with the effective discharge of public responsibilities." With approximately 3.3 billion feet of facility space and over one-half million automobiles, the federal government is the largest single energy consumer in the nation. Various laws, regulations, and executive memorandums direct federal facility managers to reduce energy consumption and environmental impacts of the buildings they manage. Agencies also must follow other requirements for the acquisition and use of alternative fuel vehicles, which use fuels like methanol, propane, and natural gas, to name a few. In constructing and renovating facilities, agencies have begun using "green" design approaches, which are intended to result in energy efficiency and minimal impact on the environment. Such approaches have been used at the White House, Pentagon, and the Zion National Park Visitor Center. Despite the possible benefits, some agencies believe they face obstacles in employing green practices in construction and renovation projects. These include key stakeholders--architects, engineers, agency staff--who are not familiar with green approaches, higher initial costs of green projects, difficulty getting agency management buy-in, and difficulty quantifying the benefits of green facility designs. In addition to efforts to make federal facilities more energy efficient, the federal government has also attempted to reduce the nation's consumption of petroleum fuels in transportation through the use of alternative fuel vehicles in the federal vehicle fleet.

In August 2008, we reported that almost half of MUAs nationwide— 47 percent, or 1,600 of 3,421—lacked a health center site in 2006, and there was wide variation among the four census regions and across states in the percentage of MUAs that lacked health center sites. (See fig. 1.) The Midwest census region had the most MUAs that lacked a health center site (62 percent), while the West census region had the fewest MUAs that lacked a health center site (32 percent). More than three-quarters of the MUAs in 4 states—Nebraska (91 percent), Iowa (82 percent), Minnesota (77 percent), and Montana (77 percent)—lacked a health center site. (See app. I for more detail on the percentage of MUAs in each state and the U.S. territories that lacked a health center site in 2006.) In 2006, among all MUAs, 32 percent contained more than one health center site; among MUAs with at least one health center site, 60 percent contained multiple health center sites, with about half of those containing two or three sites. Almost half of all MUAs in the West census region contained more than one health center site, while less than one-quarter of MUAs in the Midwest contained more than one site. The states with three-quarters or more of their MUAs containing more than one health center site were Alaska, Connecticut, the District of Columbia, Hawaii, New Hampshire, and Rhode Island. In contrast, Nebraska, Iowa, and North Dakota were the states where less than 10 percent of MUAs contained more than one site. We could not determine the types of primary care services provided at individual health center sites because HRSA did not collect and maintain readily available data on the types of services provided at individual sites. While HRSA requests information from applicants in their grant applications on the services each site provides, in order for HRSA to access and analyze individual health center site information on the services provided, HRSA would have to retrieve this information from the grant applications manually. HRSA separately collects data through the UDS from each grantee on the types of services it provides across all of its health center sites, but HRSA does not collect data on services provided at each site. Although each grantee with community health center funding is required to provide the full range of comprehensive primary care services, HRSA does not require each grantee to provide all services at each health center site it operates. HRSA officials told us that some sites provide limited services—such as dental or mental health services. Because HRSA lacks readily available data on the types of services provided at individual sites, it cannot determine the extent to which individuals residing in MUAs have access to the full range of comprehensive primary care services provided by health center grantees. This lack of basic information can limit HRSA’s ability to assess the full range of primary care services available in needy areas when considering the placement of new access points and can also limit the agency’s ability to evaluate service area overlap in MUAs. In August 2008, we reported that our analysis of new access point grants awarded in 2007 showed that these awards reduced the number of MUAs that lacked a health center site by about 7 percent. Specifically, 113 fewer MUAs in 2007—or 1,487 MUAs in all—lacked a health center site when compared with the 1,600 MUAs that lacked a health center site in 2006. (See app. I.) As a result, 43 percent of MUAs nationwide lacked a health center site in 2007. Despite the overall reduction in the percentage of MUAs nationwide that lacked health center sites in 2007, regional variation remained. The West and Midwest census regions continued to show the lowest and highest percentages of MUAs that lacked health center sites, respectively. (See fig. 2.) Three of the four census regions showed a 1 or 2 percentage point decrease since 2006 in the percentage of MUAs that lacked a health center site, while the South census region showed a 5 percentage point decrease. We found that the minimal impact of the 2007 awards on regional variation was due, in large part, to the fact that more than two-thirds of the nationwide decline in the number of MUAs that lacked a health center site—77 out of the 113 MUAs—occurred in the South census region. In contrast, only 24 of the 113 MUAs were located in the Midwest census region, even though the Midwest had nearly as many MUAs that lacked a health center site in 2006 as the South census region. While the number of MUAs that lacked a health center site declined by 12 percent in the South census region, the other census regions experienced declines of about 4 percent. The South census region experienced the greatest decline in the number of MUAs lacking a health center site in 2007 in large part because it was awarded more new access point grants that year than any other region. Specifically, half of all new access point awards made in 2007— from the two separate new access point competitions—went to applicants from the South census region. For example, when we examined the High Poverty County new access point competition, in which 200 counties were targeted by HRSA for new health center sites, we found that 69 percent of those awards were granted to applicants from the South census region. The greater number of awards made to the South census region may be explained by the fact that nearly two-thirds of the 200 counties targeted were located in the South census region. When we examined the open new access point competition, which did not target specific areas, we found that the South census region also received a greater number of awards than any other region under that competition. Specifically, the South census region was granted nearly 40 percent of awards; in contrast, the Midwest received only 17 percent of awards. In our August 2008 report, we noted that awarding new access point grants is central to HRSA’s ongoing efforts to increase access to primary health care services in MUAs. From 2006 to 2007, HRSA’s new access point awards achieved modest success in reducing the percentage of MUAs that lacked a health center site nationwide. However, in 2007, 43 percent of MUAs continued to lack a health center site, and the new access point awards made in 2007 had little impact on the wide variation among census regions and states in the percentage of MUAs lacking a health center site. The relatively small effect of the 2007 awards on geographic variation may be explained, in part, because the South census region received a greater number of awards than other regions, even though the South was not the region with the highest percentage of MUAs lacking a health center site in 2006. We reported that HRSA awards new access point grants to open new health center sites, which increase access to primary health care services for underserved populations in needy areas, including MUAs. However, HRSA’s ability to target these awards and place new health center sites in locations where they are most needed is limited because HRSA does not collect and maintain readily available information on the services provided at individual health center sites. Having readily available information on the services provided at each site is important for HRSA’s effective consideration of need when distributing federal resources for new health center sites, because each health center site may not provide the full range of comprehensive primary care services. This information could also help HRSA assess any potential overlap of services provided by health center sites in MUAs. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or Members of the Committee may have. For further information about this statement, please contact Cynthia A. Bascetta at (202) 512-7114 or bascettac@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were Helene Toiv, Assistant Director; Stella Chiang; Karen Doran; and Karen Howard. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Health centers funded through grants under the Health Center Program--managed by the Health Resources and Services Administration (HRSA) of the U.S. Department of Health and Human Services (HHS)--provide comprehensive primary care services for the medically underserved. The statement GAO is issuing today summarizes an August 2008 report, Health Resources and Services Administration: Many Underserved Areas Lack a Health Center Site, and the Health Center Program Needs More Oversight (GAO-08-723). In that report, GAO examined to what extent medically underserved areas (MUA) lacked health center sites in 2006 and 2007. To do this, GAO obtained and analyzed HRSA data and grant application In its August 2008 report, which is summarized in this statement, GAO found the following: (1) Grant awards for new health center sites in 2007 reduced the overall percentage of MUAs lacking a health center site from 47 percent in 2006 to 43 percent in 2007. (2) There was wide geographic variation in the percentage of MUAs that lacked a health center site in both years. (3) Most of the 2007 nationwide decline in the number of MUAs that lacked a health center site occurred in the South census region, in large part because half of all awards made in 2007 for new health center sites were granted to the South census region. (4) HRSA lacked readily available data on the services provided at individual health center sites. GAO concluded that from 2006 to 2007, HRSA's grant awards to open new health center sites reduced the number of MUAs that lacked a site by about 7 percent. However, in 2007, 43 percent of MUAs continued to lack a health center site, and the grants for new sites awarded that year had little impact on the wide variation among census regions and states in the percentage of MUAs lacking a health center site. GAO reported that HRSA's grants to open new health center sites increased access to primary health care services for underserved populations in needy areas, including MUAs. However, HRSA's ability to place new health center sites in locations where they are most needed was limited because HRSA does not collect and maintain readily available information on the services provided at individual health center sites. Because each health center site may not provide the full range of comprehensive primary care services, having readily available information on the services provided at each site is important for HRSA's effective consideration of need when distributing federal resources for new health center sites.

When the President declares a state of emergency after a natural or other major disaster, the declaration gives the federal government the authority to engage in various emergency response activities, many of which federal agencies provide through contracts with private businesses, including those for debris removal, reconstruction, and the provision of supplies. Federal agencies’ contracts with private businesses, whether made in the normal course of agency operations or specifically related to a natural disaster declaration, in most cases, are subject to certain goals to increase participation by various types of small businesses. The Small Business Act requires that the President set a governmentwide goal each fiscal year for small business participation for the total value of all prime contracts awarded directly by an agency. Additionally, the Small Business Act sets annual prime contract dollar goals for participation by five specific types of small businesses: small businesses, small disadvantaged businesses, businesses owned by women, businesses owned by service-disabled veterans, and businesses located in historically underutilized business zones (HUBZone). The Stafford Act also requires federal agencies to give contracting preferences, to the extent feasible and practicable, to organizations, firms, and individuals residing in or doing business primarily in the area affected by a major disaster or emergency. The Federal Acquisition Regulation (FAR) implements many federal procurement statutes and provides executive agencies with uniform policies and procedures for acquisition. For example, the FAR generally requires that executive agencies report information about procurements directly to the Federal Procurement Data System-Next Generation (FPDS-NG), a governmentwide contracting database that collects, processes, and disseminates official statistical data on all federal contracting activities that are greater than the micro-purchase threshold (generally $3,000). This system automatically obtains from other systems or online resources additional information that is importan procurement, such as the contractor’s location. The FAR also requires agencies to measure small business participation in their acquisition programs. A small business may participate via prime contracts—which are contracts awarded directly by a federal agency—or through subcontracts. Any business receiving a contract directly from a federal executive agency for more than the simplified acquisition threshold must agree in the contract that small businesses will be given the “maximum practicable opportunity” to participate in the contract “consistent with its efficient performance.” Additionally, in general, for acquisitions (or modifications to contracts) that (1) are individually expected to exceed $650,000 ($1.5 million for construction contracts) and (2) have subcontracting possibilities, the solicitation shall require the apparently successful offeror in a negotiated acquisition to negotiate a subcontracting plan that is acceptable to the contracting officer, and each invitation for bid shall require the bidder selected for award to submit a subcontracting plan to be eligible for award. The subcontracting plan must include certain information, such as a description of the types of work the prime contractor believes it is likely to award to subcontractors, as well as goals, expressed as a percentage of total planned subcontracting dollars, for the use of small businesses. Generally, contracts that offer subcontracting possibilities and are expected to exceed the monetary thresholds that we have previously mentioned are to include certain clauses. These clauses require that for contracts that have individual subcontracting plans, prime contractors generally must semiannually and at project completion report on their progress toward reaching the goals in their subcontracting plans. Generally, contractors that have individual subcontracting plans are required to report on their subcontracting goals and accomplishments twice a year to the federal government through the Electronic Subcontracting Reporting System (eSRS), which is a governmentwide database for capturing this information. Furthermore, the agencies’ administrative contracting officers are responsible for monitoring the prime contractors’ activities and evaluating and documenting contractor performance under any subcontracting plan included in the contract. The contracting officer is tasked with acknowledging receipt of the reports submitted to eSRS. Federal agencies directly awarded $20.5 billion in contracts nationwide between fiscal years 2005 and 2011 for recovery efforts related to Hurricanes Katrina and Rita. Of this $20.5 billion, small businesses located in four Gulf Coast states received approximately $2.7 billion (13.3 percent), and small businesses in the rest of the United States received United States received about $2.6 billion (see fig. 1). about $2.6 billion (see fig. 1). Among the four Gulf Coast states in our review, Louisiana small businesses directly received the greatest amount of federal contract funds, about $1.4 billion. However, Alabama had the highest proportion (47 percent) of total prime contract dollars awarded to small businesses (see fig. 2). In the four states, the amount of federal contract funds directly awarded to specific types of small businesses for Hurricanes Katrina- and Rita- related recovery efforts varied (see fig. 3). Small disadvantaged businesses: Of the approximately $2.7 billion that went directly to small businesses, about $804 million (29 percent) went to small disadvantaged businesses. Small disadvantaged businesses in Louisiana received the greatest amount of federal contract funds awarded to this category (more than $420 million). HUBZones: Small businesses in HUBZones directly received about $560 million (20 percent of federal contract funds directly awarded to Gulf Coast small businesses). Small businesses in HUBZones in Louisiana received the greatest amount (about $292 million). Women-owned small businesses: About $381 million were directly awarded to women-owned small businesses (14 percent of all federal contract funds directly awarded to Gulf Coast small businesses). Women-owned small businesses in Louisiana received the greatest amount (approximately $182 million). Veteran-owned small businesses: About $270 million (or 10 percent of federal contracts directly awarded to Gulf Coast small businesses) went to this category. Veteran-owned small businesses in Louisiana received about $180 million, the most in the Gulf Coast states. The Corps and DOD could not demonstrate that they consistently were monitoring subcontracting accomplishment information as required. As we have previously discussed, subcontracting plans are generally required for construction contracts (or modifications to contracts) that are expected to exceed $1.5 million and that have subcontracting possibilities. The FAR states that subcontracting plans must include assurances that prime contractors will report on their progress toward reaching their subcontracting goals. Generally, contracts that offer subcontracting possibilities and are expected to exceed the monetary thresholds above are to include certain clauses. In general, these clauses require contractors to submit these reports semiannually and at project completion. The Corps and DOD use these reports to monitor contractor performance under subcontracting plans. We reviewed the 57 construction contracts that the Corps, DHS, DOD, and GSA awarded directly to large businesses in fiscal years 2005– 2009 for hurricane- related recovery and that were listed in FPDS-NG as having subcontracting plans. The Corps awarded 29 of these contracts but could not provide subcontracting accomplishment report information for 11. DOD awarded 14 contracts and could not provide information for 2 (see table 1). Without these reports, either in eSRS or paper form, contracting officials lacked a key tool for monitoring contractors’ performance under subcontracting plans. As of 2005, all contractors with subcontracting reporting requirements related to contracts with civilian agencies were generally required to submit, with some exceptions, summary subcontract reports into eSRS, a Web-based govermentwide subcontracting system that allows contractors to submit and agency officials to review subcontracting accomplishment reports electronically rather than using paper forms. DOD implemented eSRS incrementally and began primarily relying on eSRS for subcontract reporting as of 2009. The development of eSRS was intended to create more visibility and transparency into the process of gathering information on federal subcontracting accomplishments. In addition to requirements for contractors to submit subcontracting accomplishment information, the FAR requires that agency contracting officers review subcontracting plans for adequacy and take action to enforce the terms of the contract if notified that the contractor is failing to meet its commitments under their subcontracting plan. Agency administrative contracting officials are required to provide information to the contracting officer on the extent to which the contractor is meeting subcontracting plan goals and to notify the contracting officer if the contractor is failing to comply in good faith with the subcontracting plan. In determining whether a contractor failed to make a good-faith effort to comply with its subcontracting plan, a contracting officer must look to the totality of the contractor’s actions, consistent with the information and assurances provided in its plan. When considered in the context of the contractor’s total effort in accordance with its plan, failure to submit contracting accomplishment reports may be considered an indicator of a failure to make a good-faith effort. These requirements were in place prior to the 2005 hurricanes and have continued in the eSRS environment. New requirements were added to the FAR in April 2008 that additionally require that contracting officers acknowledge receipt of or reject the subcontracting accomplishment reports submitted by contractors in eSRS. In addition, DHS, GSA, DOD, and the Corps have agency guidance that spells out the contract administration duties necessary to monitor contractor compliance with subcontracting plan reporting requirements. Without subcontracting accomplishment information, contracting officials at the Corps and DOD lack a key tool used to monitor contractor performance under subcontracting plans. In the absence of these reports, the Corps and DOD could not demonstrate that they were consistently monitoring contractor performance under the plans. As we have previously noted, the Corps did not provide subcontracting accomplishment report information for 11 contracts and could not explain why the information was unavailable. DOD did not provide us with subcontracting information on 2 of 14 construction contracts we reviewed. DOD officials told us that after searching retained records, they could not find any paper or electronic subcontracting accomplishment reports. We concluded that without monitoring, the Corps and DOD were limited in their ability to determine the extent to which their prime contractors followed subcontracting plans. We recommended that the Secretary of Defense take steps to ensure that contracting officials consistently comply with requirements to monitor the extent to which contractors were meeting subcontracting plan goals, including requirements for contractors with subcontracting plans to submit subcontracting accomplishment reports. Once these reports are submitted, contracting officials should maintain and regularly review them to determine whether contractors have been following subcontracting plans. To ensure consistent compliance, DOD and the Corps small business offices should monitor such actions by contracting officials, as deemed appropriate. DOD did not concur with the implication that its contracting personnel did not enforce requirements. We recently received information from both DOD and the Corps that indicates that they have initiated actions to address our recommendation. Chair Landrieu, Ranking Member Snowe, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact William T. Woods at (202) 512-4841 or woodsw@gao.gov or William B. Shear at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony included Marshall Hamlett, Assistant Director; Christine Houle; Julia Kennon; Triana McNeil; Marc Molino; Barbara Roesmann, and Alyssa Weir. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses small business participation in Gulf Coast rebuilding after Hurricanes Katrina and Rita. Federal agencies directly awarded $20.5 billion in contracts nationwide between fiscal years 2005 and 2011 for recovery efforts related to these hurricanes. These contracts are subject to federal procurement regulations and, in most cases, are generally subject to certain goals to increase participation by small businesses. This statement is based on a report we issued in July 2010, which discussed the extent to which Gulf Coast small businesses received federal contract funds for recovery efforts, with data on contract funds updated through fiscal year 2011 where possible. More specifically, the statement discusses (1) the amounts that small businesses nationwide and small businesses in four Gulf Coast states received directly from federal agencies through contracts for relief and recovery efforts related to Hurricanes Katrina and Rita; and (2) the extent to which four agencies--the U.S. Army Corps of Engineers (Corps), Department of Homeland Security (DHS), Department of Defense (DOD) excluding the Corps, and General Services Administration (GSA)--monitored subcontracting accomplishment information as required for selected contracts. Small businesses located in four Gulf Coast states (Alabama, Florida, Louisiana, and Texas) received about $2.7 billion (13.3 percent) of the $20.5 billion federal agencies directly awarded nationwide in contracts for hurricane recovery between fiscal years 2005 and 2011. Small businesses in the rest of the United States received about $2.6 billion (12.9 percent). The Corps and the rest of DOD--two of four agencies that awarded the most in federal contracts for hurricane recovery--could not demonstrate that they consistently were monitoring subcontracting accomplishment data for 13 of the 43 construction contracts for which subcontracting plans were required. We recommended that the Secretary of Defense take steps to ensure that contracting officials with the Corps and other DOD departments consistently comply with requirements to monitor the extent to which contractors were meeting subcontracting plan goals. DOD did not concur with the implication that its contracting personnel did not enforce requirements. We recently received information from both DOD and the Corps that indicates that they have initiated actions to address our recommendation.

Our work has shown that concession activities on federal lands are a large industry that generates billions of dollars. In April 1996, we issued a report on governmentwide concessions activities. Unlike our past work, which examined concession activities within the six land management agencies, this report reviewed concession operations throughout the civilian agencies of the federal government and included concession activities at agencies such as NASA, the U.S. Postal Service, the Department of Justice, and the Department of Veterans Affairs—just to name a few. In the report, we found that in fiscal year 1994, there were 11,263 concession agreements managed by 42 different federal agencies. Concessioners operating under these agreements generated about $2.2 billion in revenues, and paid the government about $65 million in fees and about $23 million in other forms of compensation. The average total rate of return to the government from concessioners that had their concession agreement initiated or extended in fiscal year 1994 was about 3.6 percent of concession revenues. While 42 different federal agencies have concession agreements, 93 percent of these agreements and revenues are managed by the six land management agencies. However, in spite of having the largest programs, the rate of return from concessioners operating in the land management agencies is significantly less than the return generated from concessioners in other federal agencies. We found that for concession agreements that were either initiated or extended during fiscal year 1994, the average return to the government from concessions in the land management agencies was about 3 percent—in the case of the Park Service it was about 3.5 percent. In contrast, the return from concessions in the other nonland management agencies averaged about 9 percent. (See app. I for a list of rates of return from concessioners for agreements initiated or extended during fiscal year 1994 for each federal agency in our review.) Our analysis of rates of return throughout the federal government indicated that there are three key factors that affect the rate of return to the government. These are (1) whether the return from a concession agreement was established through a competitive bidding process, (2) whether the incumbent concessioner had a preferential right of renewal in the award of a follow-on concession agreement, and (3) whether the agency had the authority to retain a majority of the fees generated from the concession agreement. Our work indicated that when concession agreements are awarded through a competitive process, the rate of return to the federal government was higher. Specifically, for concession agreements initiated during fiscal year 1994, the return to the government from concession agreements that were competed averaged 5.1 percent of the concessioners’ gross revenues. When competition was not used in establishing concession agreements, the return to the government averaged about 2.0 percent. While the return to the government is higher for concessions that are competitively selected, very few concessions agreements have fees established through competition—especially among concessions in the land management agencies. For concession agreements that were entered into during fiscal year 1994, only 8.6 percent of over 2,100 agreements in the land management agencies were established through competition. In contrast, for concession agreements in the nonland management agencies, about 96 percent of 101 concession agreements were established through competition during this time period. Another factor affecting the return to the government from concessioners is the existence of preferential rights of renewal. These rights primarily affect concessioners in the Park Service. Under the Concessions Policy Act of 1965, Park Service concessioners that have performed satisfactorily have a preferential right of renewal when their concession agreements expire. This preference has generally meant that when a concession agreement expires, an incumbent concessioner has the right to match or better the best competing offer to win the award of the next concession agreement. This preference tends to put a chilling effect on competition because qualified businesses are reluctant to expend time and money preparing bids in a process where the award is most likely to go to the incumbent concessioners. With fewer bidders, there is less competitive pressure to increase the return to the government. Our analysis of Park Service concession agreements showed that in fiscal year 1994, new concession agreements that were awarded with a preferential right of renewal resulted in a return to the government of about 3.8 percent. In contrast, Park Service concession agreements that were competed in the same year without any preference resulted in an average return to the government of 6.4 percent. A third factor that affects the rate of return to the government from concessioners is the agencies’ authority to retain fees. Our analysis of federal concessions showed that when agencies are permitted to retain over 50 percent of the fees from concessions, the return to the government is over 3 times higher than agencies that are not authorized to retain this level of fees. In addition, five nonland management agencies that had authority to retain most of their fees managed 5 percent of the concession agreements throughout the government. These agreements generated about 3 percent of the total revenues from concessioners, but generated 18 percent of the total concession fees. In contrast, the six land management agencies, which have not had authority to retain concession fees, have over 90 percent of the total concession agreements and concession revenues, but generate only 73 percent of the total concession fees. Thus, our work showed that agencies authorized to retain fees obtained more fees in proportion to their concessioners’ revenue than agencies that were not authorized to retain fees. For over 20 years, we have issued reports and testimonies that highlighted the need for reform of federal concession laws and policies. Our most recent work, which I have just summarized, is further evidence of the need for reform. Based on this body of work, it is our view that any efforts at reforming concessions should consider (1) encouraging greater competition in the awarding of concession agreements, including eliminating preferential rights of renewal, and (2) under what circumstances it would be appropriate to provide opportunities for the land management agencies to retain at least a portion of their concession fees. In addition, some concession reform proposals have suggested removing possessory interest—the right of concessioners in the Park Service to be compensated for facilities constructed or acquired on federal lands. At issue are the costs of acquiring concessioner-owned facilities relative to the benefits realized by having greater control through government ownership of facilities. Encouraging greater competition in awarding concession agreements, and eliminating preferential rights of renewal, should be a primary goal of reforming concessions. Using a competitive bid process to award concession agreements has several benefits. Our April 1996 report presents evidence that where there is competition in awarding concession agreements the rate of return to the government is significantly higher. Competition among qualified bidders would also likely result in improving the level or quality of services provided to the public. Finally, using competition to establish fees would eliminate much of the need for elaborate and at times cumbersome fee systems used by the land management agencies. A significant impediment to competition is preferential rights of renewal granted to Park Service concessioners by the Concessions Policy Act of 1965. Thus, in our view, any legislative effort to reform existing concessions law should consider including the elimination of preferential rights of renewal. Our April 1996 report on concessions indicated that when agencies are authorized to retain most of their concession fees, the return to the government from its concessioners is significantly higher. However, permitting agencies to retain a portion of the fees from concessioners has both costs and benefits. Our work has shown that retaining fees for use in agencies’ operations serves as a powerful incentive in managing concessioners. However, if the Congress decides to use increased fees to supplant rather than supplement existing appropriations, this incentive would be diminished. In addition, our past work in the Park Service indicated that the agency has a multibillion dollar backlog of unmet maintenance and infrastructure needs. Furthermore, in recent years, the agency has had to cutback on the level of visitor services provided to the public. One option to help address these issues, which we have raised in the past, might be to provide additional financial resources through fees—including entrance fees, user fees, and concession fees. While retaining fees will not resolve such problems as multibillion dollar backlogs, it will nonetheless provide some assistance to parks units across the nation. It is important to note that permitting the land management agencies to retain concession fees is a form of “backdoor” spending authority, and as such raises questions of oversight and accountability. In addition, earmarking revenues reduces congressional flexibility to shift budget priorities. Furthermore, permitting the land management agencies to retain fees could also raise scoring and compliance issues under the Budget Enforcement Act. These issues need to be weighed in considering whether to permit the land management agencies to retain fees. One issue that is frequently discussed as part of Park Service concession reform is possessory interest—the concessioners right to be compensated for improvements constructed or acquired on federal lands. Possessory interest was established by the Concessions Policy Act of 1965 and is unique to the Park Service. Bills to reform concessions law have often differed in their treatment of possessory interest. Some proposals have sought to get rid of possessory interests while others would allow it to remain. There are some costs and benefits of removing possessory interest which I would like to discuss. Bills which have proposed to remove possessory interest have suggested it be done over time. As existing concession contracts expired, the new contracts would contain language directing the concessioner to depreciate the value of its possessory interest over an extended period of time. Once the possessory interest was fully depreciated, the structure would be owned by the government. Removing possessory interest in concession facilities would provide the Park Service with greater control over these facilities and would allow greater flexibility in managing concessioners. For example, when possessory interest is provided for, the Park Service would have to use appropriations to buy out the possessory interest of a nonperforming concessioner. If possessory interest were eliminated, the Park Service could terminate the contract of a nonperforming concessioner without having to use appropriations to acquire concession facilities. In addition, government ownership of concessions facilities has the potential of expanding competition for concession contracts. If the concession facilities are government owned, prospective bidders for concession contracts would not be required to expend capital to acquire facilities. As such, the Park Service may receive more bids for the award of concession contracts which has the potential of increasing the return to the government. However, in the near-term, acquiring these facilities could be costly. If the Park Service acquired a concession facility during the term of the contract, the fees it received would likely be lower because the concession would probably not give up its ownership interest in a park facility without some form of compensation in return. This result becomes more significant if, as the administration proposes, concession fees are returned to the parks. While the Park Service would gain ownership of the facilities, it would be getting less, and possibly substantially less, in fees during the acquisition period. In addition, once the Park Service owns these facilities, it is responsible for maintaining them. The Park Service currently has a multibillion dollar backlog of deferred maintenance. If the concessions’ possessory interest is eliminated and the Park Service acquires additional facilities that need to be maintained, its workload will increase. While the Park Service could require the facilities to be maintained as part of a concession contract, such a requirement may lead to some reduction in the fees it receives. Mr. Chairman, in recent years, an understanding has emerged that the federal government needs to be run in a more businesslike manner than in the past. It is clear that agencies such as the Park Service can learn some lessons about competition and incentives from nonland management agencies. However, if the Congress proceeds with reforming concessions, it should consider (1) changing existing concessions law to encourage greater competition and eliminating preferential rights of renewal, and (2) providing opportunities for the Park Service to retain at least a portion of its concession fees. This concludes my statement. I would be happy to answer any questions that you or other members of the Subcommittee may have. Total (fees + special accounts) The first copy of each GAO report and testimony is free. 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GAO discussed the need for concessions reform in the National Park Service as well as in other land management agencies, focusing on a comparison of the Park Service's concessions programs with those of other federal agencies. GAO noted that: (1) concession activities on federal lands is a large industry that generates billions of dollars; (2) GAO's most recent work showed that over 11,000 concession agreements were managed by civilian agencies throughout the federal government; (3) concessioners operating under these agreements generated about $2.2 billion in gross revenues; (4) over 90 percent of concession agreements and the concession gross revenues were from concessioners in the six land management agencies--with many of the largest concessioners operating in the Park Service; (5) for agreements that were either initiated or extended during fiscal year 1994, concessioners in all of the land management agencies paid the government an average of about 3 percent of their gross revenues; (6) in the case of the Park Service, the average return was about 3.5 percent; (7) in contrast, concessioners in nonland management agencies paid fees of about 9 percent of their gross revenues; (8) the key factors affecting rate of return to the government were: (a) whether the fee was established through competition; (b) whether the agency was permitted to retain most of the concessions fees it generated; and (c) whether an incumbent concessioner had a preferential right in renewing its concession agreement with the government; (9) throughout the federal government, rates of return from concessioners were higher when established through competition; (10) in addition, agencies which had authority to retain fees and which did not grant preferential rights of renewal generally obtained higher rates of return to the government from concessioners; (11) in previous reports, GAO noted that as Congress considers reforming concessions in the Park Service, it may want to consider: (a) encouraging greater competition by eliminating preferential rights of renewal; and (b) providing opportunities for the Park Service to retain at least a portion of concession fees; (12) in addition, some concession reform proposals have suggested removing possessory interest--the concessioners right to be compensated for facilities constructed or acquired on federal lands; and (13) at issue are the long-term costs of acquiring concessioner-owned facilities relative to the benefits realized by having greater control through government ownership of facilities.

As shown in figure 2, Congress and executive branch agencies have made progress in addressing or partially addressing many actions we identified from 2011 to 2016. As of March 2017, 82 percent of the 645 total actions we had identified since 2011 have been addressed or partially addressed. See our online Action Tracker for the status of all actions. Congress and executive branch agencies have addressed 329 (51 percent) of the 645 actions we identified from 2011 to 2016 (see table 3). We found that these efforts have resulted in roughly $136 billion in financial benefits—$75 billion from 2010 through 2016, with at least an additional $61 billion in estimated benefits projected to be accrued in future years. The progress Congress and executive branch agencies have made in addressing our open actions has resulted in significant financial benefits. Table 4 highlights examples of these results. Congress has also implemented a number of key government-wide statutory requirements in recent years that could help identify areas of fragmentation, overlap, or duplication, or help address issues we raise in this report, including the following: The Program Management Improvement Accountability Act. The act seeks to improve program and project management in certain federal agencies. Among other things, the act requires the Deputy Director of the Office of Management and Budget (OMB) to adopt and oversee implementation of government-wide standards, policies, and guidelines for program and project management in executive agencies. It further creates a Program Management Policy Council to act as an interagency forum for improving practices related to program and project management. This interagency collaboration and strengthened program management could help reduce fragmentation, overlap, and duplication among federal agencies. The Digital Accountability and Transparency Act of 2014 (DATA Act). The DATA Act expands on previous federal transparency requirements to link federal agency spending to federal program activities so that taxpayers and policymakers can more effectively track federal spending. Full and effective implementation of the act offers the promise of a much more complete and accurate understanding of federal spending by enabling—for the first time—the federal government as a whole to track these funds at multiple points in the federal spending life cycle, and significantly increasing the types and transparency of data available to Congress, agencies, and the general public. In what will be the first reporting of data in compliance with the act’s requirements, agencies must submit second-quarter fiscal year 2017 data in compliance with the act’s requirements for inclusion on USASpending.gov in May 2017. This information could potentially help identify areas of fragmentation, overlap, or duplication. Information Technology (IT) acquisition reform, known as the Federal Information Technology Acquisition Reform Act (FITARA). The effective and efficient acquisition and management of IT investments has been a long-standing challenge in the federal government. FITARA holds promise for improving agencies’ acquisition of IT and enabling Congress to monitor agencies’ progress and hold them accountable for reducing duplication and achieving cost savings. FITARA includes several specific requirements related to existing areas in our fragmentation, overlap, and duplication work, such as implementing the federal data-center consolidation initiative, enhancing transparency, improving risk management, and maximizing the benefits of government-wide software purchasing and the federal strategic sourcing initiative. The Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA). Improper payments are a long-standing, widespread, and significant problem in the federal government— totaling over $1.2 trillion since reporting requirements first began at some agencies in 2003. IPERIA requires agencies to ensure that a thorough review of available databases occurs prior to the release of federal funds. We have identified numerous actions to reduce improper payments in several areas, such as Medicare improper payments, Medicaid improper payments, and refundable tax credits. While Congress and executive branch agencies have made progress toward addressing the 724 total actions we have identified since 2011, further steps are needed to fully address the 395 actions that remain open (i.e., partially or not addressed). We estimate that tens of billions of dollars in additional financial benefits could be realized should Congress and executive branch agencies fully address open actions. In addition to producing financial benefits, these actions make government more efficient; improve major government programs or agencies; reduce mismanagement, fraud, waste, and abuse; and increase assurance that programs comply with laws and funds are legally spent. Congress has used our work to identify legislative solutions to achieve cost savings, address emerging problems, and find efficiencies in federal agencies and programs. Our work has contributed to a number of key authorizations and appropriations. Congressional oversight has been critical in realizing the full benefits of our suggested actions, and it will continue to be critical in the future. In our 2011 to 2017 annual reports, we directed 97 actions to Congress, including 2 new congressional actions we identified in 2017. Of the 97 actions, 61 remained open (9 were partially addressed and 52 were not addressed) as of March 2017. Table 5 highlights areas with significant open actions directed to Congress. In our 2011 to 2017 annual reports, we directed 627 actions to executive branch agencies, including 77 new actions identified in 2017. Of the 627 actions, over half—334—remained open (192 were partially addressed and 142 were not addressed) as of March 2017. While these open actions span the government, a substantial number of actions are directed to seven agencies that made up 84 percent—$3.6 trillion—of federal outlays in fiscal year 2016; see figure 3. As shown in figure 4, 10 agencies have at least 20 open actions. In our 2011 to 2017 reports, we directed 168 actions to the Department of Defense (DOD) in areas that contribute to DOD’s effectiveness in providing the military forces needed to deter war and to protect the security of the United States. As of March 2017, 95 of these 168 actions remained open. DOD represented about 15 percent of federal spending in fiscal year 2016, with outlays totaling about $637.6 billion. Our work suggests that effectively implementing our open actions, including those related to areas listed in table 6, could yield substantial financial benefits. In our 2011 to 2017 reports, we directed 98 actions to the Department of Health and Human Services (HHS) in areas that contribute to HHS’s mission to enhance the health and well-being of Americans. HHS administers Medicare, which in fiscal year 2016 financed health services for over 57 million beneficiaries at an estimated cost of $696 billion. HHS also administers Medicaid, which covered an estimated 72.2 million low- income people in fiscal year 2016 at a cost of $575.9 billion. HHS represents about 28 percent of the fiscal year 2016 federal budget, with outlays totaling about $1.2 trillion. As of March 2017, 56 of HHS’s 98 actions remained open. Our work suggests that effectively implementing these actions, such as those related to areas listed in table 7, could yield substantial financial benefits. In our 2011 to 2017 reports, we directed 83 actions to the Internal Revenue Service (IRS) in areas that contribute to effectively and efficiently providing quality service to taxpayers and enforcing the law with integrity and fairness to all. As of March 2017, 43 of these 83 actions remained open. The funding of the federal government depends largely upon IRS’s ability to collect taxes—in fiscal year 2016, IRS collected about $3.3 trillion. Our work suggests that effective implementation of our open actions, such as those related to areas listed in table 8, could substantially increase revenues and result in other financial benefits. In our 2011 to 2017 reports, we directed 78 actions to the Department of Homeland Security (DHS) in areas that contribute to the effective implementation of its mission to, among other things, prevent terrorist attacks from occurring within the United States, reduce U.S. vulnerability to terrorism, and help the nation recover from any attacks that may occur. In fiscal year 2016, DHS spent about $57.6 billion, about 1.3 percent of federal outlays. As of March 2017, 37 of the 78 actions to DHS remained open. Fully implementing these actions, such as those related to areas listed in table 9, could result in financial benefits and substantial improvements in operations. Many of the results the federal government seeks to achieve require the coordinated effort of more than one federal agency, level of government, or sector. The Office of Management and Budget (OMB) manages and coordinates many government-wide efforts. In our 2011 to 2017 reports, we directed 64 actions to OMB in areas to improve the efficiency and effectiveness of government-wide programs and activities. As of March 2017, 34 of the 64 actions to OMB remained open. Fully implementing these actions, such as those related to areas listed in table 10, could yield substantial financial benefits and program improvements. In our 2011 to 2017 reports, we directed 28 actions to the Social Security Administration (SSA) in areas that contribute to SSA providing financial assistance to eligible individuals through Social Security retirement and disability benefits and Supplemental Security Income (SSI) payments. As of March 2017, 25 of these 28 actions remained open. In fiscal year 2016, SSA spent about $979.7 billion, roughly 23 percent of federal outlays. While most of SSA’s funding is used to pay Social Security retirement, survivors, and disability benefits from the Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund, our work suggests that effective implementation of these actions, such as the examples listed in table 11, could yield substantial benefits. In our 2011 to 2017 reports, we directed 44 actions to the Department of Veterans Affairs (VA) in areas that contribute to VA effectively and efficiently achieving its mission to promote the health, welfare, and dignity of all veterans by ensuring that they receive medical care, benefits, and social support. As of March 2017, 24 of these 44 actions remained open. In fiscal year 2016, VA spent about $179.6 billion—about 4 percent of federal outlays—for veterans’ benefits and services. Our work suggests that effective implementation of these actions, such as those related to areas listed in table 12, could yield cost savings and efficiencies that would improve the delivery of services. We will continue to look for additional or emerging instances of fragmentation, overlap, and duplication and opportunities for cost savings or revenue enhancement. Likewise, we will continue to monitor developments in the areas we have already identified. We stand ready to assist this and other committees in further analyzing the issues we have identified and evaluating potential solutions. Thank you, Chairman Johnson, Ranking Member McCaskill, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer questions. For further information on this testimony or our April 26, 2017 report, please contact J. Christopher Mihm, Managing Director, Strategic Issues, who may be reached at (202) 512-6806 or mihmj@gao.gov, and Jessica Lucas-Judy, Acting Director, Strategic Issues, who may be reached at (202) 512-9110 or lucasjudyj@gao.gov. Contact points for the individual areas listed in our 2017 annual report can be found at the end of each area in GAO-17-491SP. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. In our 2011 to 2017 annual reports, we directed 97 actions to Congress, of which 61 remain open. Of the 61 open congressional actions, 9 are partially addressed and 52 are not addressed, as of March 1, 2017. See table 13.

The federal government faces a long-term, unsustainable fiscal path based on an imbalance between federal revenues and spending. While addressing this structural imbalance will require fiscal policy changes, in the near term opportunities exist in a number of areas to improve this situation, including where federal programs or activities are fragmented, overlapping, or duplicative. To call attention to these opportunities, Congress included a provision in statute for GAO to identify and report on federal programs, agencies, offices, and initiatives—either within departments or government-wide—that have duplicative goals or activities. GAO also identifies areas that are fragmented or overlapping and additional opportunities to achieve cost savings or enhance revenue collection. GAO's 2017 annual report is its seventh in this series (GAO-17-491SP). This statement discusses: new issues GAO identifies in its 2017 report; the progress made in addressing actions GAO identified in its 2011 to 2016 reports; and examples of open actions directed to Congress or executive branch agencies. To identify what actions exist to address these issues, GAO reviewed and updated prior work, including recommendations for executive action and matters for congressional consideration. GAO's 2017 annual report identifies 79 new actions that Congress and executive branch agencies can take to improve the efficiency and effectiveness of government in 29 new areas. Of these, GAO identified 15 areas in which there is evidence of fragmentation, overlap, or duplication. For example, GAO found that the Army and Air Force need to improve the management of their virtual training programs to avoid fragmentation and better acquire and integrate virtual devices into training to potentially save tens of millions of dollars. GAO also identified 14 areas to reduce the cost of government operations or enhance revenues. For example, GAO found that the Department of Energy could potentially save tens of billions of dollars by improving its analysis of options for storing defense and commercial high-level nuclear waste and fuel. Congress and executive branch agencies have made progress in addressing the 645 actions that GAO identified from 2011 to 2016. Congressional and executive branch efforts to address these actions over the past 6 years have resulted in roughly $136 billion in financial benefits, of which $75 billion has accrued and at least an additional $61 billion in estimated benefits is projected to accrue in future years. Status of 2011–2016 Actions as of March, 2017 Further steps are needed to fully address the remaining actions GAO identified. GAO estimates that tens of billions of additional dollars would be saved should Congress and executive branch agencies fully address the 395 actions that remain open, including the 79 new actions GAO identified in 2017. While these open actions span the government, a substantial number of them are directed to seven agencies: the Departments of Defense, Health and Human Services, Homeland Security, Veterans Affairs, the Internal Revenue Service, Office of Management and Budget, and the Social Security Administration. For example, the Department of Health and Human Services could potentially save over a billion dollars annually by better aligning its payments to hospitals for the uncompensated care they provide to uninsured and low-income patients.

Historically, patient health information has been scattered across paper records kept by different caregivers in many different locations. Thus, the move toward collecting, storing, retrieving, and transferring these records electronically can significantly improve the quality and efficiency of care. This is especially true in the case of military personnel and veterans, because they tend to be highly mobile and may have health records at multiple facilities both within and outside the United States. Interoperability allows patients’ electronic health information to be available from provider to provider, regardless of where it originated. Achieving this depends on, among other things, the use of agreed-upon health data standards (e.g., standardized language for prescriptions and laboratory testing) and the ability of systems to use the information that is exchanged. Currently, both VA and DOD operate separate electronic systems to create and manage electronic health records. VA uses its Veterans Health Information Systems and Technology Architecture (VistA), a system that the department developed in-house and that consists of 104 separate computer applications; while DOD uses the Armed Forces Health Longitudinal Technology Application (AHLTA), which consists of multiple legacy medical information systems developed from customized commercial software applications. Since 1998, VA and DOD have undertaken a patchwork of initiatives intended to allow their health information systems to exchange information and increase interoperability. Among others, these have included initiatives to share viewable data in existing (legacy) systems, link and share computable data between the departments’ updated heath data repositories, and jointly develop a single integrated system. Table 1 below summarizes a number of the departments’ key efforts. In addition to the initiatives mentioned in table 1, the departments took a variety of actions to respond to provisions in the National Defense Authorization Act (NDAA) for Fiscal Year 2008, which required them to jointly develop and implement fully interoperable electronic health record systems or capabilities in 2009. The act also directed them to set up an interagency program office (referred to as the IPO) to serve as a single point of accountability for these efforts. Department officials stated that their previous initiatives, along with meeting six interoperability objectives established by their Interagency Clinical Informatics Board, had enabled them to meet the deadline for full interoperability established by the act. However, we previously identified a number of challenges that the departments faced in managing their efforts in response to the act and to address their common health IT needs. In particular, although these initiatives have helped to increase data-sharing in various ways, they have been plagued by persistent management challenges that have hampered progress toward fully interoperable electronic health record capabilities. In March 2011, the secretaries of the two departments announced that they would develop a new, joint integrated electronic health record system (referred to as iEHR). This was intended to replace the departments’ separate systems with a single common system, thus sidestepping many of the challenges they had previously encountered in trying to achieve interoperability. However, in February 2013, about 2 years after initiating iEHR, the secretaries announced that the departments were abandoning plans to develop a joint system, due to concerns about the program’s cost, schedule, and ability to meet deadlines. The IPO reported spending about $564 million on iEHR between October 2011 and June 2013. In place of the iEHR initiative, VA stated that it would modernize VistA, while DOD planned to buy a commercially available system to replace AHLTA. The departments stated that they would ensure interoperability between these updated systems, as well as with other public and private health care providers. In December 2013, the IPO was re-chartered and given responsibility for establishing technical and clinical standards and processes to ensure that health data between the two departments (and other providers) are integrated. We issued several prior reports regarding this approach, in which we noted that the departments did not substantiate their claims that it would be less expensive and faster than developing a single, joint system. We also noted that the departments’ plans to modernize their two separate systems were duplicative and stressed that their decisions should be justified by comparing the costs and schedules of alternate approaches. We therefore previously recommended that the departments develop cost and schedule estimates that would include all elements of their approach (i.e., modernizing both departments’ health information systems and establishing interoperability between them) and compare them with estimates of the cost and schedule for the single-system approach. If the planned approach was projected to cost more or take longer, we recommended that they provide a rationale for pursuing such an approach. VA and DOD agreed with our prior recommendations and stated that initial comparison indicated that the current approach would be more cost effective. However, as of October 2015, the departments have not provided us with a comparison of the estimated costs of their current and previous approaches. On the other hand, with respect to their assertions that separate systems could be achieved faster, both departments have developed schedules that indicate their separate modernizations are not expected to be completed until after the 2017 planned completion date for the previous single system approach. In light of the departments’ not having yet implemented a solution that allows for seamless electronic sharing of health care data, the National Defense Authorization Act (NDAA) for Fiscal Year 2014 included requirements pertaining to the implementation, design, and planning for interoperability between VA’s and DOD’s electronic health record systems. Among other actions, provisions in the act directed each department to (1) ensure that all health care data contained in their systems (VA’s VistA and DOD’s AHLTA) complied with national standards and were computable in real time by October 1, 2014, and (2) deploy modernized electronic health record software to support clinicians while ensuring full standards-based interoperability by December 31, 2016. Our August 2015 report noted that the departments have engaged in several near-term efforts focused on expanding interoperability between their existing electronic health record systems. For example, the departments analyzed data related to 25 “domains” identified by the Interagency Clinical Informatics Board and mapped health data in their existing systems to standards identified by the IPO. The departments also expanded the functionality of their Joint Legacy Viewer—a tool that allows clinicians to view certain health care data from both departments in a single interface. In addition, VA and DOD have both moved forward with plans to modernize their respective electronic health record systems. VA has developed a number of plans for its VistA modernization effort (known as VistA Evolution), including an interoperability plan and a road map describing functional capabilities to be deployed through fiscal year 2018. According to the road map, the first set of capabilities was to be delivered in September 2014, and was to include access to the Joint Legacy Viewer, among other things. For its part, DOD issued a request for proposals and developed a series of planning documents for its systems modernization effort (referred to as the Defense Healthcare Management System Modernization (DHMSM) program). Further, the department announced that the DHMSM contract was awarded on July 29, 2015, and that it plans for the new system to reach initial operating capability by December 2016. The IPO has also taken actions to facilitate departmental interoperability efforts. These included developing technical guidance that details how VA and DOD systems are to exchange information consistent with national and international standards. The office also developed a joint interoperability plan, which summarizes the departments’ actions in this area, and a health data interoperability management plan, which outlines a high-level approach and roles and responsibilities for achieving health data exchange and terminology standardization. While these are important steps toward greater interoperability, VA and DOD nonetheless did not, by the October 1, 2014, deadline established by the 2014 National Defense Authorization Act for compliance with national data standards, certify that all health care data in their systems complied with national standards and were computable in real time. Additionally, the departments acknowledged that they do not expect to complete a number of key activities related to their electronic health record system efforts until sometime after the December 31, 2016, statutory deadline for deploying modernized electronic health record software with interoperability. Specifically, deployment of VA’s modernized VistA system at all locations and for all users is not planned until 2018. Meanwhile, DOD has yet to define all the additional work that will be necessary beyond 2016 to fully deploy the DHMSM system, and full operational capability is not planned to occur until the end of fiscal year 2022. Thus, for the departments, establishing modernized and fully interoperable health record systems is still years away. A significant concern is that VA and DOD had not identified outcome- oriented goals and metrics that would more clearly define what they aim to achieve from their interoperability efforts and the value and benefits these efforts are intended to yield. As we have stressed in prior work and guidance, assessing the performance of a program should include measuring its outcomes in terms of the results of products or services. In this case, such outcomes could include improvements in the quality of health care or clinician satisfaction. Establishing outcome-oriented goals and metrics is essential to determining whether a program is delivering value. The IPO is responsible for monitoring and reporting on the departments’ progress in achieving interoperability and coordinating with VA and DOD to ensure that these efforts enhance health care services. Toward this end, the office issued guidance that identified a variety of process- oriented metrics to track, for example, the percentage of data domains that have been mapped to national standards. The guidance also identified metrics to be reported that relate to tracking the amount of certain types of data being exchanged between the departments’ existing initiatives, such as laboratory reports exchanged from DOD to VA through the Federal Health Information Exchange and patient queries submitted by providers through the Bidirectional Health Information Exchange. Nevertheless, as we reported in August 2015, the IPO had yet to specify outcome-oriented metrics and goals that would gauge the impact interoperable health record capabilities will have on the departments’ health care services. The acting director of the IPO stated that the office was working to identify metrics that would be more meaningful, such as metrics on the quality of a user’s experience or improvements in health outcomes. However, the IPO had not established a time-frame for completing such metrics and incorporating them into the office’s guidance. In our August 2015 report, we stressed that using an effective outcome- based approach could provide DOD and VA with a more accurate picture of their progress toward achieving interoperability and the value and benefits generated. Accordingly, we recommended that the departments, working with the IPO, establish a time frame for identifying outcome- oriented metrics, define related goals as a basis for determining the extent to which the departments’ modernized electronic health records systems are achieving interoperability, and update IPO guidance accordingly. Both departments concurred with our recommendations. In conclusion, VA and DOD are continuing to pursue their nearly 2 decades-long effort to establish interoperability between their electronic health records systems. Yet while the departments’ various initiatives over the years have increased the amount of patient health data exchanged by the departments and made accessible to providers, these efforts have been beset by persistent management challenges and uncertainty about the extent to which fully interoperable capabilities will be achieved and when. The 2013 decision to pursue separate modernizations, rather than a single, joint system, indicates that achieving interoperability will be an ongoing concern for years to come. Moreover, it has once again highlighted the criticality of these departments needing to define what they aim to accomplish through these efforts, and identify meaningful outcome-oriented goals and metrics that indicate not only the extent to which progress is being made toward achieving full interoperability, but also the measures to which they will be held accountable. As we stressed in our report, establishing measurable goals for improving the care that VA and DOD provide to the millions of service members, veterans, and their beneficiaries is essential to more effectively position the departments to do so. Chairmen Hurd and Coffman, Ranking Members Kelly and Kuster, and Members of the Subcommittees, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. If you or your staffs have any questions about this statement, please contact Valerie C. Melvin at (202) 512-6304 or melvinv@gao.gov. Additional staff who made key contributions to this statement include Mark T. Bird (assistant director), Lee McCracken, Jacqueline Mai, Scott Pettis, and Jennifer Stavros-Turner. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

VA and DOD operate two of the nation's largest health care systems, serving millions of veterans and active duty members and their beneficiaries. For almost two decades the departments have undertaken various efforts to advance interoperability between their respective electronic health record systems. While the departments have made progress, these initiatives have also faced significant management challenges. Among their recent initiatives, the secretaries of the two departments committed to establishing interoperability between their separate electronic health record systems, which they are working to modernize. This statement summarizes GAO's August 2015 report (GAO-15-530) on VA and DOD's efforts to achieve interoperability between their health records systems. As GAO reported in August 2015, the Departments of Veterans Affairs (VA) and Defense (DOD), with guidance from the Interagency Program Office (IPO) tasked with facilitating the departments' efforts to share health information, have taken actions to increase interoperability between their existing electronic health record systems. These actions have included work on near-term objectives such as standardizing certain health data and making them viewable by clinicians in both departments in an integrated format. The departments also developed plans for their longer-term initiatives to modernize their respective electronic health record systems. In accordance with its responsibilities, the IPO issued guidance outlining the technical approach for achieving interoperability between the departments' systems. Having taken these actions, however, the departments did not, by the October 1, 2014, deadline established in the National Defense Authorization Act (NDAA) for Fiscal Year 2014 for compliance with national standards, certify that all health care data in their systems complied with national data standards and were computable in real time. Moreover, the departments do not plan to complete the modernization of their electronic health record systems until well after the December 2016 statutory deadline by which they are to deploy modernized electronic health record software while ensuring full interoperability. Specifically, VA plans to modernize its existing system, while DOD plans to acquire a new system; but their plans indicate that deployment of the new systems with interoperable capabilities will not be complete until after 2018. Consistent with its responsibilities, the IPO took steps to begin developing metrics to monitor progress related to the standardization of the departments' data and their exchange of health information. For example, it called for the development of tracking metrics to gauge the percentage of data domains within the departments' current systems that have been mapped to national standards. However, the office had not defined outcome-oriented metrics and related goals to measure the effectiveness of interoperability efforts in terms of improving health care services for patients served by both departments. IPO officials said that work was ongoing to develop more meaningful measures of progress, but the office had not established a time frame for completing this work or incorporating the outcome metrics and associated goals into its guidance. GAO concluded that without defining outcome-oriented metrics and related goals and incorporating them into their current approach, the departments and the IPO will not be in a position to effectively assess their progress toward further achieving interoperability and identifying the benefits that their efforts yield. In its August 2015 report, GAO recommended that VA and DOD, working with the IPO, establish a time frame for identifying outcome-oriented metrics, define goals to provide a basis for assessing and reporting on the status of interoperability, and update the IPO's guidance accordingly. The departments concurred with GAO's recommendations.

The mission of INS, an agency of the Department of Justice, is to administer and enforce the immigration laws of the United States. To accomplish its mission, INS has three interrelated business areas— enforcement, immigration services, and corporate (i.e., mission-support) services. Enforcement includes border inspections of persons entering the United States, detecting and preventing smuggling and illegal entry, and identifying and removing illegal entrants. Immigration services include granting legal permanent residence status, nonimmigrant status (e.g. students and tourists), and naturalization. INS efforts to protect our nation’s borders are performed under both of these core mission areas. Corporate services include functions such as financial and human capital management. INS’ field structure consists of 3 regional offices, 4 regional service centers, 3 administrative centers, 36 district offices, 21 Border Patrol sectors, and more than 300 land, sea, and air ports of entry. To carry out its responsibilities, INS relies on IT. For example, the Integrated Surveillance Intelligence System (ISIS) is to provide “24 by 7” border coverage through ground-based sensors, fixed cameras, and computer-aided detection capabilities. Also the Student Exchange Visitor Information System (SEVIS) is to manage information about nonimmigrant foreign students and exchange visitors from schools and exchange programs. Each year INS invests, on average, about $300 million in IT systems, infrastructure, and services. Recent studies have identified significant weaknesses in INS’ management of IT projects. In August 1998, the Logistics Management Institute (LMI) reported that INS did not track and manage projects to a set of cost, schedule, technical, and benefit baselines. LMI noted that while INS had defined good procedures for developing systems, it did not consistently follow them. Similarly, in July 1999, the Justice Inspector General (IG) reported that INS was not adequately managing its IT systems. In particular, the IG reported that (1) estimated completion dates for some IT projects had been delayed without explanation, (2) project costs continued to spiral upward with no justification for how funds are spent, and (3) projects were nearing completion with no assurance that they would meet performance and functional requirements. In light of the reported problems on individual projects, we reviewed INS’ institutional approach to managing IT to determine the root cause of project problems and to provide the basis for recommending fundamental management reform. In doing so, we focused on two key and closely related IT management process controls: investment management and enterprise architecture management. In August 2000 and December 2000, we reported that INS lacked both of these management process controls because the former agency leadership had not viewed either as an institutional priority. We also provided INS, through our recommenda- tions, a roadmap for establishing and implementing both controls. INS agreed with our findings and recommendations, and it committed to implementing the recommendations. Although INS has made progress to date in doing so, much remains to be accomplished before it will have implemented these management controls and have the capability to effectively and efficiently manage IT. As defined by the Clinger-Cohen Act of 1996 and associated Office and Management and Budget instructions, and as practiced by leading public and private sector organizations, effective IT investment management requires implementing process controls for maximizing the value and assessing and managing the risks of investments. The goal is to have the means in place and functioning to help ensure that IT projects are being implemented at acceptable costs, within reasonable and expected time frames, and are contributing to tangible, observable improvements in mission performance. To help agencies understand their respective IT investment management capabilities, we developed the Information Technology Investment Management (ITIM) maturity framework. The ITIM framework is a tool that identifies critical processes and practices for successful IT investment and organizes them into a framework of increasingly mature stages. A fundamental premise of the framework is that each incremental stage lays a foundation on which subsequent stages build. The initial stage focuses on controlling investments already underway, while also starting to establish a way to select new investments. Later stages emphasize managing investments from a portfolio perspective in which individual investments are evaluated as a set of competing options based on their contribution to mission goals and objectives. The goal is to arrive at the optimal mix of projects in which to invest resources. Agencies can use the framework for assessing the strengths and weaknesses of their existing investment management processes and for developing a roadmap for improvement. The Chief Information Officers Council has endorsed the ITIM framework. In order for an agency to achieve a minimum level of IT management effectiveness, it needs to first gain control of its current investments. To do this, it must establish and implement processes and practices for ensuring that projects have defined cost, schedule, and performance expectations; that projects are continuously controlled to determine whether commitments are being met and to address deviations; and that decisionmakers have this basic investment information to use in selecting new projects for funding and deciding whether to continue existing projects. Once it has established these project-specific control and selection processes, the agency then should move to considering each new investment not as a separate and distinct project, but rather as part of an integrated portfolio of investments that collectively contribute to mission goals and objectives. To do this, the agency should establish and implement processes and practices for analyzing the relative pros and cons of competing investment options and selecting a set of investments that agency leadership believes best meets mission-based and explicitly defined investment criteria. Integral to an effective IT investment management process is having a well-defined enterprise architecture or blueprint for guiding the content and characteristics of investments in new and existing IT systems, infrastructure, and services. The goal is to help ensure that the new and modified IT assets will, among other things, be designed and implemented to promote interoperability and avoid duplication, thereby optimizing agencywide performance and accountability. In more specific terms, an enterprise architecture is a comprehensive and systematically derived description of organization’s operations, both in logical terms (including business functions and applications, business rules, work locations, information needs and users, and the interrelation- ships among these variables) and in technical terms (including IT hardware, software, data, communications, security, and performance characteristics and standards). If defined properly, enterprise architectures can clarify and help optimize the connections among an organization’s interrelated and interdependent business operations and the underlying IT supporting these operations. A complete enterprise architecture includes both the current architecture (as it is now) and the target architecture (the goal), as well as a plan for moving between the two. To assist agencies in developing, maintaining, and implementing enterprise architectures, we collaborated with the Chief Information Officers Council to develop a practical guide for enterprise architecture management. In December 2000 we reported that while INS had some investment control elements, it nevertheless lacked the full set of foundational investment management processes and practices needed to effectively control its ongoing IT projects and ensure that it was meeting cost, schedule, and performance commitments and contributing to measurable mission performance and accountability goals. For example, INS had not consistently (1) developed and maintained project management plans that specified cost and schedule baselines, (2) linked projects to INS mission needs, and (3) tracked and monitored projects to determine whether they were meeting project baselines and mission needs. Without this information, the investment review board (that, to its credit, INS had established to make investment selection decisions) could not act to effectively address deviations. The result was increased risk that the technology needed to support mission goals, such as securing America’s borders, would not be delivered on time and on budget and would not perform as intended. We also reported in December 2000 that INS was not effectively managing its IT investments, both new proposals and ongoing projects, as a portfolio, meaning that INS’ investment review board was not making portfolio selection and control decisions in terms of what mix of proposed and ongoing projects collectively best supported achievement of mission needs and priorities. In particular, INS had not defined, and thus was not using, investment selection criteria that were linked to mission needs and addressed cost, schedule, benefits, and risk. Without such criteria, the board lacked the basic information needed to assess the relative merits of and make trade-offs among its options for increasing IT capabilities, including acquiring new, enhancing existing, and operating and maintaining existing systems and infrastructure. By not employing portfolio investment management, we concluded that INS was at risk of not having the right mix of technology in place to support critical mission priorities, such as protecting America’s borders against the threat of terrorism. Accordingly, we made a series of recommendations to INS aimed at, among other things, treating the development and implementation of IT investment management process controls as an agency priority and managing them as such. Since our December 2000 report, INS has taken steps to implement our recommendations for establishing and following rigorous and disciplined investment management controls. In particular, it has developed a guide for IT investment management that, according to INS, defines many of the missing processes and practices. The key for INS will be to ensure that these processes and practices are effectively implemented. Given that the Justice IG, in reporting on IT project problems, found that INS was not following established project management procedures, successful implementation of INS’ newly developed investment guide cannot be taken for granted, and needs to be given the attention it deserves. In July 2000, we reported that INS did not have an enterprise architecture, including a description of both its “as is” and “to be” operational and technology environments and a roadmap for transitioning between the two environments. Moreover, we also reported that the efforts underway to develop the architecture were flawed and unlikely to produce useful architectural products. In particular, the development efforts were limited to a producing a bottom-up description of INS’ current IT environment (e.g., hardware and system software computing platforms, data structures and schemas, software applications) and mapping the software applications to mission areas. While this was a reasonable start to describing the current architectural environment, important steps still needed to be accomplished, such as linking the systems environment description to a decomposed view of agency mission areas, including each area’s component business functions, information needs, and information flows among functions. Moreover, doing this reliably required the participation of agency business owners; however, these owners were not involved. Also, INS had not begun developing either a target architecture or a capital investment plan for sequencing the projects that will it allow to migrate from its current architecture to its target architecture. These two components would be integral to INS’ previously mentioned need to implement effective investment management processes and practices because both controlling and selecting IT projects requires ensuring that these projects are provided for in the sequencing plan and are aligned with the target architecture. By doing so, investment decisionmakers can know (1) how proposed projects contribute to the strategic mission goals, needs, and priorities and (2) whether these projects will be engineered according to the technical models and standards, that are both embedded in the target architecture descriptions. Equally important, we reported that INS’ architecture development efforts were not being managed as a formal program, including having meaningful plans that provided a detailed breakdown of the work and associated schedules and resource needs. Further, these efforts did not include performance measures and progress reporting requirements to ensure that the effort was progressing satisfactorily. As a result, we concluded that it was unlikely that INS could produce a meaningful architecture that could be used to effectively and efficiently guide and constrain IT investment and project decisionmaking. Accordingly, we made a series of recommendations to INS aimed at making development of an enterprise architecture an agency priority and managing it as such.

Information technology (IT) management process controls are predictors of organizational success in developing, acquiring, implementing, operating, and maintaining IT systems and related infrastructure. GAO found that the Immigration and Naturalization Service (INS) has not implemented practices associated with effective IT investment and enterprise architecture management. Furthermore, these investments are not aligned with an agencywide blueprint that defines the agency's future operational and technological plans. INS does not know whether its ongoing investments are meeting their cost, schedule, and performance commitments.

Sixty percent of the U.S. population is eligible to donate blood, but in any given year only about 5 percent of those who are eligible actually do so. Eighty percent of donors are repeat donors. A typical donor gives blood approximately 1.6 times per year, but donors may give 6 times per year, or every 8 weeks, which is the period the body needs to replenish red blood cells. The two largest blood suppliers, the Red Cross and ABC, each collect about 45 percent of the nation’s blood supply, and roughly 10 percent is supplied by other independent blood centers, the Department of Defense, and hospitals that have their own blood banks. Suppliers test, process, and store the blood they collect, and ultimately sell it to health care providers. Liquid red blood cells have a shelf life of 42 days, and a small proportion of the blood collected is not used during that period and is discarded. Most hospital transfusion services purchase blood and blood components under a contract with a local supplier, which describes the price and quantity of blood to be delivered. Blood suppliers use resource-sharing programs to help distribute blood from low-demand to high-demand areas. Taken together, the Red Cross, ABC, and AABB’s National Blood Exchange redistributed about 1.4 million units of blood—over 10 percent of the nation’s supply—among blood banks in 2000. In addition, the Red Cross has a nationwide inventory control system to facilitate the movement of its surplus blood. Under the Public Health Service Act and the Federal Food, Drug and Cosmetic Act, FDA regulates and licenses blood and blood products to ensure that they are safe. FDA has no authority to determine the amount of blood that should be collected or to compel suppliers to make products available. However, it can make recommendations related to the availability of blood during public health emergencies. For example, after the September 11 attacks, FDA issued emergency guidelines to speed the delivery of blood to areas affected by the attacks. Also within the Department of Health and Human Services (HHS), the Advisory Committee on Blood Safety and Availability provides advice to the Secretary of HHS and to the Assistant Secretary for Health on various issues involving the blood supply, including economic factors affecting cost and supply, as well as public health, ethical, and legal issues related to blood safety. Available data indicate that the nation’s blood supply has increased and remains generally adequate. Although local and temporary blood shortages occur from time to time, the inventory of blood in America’s hospitals was at historically high levels before September 11 and has remained adequate through the first 8 months of 2002. Although no one data source has comprehensively tracked the nation’s blood supply in the past, all of the sources we identified indicated that the national supply has grown in recent years and was at historically high levels before the surge in donations that occurred after September 11. Annual blood collections have increased substantially—21 percent—since 1997, according to National Blood Data Resource Center (NBDRC) measurements and estimates of annual blood collections by all blood centers. (See fig. 1.) The number of units of blood collected annually increased from 12.4 million in 1997 to an estimated 15 million in 2001. (NBDRC estimated that 2001 collections would have reached 14.5 million units, 17 percent higher than in 1997, without the post-September 11 surge.) The increase in the blood supply has been echoed by a corresponding increase in the amount of blood transfused. (See fig. 1.) For example, NBDRC data indicate that the number of red blood cell units transfused rose 17 percent from 1997 to 2001, from 11.5 million to 13.5 million units. The annual number of units that were available but not transfused remained at about 1 million units. Blood inventories were generally adequate just prior to the September 11 attacks. The Red Cross reported that its total red blood cell inventory was 33 percent higher in August 2001 than it was in August 2000 and that its type O inventory was 83 percent higher than it was in August 2000. The New York Blood Center (NYBC) reported that it had a 4- to 5-day supply of blood on hand in early September 2001. On September 10, 2001, the median inventory for the hospitals in HHS’s Blood Sentinel Surveillance System for all blood types stood at approximately 7 days, and for type O Rh-negative blood, at 6 days. The limited information available to us indicates that blood collections to date in 2002 have been roughly comparable to the levels immediately prior to September 11. According to NBDRC data, collections for the first half of 2002 have been similar to the same period in 2001. The hospital inventories measured by HHS’s Blood Sentinel Surveillance System in mid-August 2002 were similar to those levels measured just prior to September 11, 2001. The high volume of blood donations by volunteers immediately after September 11 stressed the collection system and resulted in a national surplus. Monthly blood collections increased nearly 40 percent over collections earlier in 2001 in the weeks immediately following September 11, but there was little additional need of blood for transfusions. The nationwide blood supply was substantially greater than needed for transfusions. Consequently, the proportion of units that expired and were discarded in October and November 2001 was five times higher than the proportion that expired in an average 2-month period earlier in 2001. America’s blood banks collected an unprecedented amount of blood in a short period after the September 11 attacks. In response to the perception that blood would be needed to treat victims, Americans formed lines to give blood at hospitals and blood banks even before a call for blood went out. HHS, ABC, and the Red Cross all issued requests for blood donations, although HHS and ABC quickly stopped issuing requests when it became clear that there were few survivors of the attacks and therefore little need for additional blood for transfusions. Many blood suppliers were reluctant to turn away potential donors, however, and some hospitals that did not have their own blood banks responded to the surge in volunteers by collecting blood anyway. NBDRC estimated that total blood collections in the United States were 38 percent higher in September 2001 than average monthly collections earlier in 2001. The Red Cross reported that its national blood collections during the week of September 11 more than doubled compared with the preceding weeks. Estimates of the number of additional units collected nationwide in September and October 2001 in response to the September 11 attacks range from 475,000 to 572,000. Following the pattern of responses to previous disasters, the sharp increase in blood collections did not last. While higher than usual blood collections continued for several weeks after September 11, the number of units collected had returned to the baseline level or slightly below it by the beginning of November. (See fig. 2.) This surge of donors stressed the collection system. Shortages in blood collecting supplies, phlebotomists (technicians trained to collect blood), and storage capacity occurred as more potential donors arrived. Long waiting lines developed because there was insufficient staff to draw blood. Increased errors in the collection process at some blood banks accompanied the surge in donations. As much as 20 percent of some blood banks’ donations was collected improperly and had to be discarded, primarily because individuals had not completed the donor questionnaire correctly. Far more blood was collected immediately after September 11 than was needed by survivors or than ultimately could be absorbed by the nation’s blood banks. Fewer than 260 units were used to treat victims of the attacks. A portion of the surplus went unused, expired, and was discarded. NBDRC surveyed a nationally representative sample of 26 blood suppliers and found that about 10 percent of the units collected in September and October 2001 by the suppliers it surveyed expired and were discarded. This was nearly a fivefold increase in the proportion of units these suppliers discarded because they had expired in the first 8 months of 2001. Of the roughly 572,000 additional units collected in response to September 11, we estimate that about 364,000 units, or about two-thirds, entered the nation’s blood inventory and that approximately 208,000 units, or about one-third, expired and were discarded. All of these figures underestimate the total number of expired units because they represent expirations at blood suppliers only and do not capture units that expired in hospital inventories. Some blood banks also suffered serious financial losses, as they incurred the costs of collecting and processing units of blood they could not sell. For example, the New York Blood Center claimed it lost from $4 million to $5 million and suffered a nearly threefold increase in the number of units it had to discard when blood donated in response to the attack expired. Incorporating the lessons learned from past disasters, blood suppliers and the federal government are reevaluating how blood is collected during and after disasters and are focusing on maintaining a consistently adequate inventory in local blood banks in preparation for disasters and not collecting more blood after a disaster than is medically necessary. Since September 11, federal public health agencies and blood suppliers have been critical of their responses to prior disasters and have begun to plan for a more effective response to future emergencies. Through an interorganizational task force organized by AABB in late 2001, the focus has begun to shift away from increasing blood collections in an emergency to maintaining an adequate inventory of blood at all times. This shift was prompted by the realization that a surge in blood collections following a disaster does not help victims because disaster victims rarely require many units of blood and because newly collected blood cannot be used immediately. For example, as with September 11, only a small percentage of the additional blood collected after the Oklahoma City bombing was transfused into victims (131 units of more than 9,000 units collected). Moreover, the units used to treat victims in the hours after a disaster are those already on hand at the treating hospital or local blood bank. It takes 2 days to completely process and test a unit of newly donated blood, so existing stores of blood must be used to treat disaster casualties. Finally, military experts and blood industry officials told us that it is unlikely a discrete disaster would require more blood than is normally stored in the nation’s blood inventory. They noted that large amounts of blood have not been needed in building collapses (like the September 11 attacks and the Oklahoma City bombing), nor would blood transfusions be a likely treatment for illnesses caused by a bioterrorism attack. Nonetheless, disaster scenarios that have not yet been identified may require more blood than is currently envisioned. A report by the AABB task force made recommendations for the emergency preparedness of the blood supply that were adopted by the HHS Advisory Committee on Blood Safety and Availability. The recommendations are aimed at having federal and other organizations that are involved in the collection or use of blood coordinate their actions in an emergency. For example, the task force recommended that all blood banks—not just the Red Cross as is now the case—be designated as suppliers of blood in an emergency and that the Assistant Secretary for Health serve as the spokesperson for all organizations involved in managing and transporting blood in an emergency. Recognizing that an adequate blood inventory in an affected area is the most important factor in the initial response to a disaster, the task force also recommended that blood banks maintain a 7-day supply of all blood types at all times. Both the Red Cross and ABC are independently pursuing their own plans to meet emergency and long-term needs. The Red Cross expects to increase annual collections by 9 percent during each of the next 5 years. The Red Cross also plans to implement a “strategic blood reserve” within the next 5 years using preregistered donors and a limited stock of frozen blood cells. ABC has established a “national strategic donor reserve” through which it can call on the donors it has registered, if needed. Although local and temporary blood shortages occur from time to time, America’s blood supply is generally adequate. The blood community’s response to disasters can be improved, and the community is beginning to take the necessary steps to learn from past experiences. The interorganizational task force organized by AABB has involved the blood community in efforts to more effectively plan for future disasters. In addition, the Red Cross and ABC are independently taking steps to meet emergency requirements. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-7119. Martin T. Gahart, Sharif Idris, and Roseanne Price also made key contributions to this statement.

The terrorist attacks of September 11 underscored the critical importance of a safe and adequate supply of blood for transfusions. In recent years, an average of 8 million volunteers have donated more than 14 million units of blood annually, and 4.5 million patients per year have received life-saving blood transfusions, according to the American Association of Blood Banks. Ninety percent of the U.S. blood supply is collected by two blood suppliers, the American National Red Cross and the independent blood banks affiliated with America's Blood Centers. Within the federal government, the Food and Drug Administration is responsible for overseeing the safety of the nation's blood supply. The surge in donations after the terrorist attacks added an estimated 500,000 units to annual collections in 2001. The experience illustrated that large numbers of Americans are willing to donate blood in response to disasters. However, because very few of the units donated immediately after September 11 were needed by the survivors, this experience has also raised concerns among blood suppliers and within the government about how best to manage and prepare the blood supply for emergencies. Data indicate that the blood supply has increased in the past 5 years and that it remains generally adequate. Blood collections increased 21 percent from 1997 to 2001, and collections in the first half of 2002 appear to have been roughly equivalent to the same period in 2001. Blood suppliers and the federal government have begun to reevaluate how blood is collected during and after disasters to avoid repeating this experience and also to ensure that enough blood is available during emergencies. A task force, including members from federal agencies and blood suppliers, has been formed to coordinate the response in future emergencies to the need for blood. Insights from the experiences of September 11 and other disasters have led the task force to conclude that the need for blood in most emergencies can be best met by maintaining an adequate blood inventory at all times, rather than increasing blood collections following a disaster.

A main goal of the bill is improving the management of service acquisitions. There is good reason for this. Over the past decade, federal agencies have substantially increased their purchases of services, particularly for information technology and professional, administrative, and management support. In fiscal year 2001 alone, the federal government acquired about $109 billion in services. This money, however, is not always well-spent. Our work, as well as the work of other oversight agencies, continues to find that millions of service contract dollars are at risk at defense and civilian agencies because acquisitions are poorly planned, not adequately competed, or poorly managed. In view of these problems, we examined how leading companies changed their approach to acquiring services. The companies we studied found themselves in a situation several years ago similar to the one that federal agencies are in today. They were spending a substantial amount of money on services—ranging from routine maintenance, to advertising, to information management—but did not have a good grasp of how much was being spent and where these dollars were going. Moreover, they were not effectively coordinating purchases, and they lacked tools to make sure that they were getting the best overall value. The companies we studied were able to turn this situation around by adopting a more strategic perspective to service spending; that is, each company focused more on what was good for the company as a whole rather than just individual business units, and each began making decisions based on enhanced knowledge about service spending. The specific activities they undertook ranged from developing a better picture of what they were spending on services, to taking an enterprisewide approach to acquiring services, to developing new ways of doing business. Figure 1 highlights key elements of the strategic approach. Specifically, the companies we visited analyzed their spending on services to answer basic questions about how much was being spent and where the dollars were going. In doing so, they realized that they were buying similar services from numerous providers, often at greatly varying prices. The companies used this data to rationalize their supplier base, or in other words, to determine the right number of suppliers that met their needs. Hasbro’s spend analysis, for example, revealed that it had 17 providers of temporary administrative, clerical, and light industrial personnel for 7 locations. The company also found that it had inconsistent policies and processes, multiple contact points, and limited performance measures. Information was not being shared across locations. The companies we studied changed how they acquired services in significant ways. Each elevated or expanded the role of the company’s procurement organization; designated “commodity” managers to oversee key services; and/or made extensive use of cross-functional teams to help identify their service needs, conduct market research, evaluate and select providers, and manage performance. These changes transformed the role of purchasing units from one focused on mission support to one that was strategically important to the company’s bottom line. For example, Dun & Bradstreet officials told us that, with the support of senior corporate management, their procurement function now exercises far more control and responsibility over their services and that it acts more in an advisory capacity to business units rather than just being relied on for negotiating expertise. Bringing about these new ways of doing business was challenging. For example, some companies spent months piecing together data from various financial management information systems and examining individual purchase orders just to get a rough idea of what they were spending on services. Other companies found that establishing new procurement processes met with resistance from individual business units reluctant to share decision-making responsibility and involved staff that traditionally did not communicate with each other. To overcome these particular challenges, the companies found they needed to have sustained commitment from their senior leadership—first, to provide the initial impetus to change and second, to keep up the momentum. Since service acquisitions were largely viewed as a mission support activity and peripheral to the bottom line, such commitment needed to be intense and accompanied by clear communication on the rationale, goals, and expected results from the reengineering efforts. Moreover, to help sustain management attention, the companies implemented performance measures to help them gauge whether reengineering efforts were really working. For example, ExxonMobil employed an extensive system to measure performance of its procurement function, which included metrics on the procurement organization’s progress in meeting financial, customer satisfaction, and business operation objectives; compliance with best practices; and more detailed metrics to assess the performance of local purchasing units. Why should these particular practices matter in looking how to reform service acquisition in the federal government? Taking a strategic approach clearly paid off. Companies were able to negotiate lower rates and better match their business managers’ needs with potential providers of services. One official estimated that his company saved more than $210 million over the past 5 years pursuing more strategic avenues to purchasing information technology services, while another estimates his company typically achieved savings of 15 percent or more on efforts that were undertaken using the new processes. The SARA bill touches on some aspects important to the approach followed by the leading companies. First, the proposed bill also encourages greater use of performance-based contracting. Performance- based service contracting is a process where the contracting agency specifies the outcome or result it desires and leaves it to the vendor to decide how best to achieve the desired outcome. Historically, the government has not widely used this strategy, but it is beginning to move in that direction in an effort to attract leading commercial companies to doing business with the government, gain greater access to technological innovations, and better ensure contractor performance. Second, the bill would create a chief acquisition officer within each agency. We support the concept of a chief acquisition officer. Our discussions with a number of officials from private sector companies about how they buy services indicate that a procurement executive or a chief acquisition officer plays a critical role in changing an organization’s culture and practices. The bill, however, differs from the approach taken by leading companies in terms of the scope and the decision-making authority of this position. Specifically, at the leading companies, these officials were corporate executives who had authority to influence decisions on acquisitions; implement needed structural, process, or role changes; and provide the necessary clout to obtain initial buy-in and acceptance of reengineering efforts. Under SARA, it is not clear that the chief acquisition officer would have comparable responsibility and authority. In addition to our work on best service acquisition practices, we are performing a number of evaluations related to specific proposals in the Services Acquisition Reform Act, including those on (1) acquisition workforce, (2) performance-based contracting, and (3) share-in-savings contracting. I would like to highlight what this work entails and how it can be of use to the subcommittee as it moves forward on the bill. The proposed bill contains several provisions to address the challenges being faced in the acquisition workforce. Procurement reforms and technological changes have placed unprecedented demands on the acquisition workforce. Contracting personnel are now expected to have a much greater knowledge of market conditions, industry trends, and technical details of the commodities and services they procure. We believe it is essential for agencies to define the future capabilities needed by the workforce and to contrast these needs with where the workforce is today. Doing so will provide a solid basis for evaluating whether different management tools are needed to meet the needs of the future workforce. Specifically, agencies could improve the capacity of the acquisition workforce by focusing on four key areas: Requirements—assessing the knowledge and skills needed to effectively perform operations to support agency mission and goals. Inventory—determining the knowledge and skills of current staff so that gaps in needed capabilities can be identified. Workforce strategies and plans—developing strategies and implementing plans for hiring, training, and professional development to fill the gap between requirements and current staffing. Progress evaluation—evaluating progress made in improving human capital capability and using the results of these evaluations to continuously improve the organization’s human capital strategies. In our current work for this and other committees, we are examining efforts to assess and address the needs of the future acquisition workforce. Specifically, we are looking at (1) the adequacy of agency training requirements for the acquisition workforce and agency practices for determining the level of funding needed for training, (2) selected federal agencies’ strategic planning efforts to manage and improve the capacity of the acquisition workforce, and (3) strategies being used to ensure that the acquisition workforce is prepared to meet the new challenges for acquiring services. As noted earlier, the proposed bill is promoting greater use of performance-based contracting. The work we are conducting now for this subcommittee should be particularly useful in determining the extent to which performance-based contracting is taking hold and whether there are governmentwide mechanisms that can be used to encourage greater use of it. Our work to date shows that for fiscal year 2001, about 23 percent of eligible service contracts were reported to be performance-based. This number is in line with a 20-percent goal set by the Office of Management and Budget. However, our work shows that there are inconsistencies in the interpretation of the definition of a performance-based contract. Moreover, demonstrating either monetary savings or efficiency gains will be challenging. We look forward to sharing the results of our review with the subcommittee by August of this year. The proposed bill focuses specifically on promoting greater use of one particular form of performance-based contract: share-in-savings. Basically, in share-in-savings contracting, a contractor funds a project up front in return for a percentage of the savings that are actually realized by an agency. Almost 6 years after the Clinger-Cohen Act called for the creation of pilot programs to test the share-in-savings concept in federal information technology contracts, the government has not identified many suitable candidates for use of this innovative technique. In large part, this is because use of this tool requires solid baseline data about the existing cost of an activity and a reliable method for measuring whether success has been achieved. Gathering reliable baseline data can be difficult. The work we are conducting in this area will identify examples of best practices using the share-in-savings contracting method found in the commercial sector and assess how these practices can be effectively applied in the federal government. We are specifically asking commercial companies why they chose this tool as a means to help achieve their business goals and what their experiences have been. One particular form of share-in-savings that has emerged in our discussions is gain sharing. Under this approach, a contractor does not assume all of the risk, rather it will reduce its normal fees in return for a percentage of increased earnings or savings that result from the contractor’s work. The idea is to develop a “win-win” arrangement, which jointly encourages the contractor and the client to achieve sustainable business results. I would like to share initial concerns we have with some particular provisions of SARA based on our previous work and experiences. First, section 221 of SARA would amend the Office of Federal Procurement Policy Act to increase the micropurchase threshold from $2,500 to $25,000. The governmentwide commercial purchase card is the preferred method for making micropurchases and is widely used. We have not comprehensively examined the use of purchase cards across the federal government. However, our reviews at selected agencies, including two Navy units, have found weak internal controls, which have left agencies vulnerable to a variety of improper purchases. We are concerned, therefore, that raising the micropurchase threshold may not be advisable until problems with controls and abuses are addressed and resolved. Second, section 223 of SARA would strengthen the process under which agencies decide challenges to their procurement decisions by imposing a statutory stay of contract award or performance pending resolution of any bid protest. The bill would require an agency to issue a decision on a bid protest within 10 business days. We support prompt resolution of protests and believe the proposed bill may help accomplish this. We are concerned, however, that the 10-day time limit would be too brief in many cases to permit meaningful consideration of a protester’s complaints, especially when the protest involves any degree of complexity. Third, section 211 of the proposed bill would authorize service contractors to submit invoices for payment more frequently—biweekly instead of monthly. Although this change would have a positive effect on service contractors’ cash flow, it could increase the cost of doing business for the government. Additionally, this change may increase the risk of erroneous payments—a significant problem across the government—as it could increase the volume of invoices and would provide agencies with less time to process and review them. As such, we believe further study is warranted on this provision. Lastly, the bill also makes a number of significant changes to commercial items, including one, section 404, that would designate as a commercial item any product or service sold by a commercial entity. Although we have not fully assessed the possible impact of the proposed change, we are concerned that the provision would allow for products or services that had never been sold or offered for sale in the commercial marketplace to be considered a commercial item. In such cases, the government may not be able to rely on the assurances of the marketplace in terms of the quality and pricing of the product or service.

The Service Acquisition Reform Act of 2002 seeks to strengthen the acquisition workforce by moving toward a performance-based contracting environment and improving service acquisitions management. During the past decade, federal agencies have substantially increased their purchases of services, particularly for information technology and professional, administrative, and management support. In fiscal year 2001 alone, the federal government acquired $109 billion in services. This money, however, is not always well-spent. GAO continues to find that defense and civilian acquisitions are poorly planned, not adequately completed, and poorly managed. Some leading companies have changed their approach to acquiring services after finding themselves spending a lot of money on services without knowing how much was being spent and where these dollars were going. GAO found that these companies were able to turn this situation around by adopting a more strategic perspective to service spending. Each company focused more on what was good for the company as a whole rather than just individual business units, and each began making decisions using enhanced knowledge about service spending. The companies analyzed their spending services to answer basic questions about how much was being spent and where the money was going. In doing so, they realized that they were buying similar services from many providers, often at different prices. The companies used this data to determine the right number of suppliers that met their needs.

VBA’s compensation program pays monthly benefits to veterans with service-connected disabilities (injuries or diseases incurred or aggravated while on active military duty), according to the severity of the disability. VBA’s pension program pays monthly benefits to wartime veterans who have low incomes and are permanently and totally disabled for reasons not service-connected. In addition, VBA pays dependency and indemnity compensation to some deceased veterans’ spouses, children, and parents. In fiscal year 2001, VBA paid over $20 billion in disability compensation to about 2.3 million veterans and over 300,000 survivors. VBA also paid over $3 billion in pensions to over 600,000 veterans and survivors. Veterans may submit their disability claims to any of VBA’s 57 regional offices, which process these claims in accordance with VBA regulations, policies, procedures, and guidance. Regional offices assist veterans in obtaining evidence to support their claims. This assistance includes helping veterans obtain the following documents: records of service to identify when the veteran served, records of medical treatment provided while the veteran was in military service, records of treatment and examinations provided at VA health-care facilities, and records of treatment of the veteran by nonfederal providers. Also, if necessary for decision on a claim, the regional office arranges for the veteran to receive a medical examination or opinion. Once this evidence is collected, VBA makes a rating decision on the claim. Veterans with multiple disabilities receive a single composite rating. For pension claims, VBA determines whether the veteran meets certain criteria. The regional office then notifies the veteran of its decision. In May 2001, the Secretary created the VA Claims Processing Task Force to develop recommendations to improve the compensation and pension claims process and to help VBA improve claims processing timeliness and productivity. The task force observed that the work management system in many VBA regional offices contributed to inefficiency and an increased number of errors. The task force attributed these problems primarily to the broad scope of duties performed by regional office staff—in particular, veterans service representatives (VSR). For example, VSRs were responsible for both collecting evidence to support claims and answering claimants’ inquiries. In October 2001, the task force made short- and medium-term recommendations for improving the claims process and reorganizing regional office operations. In particular, the task force recommended that VBA change its claims processing system to one that utilizes specialized teams. VBA is in the process of implementing many of these recommendations and has established a new claims processing structure that is organized by specific steps in the claims process. For example, regional offices will have teams devoted specifically to claims development, that is, obtaining evidence needed to evaluate claims. VBA’s key timeliness measure does not clearly reflect its timeliness in completing claims because it fails to distinguish among its three disability programs—disability compensation, pension, and dependence and indemnity compensation. The programs’ processing times differ, in part because they have different purposes, beneficiaries, eligibility criteria, and evidence requirements to decide each type of claim. Despite these differences, VBA sets an annual performance goal that is an average of all three programs. For the purposes of reporting its performance to the Congress and other stakeholders, VBA adopted one key timeliness measure—the average time to complete decisions on rating-related cases. This measure includes original and reopened disability compensation, pension, and dependency and indemnity compensation claims—in other words, claims for three VBA compensation and pension programs. VBA sets an annual goal for average days to complete rating-related cases in VA’s annual performance plans and subsequently reports its actual timeliness—and whether it met its goal—in VA’s annual performance reports to the Congress. This one measure does not reflect the differences in the timeliness for the three programs. In general, the disability compensation program requires the most evidence and thus these claims generally take longer to complete, as shown in figure 1. While VBA’s average fiscal year 2002 timeliness was 223 days, disability compensation decisions (which represented about 83 percent of total decisions) took almost twice as long to complete as pension decisions. The aggregate measure understated the time required to decide disability compensation claims by 18 days and overstated the time to decide pension claims by 97 days and dependency and indemnity compensation claims by 51 days. Each program has a different claims processing time frame because each has different evidence requirements resulting from their different purposes and eligibility requirements. For example, a major reason why disability compensation claims take longer is that VBA must not only establish that each claimed disability exists, but that each was caused or aggravated by the veteran’s military service. This process requires substantial evidence gathering, with VBA actively assisting the claimant. To prove service- connection, VBA obtains the veteran’s service medical records and may request medical examinations and treatment records from VA medical facilities. In contrast, pension claims do not require evidence that the claimed disabilities were service-connected. Also, veterans aged 65 and older do not have to prove that they are disabled to receive pension benefits as long as they meet the income and military service requirements. VBA does not yet have adequate data to measure timeliness or set goals for its specialized regional office teams but is making progress in obtaining complete and accurate data. While VBA is in the process of developing performance measures and goals for these teams and has developed a system to report timeliness data, it acknowledges that the quality of its existing timeliness data needs to be improved. Implementation of the task force recommendations to reorganize claims processing requires that VBA measure its performance for its teams. Where teams were once responsible for processing claims from receipt to completion, teams are now responsible for specific phases of the process. With complete and accurate data, VBA will be able to measure the timeliness of the individual teams and, therefore, will be able to hold them accountable for their performance as well as identify processing delays and take corrective actions. VBA expects to be able to obtain more complete and accurate data to measure team performance once it deploys new software applications that should enable it to consistently capture data for all cases and will rely less on manual data entry. VBA expects these applications to be fully deployed by October 2003. The task force recommended that regional office Veterans Service Centers (VSC), which process compensation and pension claims, be reorganized into specialized teams. The task force identified six types of teams—triage, pre-determination, rating, post-determination, appeals, and public contact—based on different phases of the claims process. From February through April 2002, VBA piloted its CPI initiative, which included reorganizing regional offices’ VSCs into specialized teams at four regional offices. The CPI task team noted that processing teams needed clearly defined and reasonable performance expectations and recommended timeliness measures for each team, as shown in table 1. VBA began to implement the CPI model at its other regional offices in July 2002. VBA has implemented an inventory management system (IMS) that allows it to measure and report team timeliness, nationally and at the regional office level. This system should provide VBA with the necessary data to develop annual performance goals, which can be used to hold itself and its regional offices accountable for improving timeliness. IMS should also provide useful data to assist VBA management with identifying problems in specific regional offices and allowing regional office management to identify problems with specific teams for further analysis and corrective actions. However, VBA acknowledges that its IMS reports are not as useful as they can be, because IMS receives incomplete data from an existing VBA system—the Claims Automated Processing System (CAPS). Not all regional offices are fully using CAPS; thus, CAPS data that are sent to IMS are incomplete. CAPS was not being used to collect timeliness data for all cases; rather, it was used to provide regional office staff with information on the status of cases expected to take more than 30 days to process. In order to provide a short-term improvement in the completeness of IMS data, in May 2001 VBA instructed regional offices to ensure that certain data were consistently entered into CAPS; for example, dates when evidence was requested and received. In May 2002, VBA instructed regional offices to report on how fully they use CAPS and to provide estimated timeframes for complete compliance with CAPS data entry requirements. As of August 2002, VBA reported that about 81 percent of its pending cases had records in CAPS. According to VBA officials, as the regional offices implement new software applications, the ability of IMS to provide complete and accurate timeliness reports is expected to improve. For example, Share, the new claims establishment application, will automatically input data on a case into other applications, including CAPS. This will help ensure more complete and consistent data in the short term, because there will be a CAPS record for each case. Eventually, the Modern Award Processing– Development (MAP-D) application will replace CAPS as a source of timeliness data for IMS. MAP-D will, according to VBA officials, contain records for all cases and will reduce the amount of manual data entry required, thus reducing the potential for data input errors. VBA plans to have all regional offices using Share and MAP-D by October 2003. VBA has chosen to use one aggregate performance measure for timeliness for its disability compensation, pension, and dependency and indemnity compensation programs. Such a measure does not reflect VBA’s performance for programs with different purposes, beneficiaries, and claims processing requirements. In particular, VBA’s timeliness in deciding disability compensation claims is assessed under a measure that also covers pension and dependency and indemnity compensation claims, which take much less time. Consequently, the aggregate measure can make the processing time for VBA’s largest and most time-consuming workload look better than it really is. As long as VBA uses an aggregate timeliness measure, it will not be able to clearly demonstrate to the Congress, top VA management, and claimants how well it is meeting its objectives to serve disabled veterans and their families. VBA’s reorganization of its regional office compensation and pension claims processing operations into specialized teams underscores the need for complete and accurate data on the timeliness of the phases of the claims process. VBA does not yet have adequate data for timeliness measurement purposes but is making progress in ensuring that it does. Once VBA has deployed its new claims processing software applications at all of its regional offices, it expects to be able to better measure the timeliness of its specialized teams, provide baselines for future comparisons, quantify team performance goals, and identify problems needing corrective action. In this way, local and team-specific information can be used to hold regional offices and their specialized teams accountable for improving timeliness. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Benefits to establish separate claims processing timeliness goals for its three main disability programs, incorporate these goals into VA’s strategic plan and annual performance plans, and report its progress in meeting these goals in its annual performance reports. In its written comments on a draft of this report (see app. I), VA concurred in principle with our recommendation. VA noted that VBA plans to develop performance measures for each of its programs, as part of VA’s effort to restructure its budget. However, VA believes establishing new goals by program should be deferred until at least fiscal year 2005, because establishing new goals at this time risks obscuring its focus on achieving the Secretary’s 100-day goal by the end of fiscal year 2003. We believe developing timeliness measures for each program would not obscure VBA’s focus on performance improvement, but would provide a more accurate picture of claims processing timeliness, because the new measures would reflect the differences among the three programs. Because VBA already has the necessary data, we believe that it should report timeliness by program for fiscal year 2004 and set goals by program for fiscal year 2005, at the latest. VA also suggested that we based our calculations of average days to complete disability compensation, pension, and dependency and indemnity compensation decisions, as shown in figure 1, on original claims only. We based our calculations on all eight types of claims (known as end products) that VBA uses to calculate rating-related timeliness. These end products include both original and reopened claims. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 1 day after its issue date. At that time, we will send copies of this report to the Secretary of the Department of Veterans Affairs, appropriate congressional committees, and other interested parties. We will also make copies of this report available to others on request. The report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please call me at (202) 512-7101 or Irene Chu, Assistant Director, at (202) 512-7102. In addition to those named, Susan Bernstein, Martin Scire, and Greg Whitney made key contributions to this report.

The Chairman and Ranking Minority Member, Senate Committee on Veterans' Affairs, asked GAO to assist the Committee in its oversight of the Veterans Benefits Administration's (VBA) efforts to improve compensation and pension claims processing. As part of this effort, GAO assessed (1) whether VBA's key timeliness measure clearly reflects its performance and (2) whether it has adequate data to measure the timeliness of its newly created specialized claims processing teams. VBA's key claims processing timeliness measure does not clearly reflect how quickly it decides claims by veterans and their families for disability compensation, pension, and dependency and indemnity compensation benefits. Although each program has its own purpose and eligibility requirements, VBA does not set a separate timeliness goal for each in its annual performance plan. This obscures the significant differences in the time required to complete decisions under each program. Fiscal year 2002 timeliness, using VBA's measure, was 223 days; however, disability compensation decisions took significantly longer than decisions under the other two programs. A disability compensation decision requires more evidence, in part because VBA must determine that each claimed disability is related to the veteran's military service. VBA does not yet have adequate data to measure the timeliness of its new specialized regional office claims processing teams but is working to improve its data. VBA's inventory management system, which allows it to report and analyze teams' timeliness, relies on an existing information system that does not provide timeliness data on all cases. VBA is acting to improve the completeness of the data in the existing system. Meanwhile, VBA is deploying new software that it expects should enable it to capture more complete and accurate data. VBA expects to deploy this new software at all regional offices by October 2003.

In 2011 the Navy received approval from DOD to begin planning for a UCLASS acquisition program to address a capability gap in sea-based surveillance and to enhance the Navy’s ability to operate in highly contested environments defended by measures such as integrated air defenses or anti-ship missiles. The Navy analyzed the potential of several alternative systems to provide these capabilities. In 2012 the JROC—the requirements validation authority for major defense acquisition programs—issued a memorandum providing direction and guidance for the Navy to focus its efforts on delivering a timely, affordable system to meet the sea-based surveillance requirements. At that time the systems that would be needed to operate in a highly contested environment were deemed unaffordable. As a result, the Navy updated its analysis of alternatives to include more affordable and feasible systems. Navy leadership approved a draft set of requirements in April 2013 that emphasized affordability, timely fielding, and endurance, while deemphasizing the need to operate in highly contested environments. DOD policy provides that the JROC, as the validation authority for major defense acquisition programs, will validate the requirements document— known as the capability development document—prior to releasing requests for proposals for development contracts and the decision review that initiates a system development program, known as a Milestone B review. The JROC has not yet validated these requirements. In September 2013, we found that the Navy had taken some positive steps to scale back requirements to match available resources. Our primary concern at the time was that the program planned to develop, manufacture and field operational UCLASS systems before holding a Milestone B review, which would defer key oversight mechanisms, such as the establishment of an acquisition program baseline, for these program activities until after they were over. Without a baseline and regular reporting on progress, it would be difficult for Congress to hold the Navy accountable for achieving cost, schedule, and performance goals. As a result, we recommended that the Navy hold a Milestone B review sooner than its then-scheduled fiscal year 2020 date in order to provide for increased oversight and accountability. At the time, the Navy disagreed, believing that its approved strategy was compliant with acquisition regulations and laws. Congress subsequently placed limitations on the number of UCLASS air vehicles that DOD could acquire prior to receiving Milestone B approval.acquisition strategy was otherwise consistent with the DOD acquisition process that applies to most weapon system programs, as well as with a knowledge-based acquisition approach. Since our last review in September 2013, the system’s intended mission and required capabilities have come into question, delaying the Navy’s UCLASS schedule. DOD has decided to conduct a review of its airborne surveillance systems and the future of the carrier air wing, and has as a result adjusted the program’s schedule. The Navy’s fiscal year 2016 budget documents reflect these changes, with award of the air system contract now expected to occur in fiscal year 2017, a delay of around 3 years. In addition the Navy now expects to achieve early operational capability—a UCLASS system on at least one aircraft carrier—no earlier than fiscal year 2022, a delay of around 2 years. Figure 1 shows delays in dates for several other key program events. Congress, DOD, and the Navy continue to debate the primary role of the UCLASS system. The main options are a largely surveillance role with limited strike operating in less contested environments, or a largely strike role with limited surveillance operating in highly contested environments. Congress has raised concerns about whether UCLASS will be armed and survivable enough to support U.S. power projection in areas in which access and freedom to operate are challenged. In addition, Congress has heard testimony from former DOD and Navy officials expressing concerns about the ability of UCLASS to help counter the defenses of adversaries trying to deny U.S. access. Congress has also directed the Navy to confirm that the program’s key performance parameters—that is, its most critical requirements—have been validated by the JROC before issuing the UCLASS development request for proposals, and prohibited the air system development contract award until after DOD completes a requirements review.program while DOD conducts airborne surveillance systems and carrier air wing reviews further indicates that the anticipated role of UCLASS is not yet settled. The resolution of the debate over UCLASS requirements could have significant design and cost implications, which will determine the resources the Navy needs and how much knowledge from the Navy’s previous assessments and estimates can still be applied. In September 2013, we concluded that the UCLASS program should demonstrate that it has an executable business case that reflects high levels of knowledge and a match between requirements and available resources before holding a Milestone B review, establishing an acquisition program baseline, and initiating system development. Our past work has found that while a match is eventually achieved on most weapon system programs, a key distinction between successful programs—which perform as expected and are developed within estimated resources—and problematic programs is when this match is achieved. When the match occurs before system development begins, the weapon system is more likely to meet objectives. The current uncertainty about UCLASS requirements underscores the need for the program to demonstrate an executable business case, establish an acquisition program baseline, and hold a Milestone B review, prior to starting a system development program. At this point, if more demanding requirements add technical risk, the Navy would likely need to conduct additional systems engineering work before it could establish an executable business case and a program baseline. As such, the Navy would need to revisit its understanding of available resources in the areas of design knowledge, funding, and technologies as detailed below: Knowledge gained through preliminary design reviews may no longer be applicable: During the four preliminary design reviews that ended in May 2014, the Navy evaluated contractor designs against a set of performance specifications issued in July 2013. Those specifications reflected the requirements that had been approved by Navy leadership just three months earlier and focused on the need to conduct mainly surveillance missions in less contested environments while emphasizing affordability, timely fielding, and endurance. If the program pursues and the JROC validates requirements that focus on a strike role and emphasize the need for the air system to operate in highly contested environments, increase internal weapons payload capacity, or change how long the air system needs to remain airborne without refueling, the contractors may have to adjust or redesign their proposals. This would increase design risk since no preliminary design reviews have been completed based on these potentially more demanding requirements. As a result, the Navy may need to conduct more systems engineering work and update or repeat entirely the preliminary design review process. Program cost estimates and funding needs depend on final requirements: We found in September 2013, that UCLASS development cost estimates were varied and uncertain, even at a time when requirements had been scaled back and appeared to be relatively stable. As the debate about requirements has progressed, the uncertainty about the program’s cost has increased. DOD and contractor officials have noted that if requirements become more demanding, for example increasing the air system’s weapons payload or the need for it to operate in a highly contested environment, then the estimated development costs could increase significantly. Until requirements are firm, the Navy will not have the knowledge it needs to develop and present an executable business case or program baseline containing reliable cost and funding estimates. Because requirements are still under debate, the Navy reduced the UCLASS fiscal year 2016 budget from almost $670 million to $135 million. Despite this near term reduction, annual development funding levels are projected to reach nearly $850 million in fiscal year 2020, as shown in figure 2. The projected funding, however, does not reflect the level of funding that may be needed if the program pursues more demanding requirements, which some officials in the Office of the Secretary of Defense believe could be substantially higher. Program may need to develop and mature additional technologies: If the program pursues and the JROC validates a more demanding set of requirements the contractors may need to develop and mature additional technologies. Navy officials believe that the critical technologies for UCLASS are mature based on their experience with a demonstration program for a carrier-launched unmanned aircraft, known as the Unmanned Combat Air System Demonstration. However, if the validated program requirements lead to the need for new technologies, then the program will likely need additional time to mature those technologies before beginning system development. Scheduling for UCLASS is particularly complicated as the program needs to synchronize its test planning with availability of aircraft carriers that have had UCLASS modifications installed. Carriers are periodically unavailable due to scheduled maintenance needs, and thus air system schedule delays could cause the program to miss opportunities for testing. The Navy also has the opportunity to decide whether to add requirements and technologies in a single step or to add them incrementally using an evolutionary acquisition approach. Firm and achievable requirements should form the basis of a business case for any major weapon system investment. A substantive debate about the intended mission and required capabilities of UCLASS is taking place before DOD makes a major resource commitment and holds a Milestone B review to formally initiate a system development program. This is a good development, because it will likely help ensure that the Navy’s UCLASS business case provides a sound foundation for an acquisition program baseline that is rooted in firm and achievable requirements at the outset. DOD policy requires the Navy to finalize UCLASS requirements, with validation by the JROC, before issuing the request for proposals for the development contract. Once the requirements are finalized and before a development contract is signed, the Navy will need to demonstrate that it has adequate resources—including design knowledge, funding, and technologies—available to meet those requirements. Unsettled requirements will hinder the Navy’s ability to develop and present a business case with realistic cost and schedule estimates, and establish an acquisition program baseline. The final requirements and how similar or different they are to those used for the past preliminary design reviews, will determine the extent to which the knowledge the Navy gained is still applicable at this key juncture in the program. Once the JROC has validated UCLASS requirements, and in order to ensure that the Navy has a sound and executable business case and establishes an acquisition program baseline before awarding a development contract and committing significant resources, we recommend that the Secretary of Defense direct the Secretary of the Navy to provide a report to the congressional defense committees and the Secretary of Defense demonstrating that the Navy has the resources available and a strategy to deliver those required UCLASS capabilities. At a minimum this report should include: An updated cost estimate; A schedule for holding a Milestone B review and establishing an acquisition program baseline before initiating system development; Plans for new preliminary design reviews and technology maturation if more demanding requirements are validated; and What consideration is being given to adopting an evolutionary acquisition approach. We provided a draft of this product to DOD for comment. On behalf of DOD, the Navy partially agreed with our recommendation. The Navy’s written comments are reproduced in appendix I. The Navy also provided technical comments that were incorporated, as appropriate. The Navy agreed that if the JROC validates a more demanding set of requirements, it will be necessary to revisit the UCLASS schedule to allow for potential development and maturation of new technologies, in addition to planning of preliminary design reviews. However, the Navy also expressed concerns that the content of the recommended report would duplicate elements of existing statutory provisions such as certifications associated with milestone reviews and reporting requirements contained in the Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015. If the Navy holds a Milestone B review before awarding the development contract for the UCLASS air system and receives the certifications required by statute and DOD policy at that point in time, as well as meeting the reporting requirements in the National Defense Authorization Act for Fiscal Year 2015, we agree that it will satisfy the basic intent of our recommendation, and thus no separate report would be required. However, the current UCLASS schedule does not include a Milestone B review prior to the air system development contract award. If a Milestone B is not held prior to the contract award—thus not triggering the requisite statutory certification requirements—the Navy should still be required to provide assurance that it has a sound, executable business case and establish an acquisition program baseline before committing significant resources. In this case, we believe that providing the recommended report would address this need. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and the Secretary of the Navy. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you have any questions about this report or need additional information, please contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the contact named above, key contributors to this report were Travis J. Masters, Assistant Director; Scott M. Bruckner; Robert P. Bullock; Laura Greifner; Marie P. Ahearn; Timothy M. Persons; and Roxanna T. Sun.

The Navy expects to have invested at least $3 billion through fiscal year 2020 in the development of the UCLASS system, which includes air system, aircraft carrier, and control system and connectivity segments. It is expected to enhance the intelligence, surveillance, reconnaissance, targeting, and strike capabilities of the Navy's aircraft carrier fleet. In August 2013, the Navy awarded contracts worth $15 million each to four competing contractors to develop and deliver preliminary designs for the air system, which were assessed by the Navy in May 2014. The next anticipated steps for the program will be to solicit proposals and award the contract for air system development. The National Defense Authorization Act for Fiscal Year 2014 included a provision that GAO review the status of the UCLASS acquisition program annually. This report assesses (1) the current status of the program, and (2) the extent to which the Navy has the knowledge about resources it needs to develop the UCLASS system. GAO applied best practice standards, analyzed program documentation, and interviewed Department of Defense (DOD) and contractor officials. Since our last review in September 2013, the intended mission and required capabilities of the Navy's Unmanned Carrier-Launched Airborne Surveillance and Strike (UCLASS) system have come into question. Ongoing debate about whether the primary role of the UCLASS system should be mainly surveillance with limited strike or mainly strike with limited surveillance has delayed the program, as shown in the figure. Requirements emphasizing a strike role with limited surveillance could be more demanding and costly. a Early operational capability is currently not anticipated before fiscal year 2022 and could occur as late as fiscal year 2023. The knowledge the Navy has obtained about the resources needed to develop the UCLASS system may no longer be applicable depending on what requirements are finally chosen. GAO's prior best practices work has found that before initiating system development, a program should present an executable business case that demonstrates that it has a high level of knowledge and a match between requirements and available resources. If the final UCLASS requirements emphasize a strike role with limited surveillance, the Navy will likely need to revisit its understanding of available resources in the areas of design knowledge, funding, and technologies before awarding an air system development contract. GAO recommends that before committing significant resources the Navy should ensure that it has an executable business case for UCLASS development that matches available resources to required capabilities. On behalf of DOD, the Navy generally agreed with the recommendation.

VA, Education, and Labor assess education and training programs for various purposes. VA’s approval process is meant to ensure that education and training programs meet VA standards for receipt of veteran education assistance benefits, while Education’s and Labor’s processes are primarily for awarding student aid and providing apprenticeship assistance. VA administers a number of programs designed to assist individuals in gaining access to postsecondary education or training for a specific occupation (see table 1). VA generally provides its assistance in the form of payments to veterans, service persons, reservists, and certain spouses and dependents. Benefits can be used to pursue a degree program, vocational program, apprenticeship, and on-the-job training (see fig. 1). Before an individual entitled to VA education assistance can obtain money for an education or training program, the program must be approved by an SAA, or by VA in those cases in which an SAA has not been contracted to perform the work. VA’s administrative structure for the education and training assistance programs includes its national office, which oversees the four regional processing offices (RPO), and the national contract with SAAs. RPOs administer the education assistance programs and process benefits for veterans. SAAs review education and training programs to determine which programs should be approved and ensure schools and training providers are complying with VA standards. SAAs have six core duties: (1) approval of programs, (2) visits to facilities, (3) technical assistance to individuals at facilities, (4) outreach, (5) liaison with other service providers, and (6) contract management. Sixty SAAs exist in the 50 states, the District of Columbia, and Puerto Rico. Eight states have two SAAs. SAAs are usually part of a state’s department of education (31 SAAs). In some states, SAAs are organizationally located in other departments such as labor (9 SAAs) or veterans’ services (19 SAAs). The U.S. Department of Education’s approval process is to ensure that schools meet federal Education standards to participate in federal student financial aid programs. In order for students attending a school to receive Title IV financial aid, a school must be (1) licensed or otherwise legally authorized to provide postsecondary education in the state in which it is located, (2) accredited by an entity recognized for that purpose by the Secretary of Education, and (3) certified to participate in federal student aid programs by Education. As such, the state licensing agencies, accrediting agencies, and certain offices within Education are responsible for various approval activities. State licensing agencies grant legal authority to postsecondary institutions to operate in the state in which they are located. Each of the states has its own agency structure, and each state can choose its own set of standards. Accrediting agencies develop evaluation criteria and conduct peer evaluations to assess whether or not those criteria are met by postsecondary institutions. Institutions or programs that meet an agency’s criteria are then “accredited” by that agency. As of November 2005, there were 60 recognized private accrediting agencies of regional or national scope. The U.S. Department of Education’s Office of Postsecondary Education evaluates and recognizes accrediting agencies based on federal requirements to ensure these agencies are reliable authorities as to the quality of education or training provided by the institutions of higher education and the higher education programs they accredit. The U.S. Department of Education’s Office of Federal Student Aid determines the administrative and financial capacity of schools to participate in student financial aid programs, conducts ongoing monitoring of participant schools, and ensures participant schools are accredited and licensed by the states. The purpose of the Department of Labor’s approval process is to establish and promote labor standards to safeguard the welfare of apprentices. Labor establishes standards and registers programs that meet the standards. Labor directly registers and oversees programs in 23 states but has granted 27 states, the District of Columbia, and 3 territories authority to register and oversee their own programs, conducted by state apprenticeship councils (SACs). Labor reviews the activities of the SACs. SACs ensure that apprenticeship programs for their respective states comply with federal labor standards, equal opportunity protections, and any additional state standards. Figure 2 shows the agencies responsible for the approval processes for the various types of education and training programs. In 2001, SAAs received additional responsibilities as a result of legislative changes. This included responsibility for actively promoting the development of apprenticeship and on-the-job training programs and conducting more outreach activities to eligible persons and veterans to increase awareness of VA education assistance. SAAs were also charged with approving tests used for licensing and certification, such as tests to become a licensed electrician. For those tests that have been approved, veterans can use VA benefits to pay for testing fees. From fiscal years 2003 to 2006, SAA funding increased from $13 million to $19 million to expand services and support the additional responsibilities. Funding is scheduled to begin to decrease in fiscal year 2008. Many education and training programs approved by SAAs have also been approved by Education and Labor. Sixty-nine percent of all programs approved by SAAs are offered by institutions that have also been certified by Education. Seventy-eight percent of SAA-approved programs in institutions of higher learning (e.g., colleges and universities) have been certified by Education. Also, 64 percent of SAA-approved non-college degree programs are in institutions that have been certified by Education. Although less than 2 percent of all programs approved by SAAs are apprenticeship programs, VA and SAA officials reported that many of these programs have also been approved by Labor. Similar categories of approval standards exist across agencies, but the specific standards within each category vary and the full extent of overlap is unknown. For example, while VA and Education’s approval standards both have requirements for student achievement, the New England Association of Schools and Colleges, an accrediting agency, requires that students demonstrate competence in various areas such as writing and logical thinking, while VA does not have this requirement. Also among the student achievement standards, VA requires schools to give appropriate credit for prior learning, while Education does not have such a requirement. Table 2 shows the similar categories of standards that exist across agencies. policies related to student achievement, such as minimum satisfactory grades, but the requirements differ in level of specificity. Despite the overlap in approved programs and standards, VA and SAAs have made limited efforts to coordinate approval activities with Education and Labor. VA reported that while it has coordinated with Education and Labor on issues related to student financial aid and apprentices’ skill requirements, it believes increased coordination is needed for approval activities in order to determine the extent of duplicative efforts. Most of the SAA officials we spoke with reported that they have coordinated with SACs to register apprenticeship programs in their states. Labor reported that it coordinated with VA’s national office in several instances, including providing a list of registered apprenticeship programs. Education reported that it does not have formalized coordination with VA but has had some contacts to inform VA of its concerns regarding specific institutions. Information is not available to determine the amount of resources spent on SAA duties and functions, including those that may overlap with those of other agencies. VA does not require SAAs to collect information on the amount of resources they spend on specific approval activities. The SAA officials we spoke with said that their most time-consuming activity is conducting inspection and supervisory visits of schools and training facilities. However, the lack of data on resource allocation prevented us from determining what portions of funds spent by SAAs were for approval activities that may overlap with those of other agencies. SAA and other officials reported that SAA activities add value because they provide enhanced services to veterans and ensure program integrity. According to these officials, SAAs’ added value includes a focus on student services for veterans and on VA benefits, more frequent on-site monitoring of education and training programs than Education and Labor, and assessments and approval of a small number of programs that are not reviewed by other agencies, such as programs offered by unaccredited schools, on-the-job training programs, and apprenticeship programs not approved by Labor. SAA approval activities reportedly ensure that (1) veterans are taking courses consistent with occupational goals and program requirements, (2) schools and training programs have evaluated prior learning and work experience and grant credit as appropriate, and (3) school or program officials know how to complete paperwork and comply with policies required by VA educational assistance through technical assistance. According to officials we interviewed, SAAs generally conduct more frequent on-site monitoring of education and training programs than Education or Labor, possibly preventing fraud, waste, and abuse. Some officials reported that SAAs’ frequent visits were beneficial because they ensure that schools properly certify veterans for benefits and that benefits are distributed accurately and quickly. States, schools, and apprenticeship officials we spoke with reported that without SAAs, the quality of education for veterans would not change. However, veterans’ receipt of benefits could be delayed and the time required to complete their education and training programs could increase. Despite areas of apparent added value, it is difficult to fully assess the significance of SAA efforts. VA does measure some outputs, such as the number of supervisory visits SAAs conduct, but it does not have outcome- oriented measures, such as the amount of benefit adjustments resulting from SAAs’ review of school certification transactions, to evaluate the overall effectiveness and progress of SAAs. (See table 3.) We made several recommendations to the Department of Veterans Affairs to help ensure that federal dollars are spent efficiently and effectively. We recommended that the Secretary of the Department of Veterans Affairs take steps to monitor its spending and identify whether any resources are spent on activities that duplicate the efforts of other agencies. The extent of these actions should be in proportion to the total resources of the program. Specifically: VA should require SAAs to track and report data on resources spent on approval activities such as site visits, catalog review, and outreach in a cost-efficient manner, and VA should collaborate with other agencies to identify any duplicative efforts and use the agency’s administrative and regulatory authority to streamline the approval process. In addition, we recommended that the Secretary of the Department of Veterans Affairs establish outcome-oriented performance measures to assess the effectiveness of SAA efforts. VA agreed with the findings and recommendations and stated that it will (1) establish a working group with the SAAs to create a reporting system to track and report data for approval activities with a goal of implementation in fiscal year 2008, (2) initiate contact with appropriate officials at the Departments of Education and Labor to identify any duplicative efforts, and (3) establish a working group with the SAAs to develop outcome-oriented performance measures with a goal of implementation in fiscal year 2008. While VA stated that it will initiate contact with officials at Education and Labor to identify duplicative efforts, it also noted that amending its administrative and regulatory authority to streamline the approval process may be difficult due to specific approval requirements of the law. We acknowledge these challenges and continue to believe that collaboration with other federal agencies could help VA reduce duplicative efforts. We also noted that VA may wish to examine and propose legislative changes needed to further streamline its approval process. Madame Chairwoman, this completes my prepared statement. I would be happy to respond to any questions that you or other members of the subcommittee may have. For further information regarding this testimony, please contact me at (202) 512-7215. Individuals making key contributions to this testimony include Heather McCallum Hahn, Andrea Sykes, Kris Nguyen, Jacqueline Harpp, Cheri Harrington, Lara Laufer, and Susannah Compton. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In fiscal year 2006, the Department of Veterans Affairs (VA) paid $19 million to state approving agencies (SAA) to assess whether schools and training programs are of sufficient quality for veterans to receive VA education assistance benefits when attending them. The Departments of Education and Labor also assess education and training programs for various purposes. This testimony describes (1) changes that have occurred in state approving agencies' duties and functions since 1995, (2) the extent to which the SAA approval process overlaps with efforts by the Departments of Education and Labor, and (3) the additional value that SAA approval activities bring to VA education benefit programs. This testimony is based on a March 2007 report (GAO-07-384). Since 1995, legislative changes effective in 2001 created additional responsibilities for SAAs, including promoting the development of apprenticeship and on-the-job training programs, providing outreach services, and approving tests for occupational licensing. From fiscal years 2003 to 2006, SAA funding increased from $13 million to $19 million to expand services and support the additional responsibilities. However, funding is scheduled to decrease beginning in fiscal year 2008. Many education and training programs approved by SAAs have also been approved by Education or Labor, and VA has taken few steps to coordinate approval activities with these agencies. More than two-thirds of all programs approved by SAAs are offered by institutions that have been certified by Education. Many apprenticeship programs approved by SAAs have also been approved by Labor, although apprenticeship programs make up less than 2 percent of all programs approved by SAAs. Similar categories of approval standards, such as student achievement, exist across agencies, but the specific standards within each category vary and the full extent of the overlap is unknown. For example, VA requires schools to give appropriate credit for prior learning while Education does not have such a requirement. Despite the overlap in approved programs and standards, VA and SAAs have made limited efforts to coordinate approval activities with other federal agencies. VA does not require SAAs to collect information on the amount of resources they spend on specific approval activities; therefore, information is not available to determine the amount of resources spent on SAA duties and functions, including those that may overlap with those of other agencies. SAAs reportedly add value to the approval process for education and training programs, but the lack of outcome-oriented performance measures makes it difficult to assess the significance of their efforts. Areas of added value include (1) a focus on student services for veterans and on the integrity of VA benefits, (2) more frequent on-site monitoring of education and training programs than provided by Education or Labor, and (3) assessments and approval of a small number of programs that are not reviewed by other agencies. States, schools, and apprenticeship officials we spoke with reported that without SAAs, the quality of education for veterans would not change. However, veterans' receipt of benefits could be delayed and the time required to complete their education and training programs could increase. Despite areas of apparent added value, it is difficult to fully assess the significance of SAA efforts. VA measures some outputs, such as the number of supervisory visits SAAs conduct, but it does not have outcome-oriented performance measures, such as the amount of benefit adjustments resulting from SAAs' reviews, to evaluate the overall effectiveness of SAAs.

In 2013, we found that most agencies did not comply with spending requirements for the SBIR or STTR programs in all 6 years, based on data the agencies submitted to SBA for fiscal years 2006 to 2011. Specifically, 8 of the 11 agencies did not consistently meet annual spending requirements for SBIR. Data from 3 of the agencies—DHS, Education, and HHS—indicated that they met their spending requirements for all 6 years. For STTR, 4 of 5 agencies did not consistently meet annual spending requirements. Data from 1 agency— HHS—indicated that it met its STTR spending requirements for all 6 years. Figure 1 shows the number of years that each agency complied with spending requirements for fiscal years 2006 through 2011. Additional data on each agency’s spending on the programs is included in our 2013 report. SBIR and STTR program managers identified reasons why spending the required amount in a given fiscal year could be difficult, which we described in our 2013 report. For example, in that report, we found that delays in receiving final appropriations can delay agencies’ awarding of contracts for SBIR or STTR projects. Some program managers said that they tend to wait to award some grants and contracts until receiving their final appropriations in case the agency’s extramural R&D budget—and, therefore, its SBIR or STTR spending requirement—differs significantly from the expected amount. Because the award process can be lengthy, a delay can push the awards and spending into the following fiscal year. As we found in our 2013 report, when appropriations were received late in the year, agencies used differing methodologies to calculate their spending requirements, making it difficult to determine whether agencies’ calculations were correct. Although SBA provided guidance in policy directives on calculating their spending requirements, we found that the policy directives did not provide guidance to agencies on how to calculate such spending requirements when agency appropriations are delayed. We found that, without such guidance, that agencies would likely continue to calculate spending requirements in differing ways. In our 2013 report, we recommended that SBA provide additional guidance on how agencies should calculate spending requirements when agency appropriations are received late in the fiscal year. SBA has since begun taking steps to address this recommendation. We also found in 2013 that agencies participating in the SBIR and STTR programs did not consistently comply with requirements in the Small Business Act to annually report a description of their methodologies for calculating their extramural R&D budgets to SBA and that SBA did not consistently comply with the act’s requirements for annually reporting to Congress. With the exception of NASA in certain years, agencies did not submit their methodology reports to SBA within the time frame required by the Small Business Act for fiscal years 2006 through 2011 for the SBIR and STTR programs. As noted earlier, the act requires that agencies report to SBA their methodologies for calculating their extramural budgets within 4 months after the date of enactment of their respective appropriations acts. However, most participating agencies documented their methodologies for calculating their extramural R&D budgets for these fiscal years and submitted them to SBA after the close of the fiscal year with their annual reports. SBA officials said that they did not hold the agencies to the act’s deadline for submitting methodology reports, in part because delays in receiving annual appropriations pushed the required reporting date until late in the fiscal year and it was more convenient for agencies to submit their methodology reports with their annual reports. By not having the methodology reports earlier in the year as specified by law, however, SBA did not have an opportunity to analyze these methodologies and provide the agencies with timely feedback to assist agencies in accurately calculating their spending requirements. By not providing such feedback, SBA was forgoing the opportunity to assist agencies in correctly calculating their program spending requirements and to help ensure that they spent the mandated amounts. More significantly, we found in 2013 that the majority of the agencies did not include an itemization of each R&D program excluded from the calculation of the agency’s extramural budget and a brief explanation of why it was excluded, as required. We found that it was difficult for SBA to comprehensively analyze the methodologies and determine whether agencies were accurately calculating their spending requirements without having more consistent information from agencies. We also found that agencies could have benefited from guidance on the format of methodology reports, and that without such guidance, participating agencies might continue to provide SBA with broad, incomplete, or inconsistent information about their methodologies and spending requirements. We recommended that SBA provide additional guidance to agencies on the format that they are to include in their methodology reports. We also recommended that SBA provide timely annual feedback to each agency following submission of its methodology report on whether its method for calculating the extramural R&D budget complies with program requirements, including an itemization of and an explanation for all exclusions from the basis for the calculations. SBA is in the process of taking steps to address these recommendations. We also found in 2013 that SBA had not consistently complied with the requirement to report its analysis of the agencies’ methodologies in its annual report to Congress, as required by the Small Business Act. Over the 6 years covered in our review, SBA reported to Congress for 3 of those; fiscal years 2006, 2007, and 2008. We found that these reports contained limited analyses of the agencies’ methodologies, and some of the analyses were inaccurate. For example, SBA’s analysis was limited to a table attached to the annual report to Congress that often did not include information on particular agencies. In our 2013 report, we found that, without more comprehensive analysis and accurate information on participating agencies in SBA’s annual report, Congress did not have information on the extent to which agencies are reporting what is required by law. In that report, we recommended that SBA provide Congress with a timely annual report that includes a comprehensive analysis of the methodology each agency used for calculating the SBIR and STTR spending requirements, providing a clear basis for SBA’s conclusions about whether these calculations meet program requirements. SBA is in the process of taking steps to address this recommendation. In 2013, we also found that changing the methodology to calculate the SBIR and STTR spending requirements based on each agency’s total R&D budget instead of each agency’s extramural R&D budget would increase the amount of each agency’s spending requirement for the programs, some much more than others, depending on how the change was implemented. Also, such a change would increase the number of agencies that would be required to participate in the programs if the threshold for participating in the programs remained the same. For example, two additional agencies—the Departments of Veterans Affairs (VA) and the Interior—would have been required to participate in SBIR in fiscal year 2011 if total R&D budgets had been the criteria because these agencies reported total R&D budgets in excess of $100 million. For STTR, three additional agencies—Commerce, USDA, and VA—would also have been required to participate in the program for fiscal year 2011 if total R&D budgets had been the criteria because these agencies reported total R&D budgets in excess of $1 billion. Some agencies told us in 2013 that changing the methodology to calculate the SBIR and STTR spending requirements could have effects on their R&D programs and create challenges. For example, changing the base would increase SBIR and STTR budgets and could result in reductions in certain types of intramural R&D, with corresponding reductions in full-time equivalent staffing of these programs. In addition, some agency officials said there would potentially be changes in the content of the agency’s extramural R&D effort because of changes in the types of businesses that receive grants and contracts. We found in 2013 that the participating agencies’ cost of administering the SBIR and STTR programs could not be determined because the agencies neither collected that information nor had the systems to do so. Neither the authorizing legislation for the programs nor SBA policy directives require agencies to track and estimate all administrative costs, and neither the law nor the policy directives define these administrative costs. Estimates agencies provided for our report indicated that the greatest amounts of administrative costs in fiscal year 2011 were for salaries and expenses, contract processing, outreach programs, technical assistance programs, support contracts, and other purposes. With the implementation in 2013 of a pilot program allowing agencies under certain conditions to use up to 3 percent of SBIR program funds for certain administrative costs, SBA expected to require agencies in the pilot program to track and report the spending of that 3 percent but not all of their administrative costs. Chairwoman Cantwell, Ranking Member Risch, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-3841 or neumannj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Hilary Benedict, Assistant Director; Antoinette Capaccio; Cindy Gilbert; Rebecca Makar; Cynthia Norris; and Daniel Semick. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Federal agencies have awarded more than 156,000 contracts and grants, totaling nearly $40 billion through the SBIR and STTR programs to small businesses to develop and commercialize innovative technologies. The Small Business Act mandates that agencies, with extramural R&D budgets that meet the thresholds for participation, must spend a percentage of these annual budgets on the two programs. The agencies are to report to SBA and SBA is to report to Congress. This testimony is based on a report GAO issued in September 2013 and addresses for fiscal years 2006 through 2011, (1) the extent to which participating agencies complied with program spending requirements, (2) the extent to which participating agencies and SBA complied with certain reporting requirements, (3) the potential effects of basing the spending requirements for the SBIR and STTR programs on agencies' total R&D budgets instead of their extramural R&D budgets, and (4) what is known about the amounts participating agencies spent for administering the programs. For that report, GAO reviewed agency calculations of spending requirements and required reports, and interviewed SBA and participating agency officials. Using data agencies had reported to the Small Business Administration (SBA), GAO found in its 2013 report that 8 of the 11 agencies participating in the Small Business Innovation Research (SBIR) program and 4 of the 5 agencies participating in the Small Business Technology Transfer (STTR) program did not consistently comply with spending requirements for fiscal years 2006 to 2011. SBA, which oversees the programs, provided guidance in policy directives for agencies on calculating these requirements, but the directives did not provide guidance on calculating the requirements when appropriations are late and spending is delayed. Some SBIR and STTR program managers told GAO that it can be difficult to spend the required amount because delays in receiving final appropriations can delay agencies' awarding of contracts. As GAO found in its 2013 report, when appropriations were received late in the year agencies used differing methodologies to calculate their spending requirements, which made it difficult to determine whether agencies' calculations were correct. GAO found that, without further SBA guidance, agencies would likely continue calculating spending requirements in differing ways. GAO also found in 2013 that the participating agencies and SBA had not consistently complied with certain program reporting requirements. For example, participating agencies did not itemize each program excluded from the calculation of their extramural research or research and development (R&D) budgets and explain why the program was excluded, as required. (Extramural R&D is generally conducted by nonfederal employees outside of federal facilities.) Also, SBA's annual reports to Congress that were available at the time of GAO's review contained limited analysis of the agencies' methodologies, often not including information on particular agencies. By providing more analysis of the agencies' reports, as GAO recommended in its 2013 report, SBA can provide information to Congress on the extent to which agencies were reporting what is required. In 2013, GAO found that the potential effects of basing each participating agency's spending requirement on its total R&D budget instead of its extramural R&D budget would increase the amount of the spending requirement—for some agencies more than others, depending on how the change was implemented. Also, if the thresholds of the spending requirements for participation in the programs did not change, changing the base to an agency's total R&D budget would increase the number of agencies required to participate. In addition, GAO found in 2013 that the agencies' cost of administering the programs could not be determined because the agencies had not consistently tracked costs as they were not required to do so by the authorizing legislation of the programs. Estimates agencies provided to GAO indicated that the greatest amounts of administrative costs in fiscal year 2011 were for salaries and expenses, contract processing, outreach programs, technical assistance programs, support contracts, and other purposes. With the start of a pilot program allowing agencies to use up to 3 percent of SBIR program funds for administrative costs in fiscal year 2013, SBA planned to require participating agencies to track and report administrative costs paid from program funds. GAO is not making any new recommendations, but made several to SBA in GAO's 2013 report on this topic. SBA agreed with those recommendations and is taking steps to implement them.

CDC has 13 guidelines for hospitals on infection control and prevention, and in these guidelines CDC recommends almost 1,200 practices for implementation to prevent HAIs and related adverse events. (See table 1.) The guidelines cover such topics as prevention of catheter-associated urinary tract infections, prevention of surgical site infections, and hand hygiene. An example of a recommended practice in the hand hygiene guideline is the recommendation that health care workers decontaminate their hands before having direct contact with patients. Most of the practices are sorted into five categories—from strongly recommended for implementation to not recommended—primarily on the basis of the strength of the scientific evidence for each practice. Over 500 practices are strongly recommended. CDC and AHRQ have conducted some activities to promote implementation of recommended practices, such as disseminating the guidelines and providing research funds. However, these steps have not been guided by a prioritization of recommended practices. One factor to consider in prioritization is strength of evidence, as CDC has done. In addition to strength of evidence, an AHRQ study identified other factors to consider in prioritizing recommended practices, such as costs or organizational obstacles. Furthermore, the efforts of the two agencies have not been coordinated. For example, we found that CDC and AHRQ independently examined various aspects of the evidence related to improving hand hygiene compliance, such as the selection of hand hygiene products and health care worker education. Although this could have been an opportunity for coordination, an official from the HHS Office of the Secretary told us that no one within the office is responsible for coordinating infection control activities across HHS. While CDC’s infection control guidelines describe specific clinical practices recommended to reduce HAIs, the infection control standards that CMS and the accrediting organizations require as part of the hospital certification and accreditation processes describe the fundamental components of a hospital’s infection control program. These components include the active prevention, control, and investigation of infections. Examples of standards and corresponding standards interpretations that hospitals must follow include educating hospital personnel about infection control and having infection control policies in place. The standards are far fewer in number than the recommended practices in CDC’s guidelines—for example, CMS’s infection control COP contains two standards. Furthermore, CMS and the accrediting organizations generally do not require that hospitals implement all recommended practices in CDC’s infection control and prevention guidelines. Only the Joint Commission and AOA have standards that require the implementation of certain practices recommended in CDC’s infection control guidelines. For example, the Joint Commission and AOA require hospitals to annually offer influenza vaccinations to health care workers, whereas CMS’s interpretive guidelines, or standards interpretations, are more general, stating that hospitals should adopt policies and procedures based as much as possible on national guidelines that address hospital-staff-related issues, such as evaluating hospital staff immunization status for designated infectious diseases. CMS, the Joint Commission, and AOA assess compliance with their infection control standards through direct observation of hospital activities and review of hospital policy documents during on-site surveys. Multiple HHS programs collect data on HAIs, but limitations in the scope of information they collect and the lack of integration across the databases maintained by these separate programs constrain the utility of the data. Three agencies within HHS—CDC, CMS, and AHRQ—currently collect HAI-related data for a variety of purposes in databases maintained by four separate programs: CDC’s National Healthcare Safety Network (NHSN) program, CMS’s Medicare Patient Safety Monitoring System (MPSMS), CMS’s Annual Payment Update (APU) program, and AHRQ’s Healthcare Cost and Utilization Project (HCUP). Each of these databases presents only a partial view of the extent of the HAI problem because each focuses its data collection on selected types of HAIs and collects data from a different subset of hospital patients across the country. (See table 2.) Although officials from the various HHS agencies discuss HAI data collection with each other, we did not find that the agencies were taking steps to integrate any of the existing data by creating linkages across the databases, such as creating common patient identifiers. Creating linkages across the HAI-related databases could enhance the availability of information to better understand where and how HAIs occur. For example, data on surgical infection rates and data on surgical processes of care are collected for some of the same patients in two different databases that are not linked. As a consequence, the potential benefit of using the existing data to monitor the extent to which compliance with the recommended surgical care processes leads to actual improvements in surgical infection rates has not been realized. Although none of the databases collect data on the incidence of HAIs for a nationally representative sample of hospital patients, CDC officials have produced national estimates of HAIs. However, those estimates derive from assumptions and extrapolations that raise questions about the reliability of those estimates. HAIs in hospitals can cause needless suffering and death. Federal authorities and private organizations have undertaken a number of activities to address this serious problem; however, to date, these activities have not gained sufficient traction to be effective. We identified two possible reasons for the lack of effective actions to control HAIs. First, although CDC’s guidelines are an important source for its recommended practices on how to reduce HAIs, the large number of recommended practices and lack of department-level prioritization have hindered efforts to promote their implementation. The guidelines we reviewed contain almost 1,200 recommended practices for hospitals, including over 500 that are strongly recommended—a large number for a hospital trying to implement them. A few of these are required by CMS’s or accrediting organizations’ standards or their standards interpretations, but it is not reasonable to expect CMS or accrediting organizations to require additional practices without prioritization. Although CDC has categorized the practices on the basis of the strength of the scientific evidence, there are other factors to consider in developing priorities. For example, work by AHRQ suggests factors such as costs or organizational obstacles that could be considered. The lack of coordinated prioritization may have resulted in duplication of effort by CDC and AHRQ in their reviews of scientific evidence on HAI-related practices. Second, HHS has not effectively used the HAI-related data it has collected through multiple databases across the department to provide a complete picture of the extent of the problem. Limitations in the databases, such as nonrepresentative samples, hinder HHS’s ability to produce reliable national estimates on the frequency of different types of HAIs. In addition, currently collected data on HAIs are not being combined to maximize their utility. HHS has made efforts to use the currently collected data to understand the extent of the problem of HAIs, but the lack of linkages across the various databases results in a lost opportunity to gain a better grasp of the problem of HAIs. HHS has multiple methods to influence hospitals to take more aggressive action to control or prevent HAIs, including issuing guidelines with recommended practices, requiring hospitals to comply with certain standards, releasing data to expand information about the nature of the problem, and soon, using hospital payment methods to encourage the reduction of HAIs. Prioritization of CDC’s many recommended practices can help guide their implementation, and better use of currently collected data on HAIs could help HHS—and hospitals themselves—monitor efforts to reduce HAIs. We concluded that leadership from the Secretary of HHS is currently lacking to do this. Without such leadership, the department is unlikely to be able to effectively leverage its various methods to have a significant effect on the suffering and death caused by HAIs. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information about this statement, please contact Cynthia A. Bascetta at (202) 512-7114 or bascettac@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were Linda T. Kohn, Assistant Director; Shaunessye Curry; Shannon Slawter Legeer; Eric Peterson; and Roseanne Price. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

According to the Centers for Disease Control and Prevention (CDC), health-care-associated infections (HAI)--infections that patients acquire while receiving treatment for other conditions--are estimated to be 1 of the top 10 causes of death in the nation. This statement summarizes a report issued in March and released today, Health-Care-Associated Infections in Hospitals: Leadership Needed from HHS to Prioritize Prevention Practices and Improve Data on These Infections (GAO-08-283). In this report, GAO examined (1) CDC's guidelines for hospitals to reduce or prevent HAIs and what HHS does to promote their implementation, (2) Centers for Medicare & Medicaid Services' (CMS) and hospital accrediting organizations' required standards for hospitals to reduce or prevent HAIs, and (3) HHS programs that collect data related to HAIs and integration of the data across HHS. To conduct the work, GAO reviewed documents and interviewed HHS agency and accrediting organization officials. In its March report, which is summarized in this statement, GAO found CDC has 13 guidelines for hospitals on infection control and prevention, which contain almost 1,200 recommended practices, but activities across HHS to promote implementation of these practices are not guided by a prioritization of the practices. Although most of the practices have been sorted into categories primarily on the basis of the strength of the scientific evidence for the practice, other factors to consider in prioritizing, such as costs or organizational obstacles, have not been taken into account. While CDC's guidelines describe specific clinical practices recommended to reduce HAIs, the infection control standards that CMS and the accrediting organizations require of hospitals describe the fundamental components of a hospital's infection control program. The standards are far fewer in number than CDC's recommended practices and generally do not require that hospitals implement all recommended practices in CDC's guidelines. Multiple HHS programs have databases that collect data on HAIs, but limitations in the scope of information collected and a lack of integration across the databases constrain the utility of the data. GAO concluded that the lack of department-level prioritization of CDC's large number of recommended practices has hindered efforts to promote their implementation. GAO noted that a few of CDC's strongly recommended practices were required by CMS or the accrediting organizations but that it was not reasonable to expect CMS or the accrediting organizations to require additional practices without prioritization. GAO also concluded that HHS has not effectively used the HAI-related data it has collected through multiple databases across the department to provide a complete picture of the extent of the problem.

Federal excess and underutilized property is an ongoing challenge facing the government due in part to unreliable data. In June 2012, we found that the FRPC did not ensure that key data elements—including buildings’ utilization, condition, annual operating costs, mission dependency, and value—were defined and reported consistently and accurately. For example, the FRPP data did not accurately describe the properties at 23 of the 26 locations we visited, often overstating the condition and annual operating costs of buildings. The types of inconsistencies and inaccuracies we identified in these five key data elements suggest that the FRPP database is not a useful decision-making tool for managing federal real property. Our review focused on five civilian federal real property-holding agencies—GSA and the departments of Energy (DOE), the Interior (Interior), Veterans Affairs (VA), and Agriculture (USDA). We reviewed key agency-reported FRPP data elements including utilization, condition index, annual operating costs, and value, and we found inconsistencies and inaccuracies for each of these data elements. For example, several buildings that received high scores for condition were actually in poor condition, with problems including: asbestos, mold, health concerns, radioactivity, and flooding (see fig. 1). In addition to the various problems we found and documented with real property data, we have also found that the federal government continues to face other challenges when managing excess and underutilized properties. Such challenges include (1) the high cost of property disposal, (2) legal requirements prior to disposal such as those related to preserving historical properties and the environment, (3) stakeholder resistance to property disposal or reuse plans, and (4) remote property locations that make selling or disposal difficult. Given the complexities of issues related to excess and underutilized federal real property management, unsuccessful implementation of cost savings efforts across administrations, and the issues that remain with data reporting, we concluded that a national strategy could provide a clear path forward to help federal agencies manage excess and underutilized property in the long term. A national strategy can guide federal agencies and other stakeholders to systematically identify risks, resources needed to address those risks, and investment priorities when managing federal portfolios. Without a national strategy, the federal government may be ill-equipped to sustain efforts to better manage excess and underutilized property. In our June 2012 report, we recommended that OMB, in consultation with the FRPC, develop a national strategy for managing federal excess and underutilized real property. OMB did not directly state whether it agreed or disagreed with our recommendation. Up to now, no comprehensive national strategy has been issued. We view such a strategy as a key step needed to improve the federal government’s management of its real property portfolio. Additionally, FRPP is not yet a useful tool for describing the nature, use, and extent of excess and underutilized federal real property. We concluded in June 2012 that FRPP data must be consistent and reliable to help decision makers overcome these long-standing problems. Accordingly, in the same report, we recommended that GSA and FRPC take action to improve the FRPP. GSA stated that they intend to improve the agency’s management of FRPP data by: making enhancements to clearly define data collection requirements, performing data quality tests and assessments to ensure data developing new performance measures to support government-wide goals, and improving collaboration with agencies. GSA developed an action plan for implementing GAO’s recommendations and was scheduled to complete these changes by June 2013. We are in the process of determining whether these actions improve FRPP consistency and reliability. We plan to report our results as part of our 2015 high risk update. The federal government manages a wide variety of structures that represent over half of the federal government’s real property assets, including roads and parking structures, utility systems, monuments, and radio towers. In January 2014, we found that incorrect and inconsistent data on structures limit the value of the government-wide FRPP data the government collects. First, at the most basic level, some of the data agencies submit on their structures are incorrect, undermining agencies’ ability to manage their structures and the reliability of the data in FRPP. Second, even if agencies effectively apply the OMB guidance, the government-wide data will continue to face reliability problems because of the flexibility built into FRPP guidance on how agencies track key elements, such as defining and counting structures. For example, agencies we reviewed—including the Department of Transportation (DOT), DOE, VA, USDA, and Interior—defined structures differently leading to inconsistencies in what assets are included in the FRPP. Figure 2 provides examples of some facilities we visited that were classified as structures, even though they were similar to buildings (having features such as walls, roofs, doors, windows, and air- conditioning systems in some cases). We concluded that agencies must improve their data quality in order to document performance and support decision making. Additionally, the agencies we reviewed submitted incorrect information for key data elements for structures, such as replacement value, annual operating costs, and condition. GSA officials who manage the FRPP said that FRPC chose to provide flexibility in the reporting guidance for data on structures to account for the wide diversity in federal structures, but it also aggregates the data as if they were comparable. We found that, even if this data were useful, FRPC reports very little information on structures. Officials at GSA told us that there is low interest in and demand for this information, creating few incentives to improve data reliability. We recommended that OMB, in coordination with the FRPC, develop guidance to improve agencies’ internal controls to produce consistent, accurate and reliable information on their structures. We also recommended that GSA, in coordination with the FRPC, clarify the definition of structures and assess the feasibility of limiting the data collected on structures submitted to the FRPP. OMB and GSA agreed with the recommendations, and GSA provided an action plan in December 2013 to implement them, but no timeframe was provided for when the proposed actions would be completed. In a 2014 report, we found that civilian agencies followed most leading practices in managing their facility maintenance and repair backlogs, except for transparent reporting about the funding amounts agencies are spending to maintain their assets and manage their backlogs. However, the deferred maintenance and repair of federal real property contributes to deteriorating assets in the federal inventory, and we found that the eventual need to address deferred maintenance and repair could significantly affect future budget resources. The five federal agencies we reviewed for our 2014 report— GSA, DOE, VA, Interior, and the Department of Homeland Security (DHS) — reported fiscal year 2012 deferred maintenance and repair backlog estimates that ranged from nearly $1 billion to $20 billion. However, agencies do not share a common definition of deferred maintenance, resulting in dissimilar backlog estimates. In addition, financial reporting requirements as well as FRPP reporting guidance do not require a specific process for determining deferred maintenance and repair backlogs, and agencies can use their existing processes to do so. For example, Interior excludes, while DHS includes, costs for some assets scheduled for disposal. As a result, when agencies report information in their financial reports and to FRPP, data include dissimilar backlog estimates and makes estimates across agencies not comparable. As such, an opportunity exists to better conform to leading practices and increase transparency. We recommended that OMB, in collaboration with agencies, collect and report information on agencies’ costs for annual maintenance and repair performed and funding spent to manage their existing backlogs. OMB agreed with our recommendation, and along with FRPC, has taken actions to improve management of deferred maintenance, including working to refine FRPP data and develop performance measures that reflect current federal real-property management priorities, but OMB has not yet fully implemented our recommendation. Thus, as OMB and FRPC agencies work to improve FRPP data and develop new performance metrics, the opportunity exists to revise requirements for agencies to collect and report costs of annual maintenance and repair and to address deferred maintenance and repair backlogs as we recommended earlier this year. In June 2010, the President issued a memorandum directing federal agencies to achieve $3 billion in real property cost savings by the end of fiscal year 2012 through a number of methods, including disposal of excess property, energy efficiency improvements, and other space consolidation efforts. Agencies reported real property cost savings of $3.8 billion across the OMB categories of disposal, space management, sustainability, and innovation in response to the June 2010 presidential memorandum. Space management savings, defined by OMB as those savings resulting from, among other things, consolidations or the elimination of lease arrangements that were not cost effective, accounted for the largest portion of savings reported by all agencies. In October 2013, we found that space management savings accounted for about 70 percent of the savings reported by the six agencies we reviewed— GSA, USDA, DOE, DHS, the Department of Justice (DOJ), and the Department of State (State). The requirements of the memorandum, as well as agencies’ individual savings targets and the time frame for reporting savings, led the selected agencies to primarily report savings from activities that were planned or under way at the time the memorandum was issued. GAO’s October 2013 review of the six selected agencies found several problems that affected the reliability and transparency of the cost savings data that the government reported in response to the June 2010 memorandum. For example, OMB did not require agencies to provide detailed documentation of their reported savings or include specific information about agencies’ reported savings on Performance.gov, limiting transparency. Furthermore the memorandum and subsequent guidance issued by OMB were not clear on the types of savings that could be reported, particularly because the term “cost savings” was not clearly defined. For instance, officials from several agencies we reviewed said the guidance was unclear about whether savings from cost avoidance measures could be reported. In addition some agencies made different assumptions in reporting disposal savings. Some agencies did not deduct costs associated with disposals, and some reported savings outside the time frame of the memorandum. For example, two agencies reported one year of avoided operations and maintenance savings for the year in which the disposal occurred, while three agencies reported up to 3 years of savings depending on when disposals occurred during the 3-year period. Agency officials stated that the memorandum broadened their understanding of real property cost-savings opportunities. However, we concluded that establishing clearer standards for identifying and reporting savings would improve the reliability and transparency of the reporting of cost savings and help decision-makers better understand the potential savings of future initiatives to improve federal real-property management. As such, we recommended that OMB establish clear and specific standards to help ensure reliability and transparency in the reporting of future real-property cost savings. OMB generally agreed with the recommendation. We are in the process of determining the extent to which OMB has implemented the recommendation and plan to report our final results as part of our 2015 high risk update. Sustained progress is needed to address the conditions and persistent challenges that make the area of federal real property management high risk. Multiple administrations have committed to a more strategic approach toward managing real property. However, problems with data reliability remain an underlying challenge for agencies to properly manage the multiple areas of real property reform. We will continue to monitor these agencies’ efforts to implement our recommendations, which we believe are critical to addressing the challenges that have led us to keep federal real property management on our High Risk List. Chairman Mica, Ranking Member Connolly, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions that you may have at this time. For further information regarding this testimony, please contact David Wise at (202) 512-2834 or wised@gao.gov. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are Keith Cunningham (Assistant Director), David Sausville (Assistant Director), Raymond Griffith, Geoffrey Hamilton, Amy Higgins, Hannah Laufe, and Sara Ann Moessbauer.

The federal real property portfolio, comprising approximately 900,000 buildings and structures and worth billions of dollars, presents several key management challenges. GAO has designated federal real property management as a high risk issue since 2003 due to long-standing challenges including unreliable data on this property, excess and underutilized property, over-reliance on leasing, and challenges with security. Since then, the federal government has given high-level attention to reforming real property management and has made some progress. It established the FRPC, chaired by OMB, in 2004. The FRPC created the FRPP, which is intended to be a comprehensive database developed for describing the nature, use, and extent of all real property under the custody and control of executive branch agencies. The FRPP is managed by GSA and began collecting data in 2005. GAO's recent work has found, however, that data problems related to federal real property have continued. This statement discusses data guidance and reliability issues GAO has found regarding federal civilian agencies' data on: (1) excess and underutilized property, (2) structures, (3) maintenance backlogs, and (4) cost saving estimates. It is based on previous GAO reports on federal real property issued from June 2012 through January 2014 and some updates on the status of recommendations made in those reports. To obtain these updates, GAO monitored agency actions taken and performed follow-up with agency officials. GAO found in 2012 that government-wide real property data were not sufficiently reliable to support sound management and decision making about excess and underutilized property. The Federal Real Property Council (FRPC) had not ensured that key data elements of the Federal Real Property Profile (FRPP) were defined and reported consistently and accurately. For example, FRPP data did not accurately describe the properties at 23 of the 26 locations GAO visited, often overstating the condition and annual operating costs of buildings. GAO recommended that the General Services Administration (GSA), in consultation with FRPC, develop a plan to improve the FRPP. Consequently, GSA developed an action plan and was scheduled to complete these changes by June 2013. GAO is determining whether these actions improve FRPP consistency and reliability and plans to report the results as part of GAO's 2015 high risk update. In 2014, GAO found that incorrect and inconsistent data on federal structures such as roads, bridges, railroads, and utility systems, limited the value of the government-wide FRPP data. For example, agencies GAO reviewed defined structures differently leading to inconsistencies. GAO recommended that GSA, in coordination with FRPC, clarify the definition of structures and assess the feasibility of limiting the data on structures submitted to the FRPP. GSA provided an action plan in December 2013 to implement GAO's recommendations, but no timeframe was provided for when the proposed actions would be completed. In a 2014 report, GAO found that civilian agencies followed most leading practices in managing their facility maintenance and repair backlogs, except for transparent reporting about the funding amounts agencies are spending to maintain their assets and manage their backlogs. Different agency financial reporting requirements as well as FRPP reporting guidance did not require a specific process for determining deferred maintenance and repair backlogs, and agencies could use their existing processes. Thus, GAO recommended that OMB, in collaboration with agencies, collect and report information on agencies' costs for annual maintenance and repair performed and funding spent to manage their existing backlogs. OMB and FRPC agencies have taken actions to improve management of deferred maintenance, including working to refine FRPP data, but have not yet fully implemented GAO's recommendation. In a 2013 review of selected agencies' reporting of real property cost savings data, GAO identified several challenges that reduced the reliability and transparency of the data the government reported. For example, OMB did not require agencies to provide detailed documentation of their reported savings or include specific information about agencies' reported savings on Performance.gov, limiting transparency. Furthermore, guidance issued by OMB was not clear on the types of savings that could be reported, particularly because the term "cost savings" was not clearly defined. GAO recommended that OMB establish clear and specific standards to help ensure reliability and transparency in the reporting of future real-property cost savings. OMB generally agreed with the recommendation. GAO is determining the extent to which OMB has implemented it and GAO plans to report the results as part of GAO's 2015 high risk update.

Section 550 of the DHS appropriations act for fiscal year 2007 requires DHS to issue regulations establishing risk-based performance standards for the security of facilities that the Secretary determines to present high levels of security risk, among other things. The CFATS rule was published in April 2007 and Appendix A to the rule, published in November 2007, listed 322 chemicals of interest and the screening threshold quantities for each.implementing DHS’s CFATS rule, including assessing potential risks and identifying high-risk chemical facilities, promoting effective security planning, and ensuring that final high-risk facilities meet the applicable risk-based performance standards though site security plans approved by DHS. ISCD is managed by a Director and a Deputy Director and operates five branches that are, among other things, responsible for information technology operations, policy and planning, and providing compliance and technical support. From fiscal years 2007 through 2012, DHS dedicated about $442 million to the CFATS program. During fiscal year 2012, ISCD was authorized 242 full-time-equivalent positions. For fiscal year 2013, DHS’s budget request for the CFATS program was $75 million and 242 positions. Our review of the ISCD memorandum and discussions with ISCD officials showed that the memorandum was developed during the latter part of 2011 and was developed primarily based on discussions with ISCD staff and the observations of the ISCD former Director in consultation with the former Deputy Director. In November 2011, the former Director and Deputy Director provided the Under Secretary with the ISCD memorandum entitled “Challenges Facing ISCD, and the Path Forward.” These officials stated that the memorandum was developed to inform leadership about the status of ISCD, the challenges it was facing, and the proposed solutions identified to date. In transmitting a copy of the memorandum to congressional stakeholders following the leak in December 2011, the NPPD Under Secretary discussed caveats about the memorandum, including that it had not undergone the normal review process by DHS’s Executive Secretariat and contained opinions and conclusions that did not reflect the position of DHS. The former ISCD Director stated that the memo was intended to begin a dialog about the program and challenges it faced. The former Director confirmed that she developed the memorandum by (1) surveying division staff to obtain their opinions on program strengths, challenges, and recommendations for improvement; (2) observing CFATS program operations, including the security plan review process; and (3) analyzing an internal DHS report on CFATS operations, which, according to the former Director served as a basis for identifying some administrative challenges and corrective action. The senior ISCD and NPPD officials we contacted said that they generally agreed with the material that they saw, but noted that they believed the memorandum was missing context and balance. For example, one NPPD official stated that that the tone of the memorandum was too negative and the problems it discussed were not supported by sound evaluation. However, the official expressed the view that the CFATS program is now on the right track. The ISCD memorandum discussed numerous challenges that, according to the former Director, pose a risk to the program. The former Director pointed out that, among other things, ISCD had not approved any site security plans or carried out any compliance inspections on regulated facilities. The former Director attributed this to various management challenges, including a lack of planning, poor internal controls, and a workforce whose skills were inadequate to fulfill the program’s mission, and highlighted several challenges that have had an impact on the progress of the program. In addition, the memorandum provided a detailed discussion of the issues or problems facing ISCD, grouped into three categories: (1) human capital management, such as poor staffing decisions; (2) mission issues, such as the lack of an established inspection process; and (3) administrative issues, such as a lack of infrastructure and support, both within ISCD and on the part of NPPD and IP. ISCD is using an action plan to track its progress addressing the challenges identified in the memorandum, and, according to senior division officials, the plan may be helping them address some legacy issues that staff were attempting to deal with before the memorandum was developed. The January 2012 version of the proposed action plan listed 91 actions to be taken categorized by issue—human capital management issues, mission issues, or administrative issues—that, according to the former ISCD Director, were developed to be consistent with the ISCD memorandum. However, the January 2012 version of the action plan did not provide information on when the action was started or to be finished. Eleven of the 12 ISCD managers (other than the former Director and Deputy Director) assigned to work as the coordinators of the individual action items told us that even though they were not given the opportunity to view the final version of the ISCD memorandum, the former Director provided them the sections of the action plan for which they were responsible to help them develop and implement any corrective actions. They said that they agreed that actions being taken in the plan were needed to resolve challenges facing ISCD. Our discussions with these officials also showed that about 39 percent (37 of 94) of the items in the March and June 2012 action plans addressed some legacy issues that were previously identified and, according to these officials, corrective actions were already underway for all 37 of these items. Our analysis of the June 2012 version of the ISCD action plan showed that 40 percent of the items in the plan (38 of 94) had been completed. The remaining 60 percent (56 of 94) were in progress. Of the 38 completed items, we determined that 32 were associated with human capital management and administrative issues, including those involving culture and human resources, contracting, and documentation. The remaining 6 of 38 action items categorized by ISCD as completed were associated with mission issues. Figure 1 shows the status of action items by each of the three categories as of June 2012. For the remaining 56 items that were in progress as of June 2012, 40 involved human capital management and administrative issues. According to ISCD officials, these 40 issues generally involved longer- term efforts—such as organizational realignment—or those that require approval or additional action on the part of IP or NPPD. Sixteen of 56 remaining actions items in progress covered mission issues that will likely also require long-term efforts to address. As of August 2012, ISCD reported that it had completed another 21 action items, of which 8 were to address mission-related issues. We did not verify ISCD’s efforts to complete actions since June 2012. However, we have recently begun a follow-up review of CFATS at the request of this and other committees, which will focus on DHS’s efforts to address mission-related issues. We expect to report the results of these efforts early in 2013. Our analysis of the April and June versions of the plan shows that the division had extended the estimated completion dates for nearly half of the action items. Estimated completion dates for 52 percent (48 of 93 items) either did not change (37 items) or the date displayed in the June 2012 plan was earlier than the date in the April 2012 version of the plan (11 items). Conversely, 48 percent (45 of 93) of the items in the June 2012 version of the plan had estimated completion dates that had been extended beyond the date in the April 2012 plan. Figure 2 shows the extent to which action plan items were completed earlier than planned, did not change, or were extended, from April 2012 through June 2012, for the human capital management, mission, and administrative issues identified in the plan. ISCD officials told us that estimated completion dates had been extended for various reasons. For example, one reason for moving these dates was that the work required to address some items was not fully defined when the plan was first developed and as the requirements were better defined, the estimated completion dates were revised and updated. In addition, ISCD officials also stated that timelines had been adversely affected for some action items because staff had been reassigned to work on higher priority responsibilities, such as reducing the backlog of security plans under review. ISCD, through its action plan, appears to be heading in the right direction towards addressing the challenges identified, but it is too early to tell if the action plan is having the desired effect because (1) the division had only recently completed some action items and continues to work on completing more than half of the others, some of which entail long-term changes, and (2) ISCD had not yet developed an approach for measuring the results of its efforts. ISCD officials told us that they had not yet begun to plan or develop any measures, metrics, or other documentation focused on measuring the impact of the action plan on overall CFATS implementation because they plan to wait until corrective action on all items has been completed before they can determine the impact of the plan on the CFATS program. For the near term, ISCD officials stated that they plan to assess at a high level the impact of the action plan on CFATS program implementation by comparing ISCD’s performance rates and metrics pre-action plan implementation and post-action plan implementation. However, because ISCD will not be completing some action items until 2014, it will be difficult for ISCD officials to obtain a complete understanding of the impact of the plan on the program using this comparison only. In our July 2012 statement, we recommended that ISCD look for opportunities, where practical, to measure results of their efforts to implement particular action items, and where performance measures can be developed, periodically monitor these measures and indicators to identify where corrective actions, if any, are needed. The agency concurred with our recommendation and developed a new action item (number 95) intended to develop metrics for measuring, where practical, results of efforts to implement action plan items, including processes for periodic monitoring and indicators for corrective actions. This action item is in progress. According to ISCD officials, almost half of the action items included in the June 2012 action plan either require ISCD to collaborate with NPPD and IP or require NPPD and IP to take action to address the challenges identified in the ISCD memorandum. NPPD, IP, and ISCD officials have been working together to identify solutions to the challenges the memorandum identified and to close pertinent action items. According to division officials, 46 of the 94 action items included in the June 2012 action plan required action either by NPPD and IP or collaboration with NPPD and IP. This includes collaborating with NPPD officials representing the NPPD human capital, facilities, and employee and labor relations offices, among others, and with IP’s Directorate of Management Office. As of June 2012, 13 of the 46 items that require action by or collaboration with NPPD or IP were complete; 33 of 46 were in progress. As of August 2012, ISCD reported that it had completed 8 more of these action items, such that 21 of the 46 were complete and 25 were in progress. We did not verify ISCD’s efforts to close these additional action items. Chairman Shimkus, Ranking Member Green, and members of the subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For information about this statement please contact Cathleen A. Berrick, Managing Director, Homeland Security and Justice, at (202) 512-8777 or BerrickC@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals making key contributions include Stephen L. Caldwell, Director; John F. Mortin, Assistant Director; Ellen Wolfe, Analyst-in-Charge; Charles Bausell; Jose Cardenas; Andrew M. Curry; Michele Fejfar; Tracey King; Marvin McGill; Mona E. Nichols-Blake; and Jessica Orr. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The events of September 11, 2001, triggered a national re-examination of the security of facilities that use or store hazardous chemicals in quantities that, in the event of a terrorist attack, could put large numbers of Americans at risk of serious injury or death. As required by statute, DHS issued regulations that establish standards for the security of high-risk chemical facilities. DHS established the CFATS program to assess the risk posed by these facilities and inspect them to ensure compliance with DHS standards. ISCD, a division of IP, manages the program. A November 2011 internal ISCD memorandum, prepared by ISCD senior managers, expressed concerns about the management of the program. This statement addresses (1) how the memorandum was developed and any challenges identified, (2) what actions are being taken in response to any challenges identified, and (3) the extent to which ISCD’s proposed solutions require collaboration with NPPD or IP. GAO’s comments are based on recently completed work analyzing the memorandum and related actions. GAO reviewed laws, regulations, DHS’s internal memorandum and action plans, and related documents, and interviewed DHS officials. In a July 2012 report, GAO recommended that ISCD explore opportunities to develop measures, where practical, to determine where actual performance deviates from expected results. ISCD concurred and has taken action to address the recommendation. The November 2011 memorandum that discussed the management of the Chemical Facility Anti-Terrorism Standards (CFATS) program was prepared based primarily on the observations of the former Director of the Department of Homeland Security’s (DHS) Infrastructure Security Compliance Division (ISCD), a division of the Office of Infrastructure Protection (IP) within the National Protection and Programs Directorate (NPPD). The memorandum was intended to highlight various challenges that have hindered ISCD efforts to implement the CFATS program. According to the former Director, the challenges facing ISCD included not having a fully developed direction and plan for implementing the program, hiring staff without establishing need, and inconsistent ISCD leadership—factors that the Director believed place the CFATS program at risk. These challenges centered on three main areas: (1) human capital issues, including problems hiring, training, and managing ISCD staff; (2) mission issues, including problems reviewing facility plans to mitigate security vulnerabilities; and (3) administrative issues, including concerns about NPPD and IP not supporting ISCD’s management and administrative functions. ISCD has begun to take various actions intended to address the issues identified in the ISCD memorandum and has developed a 94-item action plan to track its progress. According to ISCD managers, the plan appears to be a catalyst for addressing some of the long-standing issues the memorandum identified. As of June 2012, ISCD reported that 40 percent (38 of 94) of the items in the plan had been completed. These include directing ISCD managers to meet with staff to involve them in addressing challenges, clarifying priorities, and changing ISCD’s culture; and developing a proposal to establish a quality control function over compliance activities. The remaining 60 percent (56 of 94) that were in progress include those requiring longer-term efforts—i.e., streamlining the process for reviewing facility security plans and developing facility inspection processes; those requiring completion of other items in the plan; or those awaiting action by others, such as approvals by ISCD leadership. ISCD appears to be heading in the right direction, but it is too early to tell if corrective actions are having their desired effect because ISCD is in the early stages of implementing them and has not yet established performance measures to assess results. According to ISCD officials, almost half of the action items included in the June 2012 action plan require ISCD collaboration with or action by NPPD and IP. The ISCD memorandum stated that IP and NPPD did not provide the support needed to manage the CFATS program when the program was first under development. ISCD, IP, and NPPD officials confirmed that IP and NPPD are now providing needed support and stated that the action plan prompted them to work together to address the various human capital and administrative issues identified.

Preventive health care can extend lives and promote well-being among our nation’s seniors. Medicare now covers a number of preventive services, including immunizations, such as hepatitis B and influenza, and cancer screenings, such as Pap smears and colonoscopies. Not all beneficiaries, however, avail themselves of covered preventive services. Some beneficiaries may simply choose not to use these services, but others may be unaware that the services are available or covered by Medicare. Further, for some beneficiaries, certain services may not be warranted or may be of limited value. Appropriate preventive care depends on an individual’s age and particular health risks, not simply on the results of a standard battery of tests. To evaluate preventive care for different age and risk groups, HHS in 1984 established the U.S. Preventive Services Task Force, a panel of private- sector experts. The task force recommends certain screening, immunization, and counseling services for people age 65 or older. Medicare covers some, but not all, of these services (see table 1). Medicare’s fee-for-service program does not cover regular periodic examinations, where clinicians might assess an individual’s health risk and provide needed preventive services. Beneficiaries could and still can, however, receive some of these services during office visits for other health issues. In late 2003, MMA added coverage under Medicare for a one-time “initial preventive physician evaluation” if performed within 6 months after an individual’s enrollment under Part B of the program. Covered services under the examination include measurement of height, weight, and blood pressure; an electrocardiogram; and education, counseling, and referral services for screenings and other preventive services covered by Medicare. MMA also added coverage for various screening tests to identify cardiovascular disease (and related abnormalities) in “elevated risk” beneficiaries and diabetes in “at risk” beneficiaries. The new coverage applies to services provided on or after January 1, 2005. Nationally representative survey data show that Medicare beneficiaries visit physicians often and that most report receiving “routine checkups.” These data do not show, however, which specific services were delivered during those “checkups.” Despite the frequency of visits, many Medicare beneficiaries do not receive the full range of recommended preventive services. Data also show that many beneficiaries may not know about their risk for health conditions that preventive care is meant to detect. From 2000 survey data and U. S. Bureau of the Census estimates of people age 65 or older, we estimated that beneficiaries visited a physician at least six times that year, on average, mainly for illnesses or medical conditions. Only about 1 in 10 visits occurred when beneficiaries were well (see fig. 1). Even though the majority of visits to physicians were to treat illness or health conditions, most Medicare beneficiaries reported receiving what they considered to be “routine checkups.” In CDC’s 2000 Behavioral Risk Factor Surveillance System Survey, for example, 93 percent of respondents age 65 or older reported that they had received a “routine checkup” within the previous 2 years. This survey did not, however, provide information on which specific services were delivered during those checkups. Data from another survey, enumerating services provided during office visits, indicated that Medicare beneficiaries do receive some preventive services during visits when they are ill or being treated for a health condition. Despite how often Medicare beneficiaries visit physicians, relatively few beneficiaries receive the full range of recommended preventive services covered by Medicare. As we reported in 2002, for example, although 91 percent of female Medicare beneficiaries in our analysis received at least one preventive service, only 10 percent were screened for cervical, breast, and colon cancer and were also immunized against influenza and pneumonia. Our analysis of additional data for our 2003 report showed that many Medicare beneficiaries still did not receive certain recommended preventive services. The task force recommends, for example, that all people age 65 or older receive an annual influenza vaccination and at least one pneumonia vaccination. According to data from CMS’s Medicare Current Beneficiary Survey of 2000, however, about 30 percent of Medicare beneficiaries did not receive an influenza vaccination, and 37 percent had never had a pneumonia vaccination. Many Medicare beneficiaries may not know that they are at risk for health conditions that preventive care could detect—strong evidence that they may not be receiving the full range of recommended preventive services. For example, data from CDC’s NHANES for 1999–2000 show that, of beneficiaries participating in this nationally representative survey who, as part of the survey, had a physical examination and were found to have elevated blood pressure readings at that time, 32 percent reported that no physician or other health professional had told them about the condition before. On the basis of this survey, we estimate that, during the period when the survey was conducted, 21 million Medicare beneficiaries may have been at risk for high blood pressure, and an estimated 6.6 million of them may have been unaware of this risk. Similarly, 32 percent of those found by the survey to have a high cholesterol level reported that no one had told them that they had high cholesterol. Projected nationally, this percentage translates into 2.1 million Medicare beneficiaries who may have had high cholesterol without knowing it (see fig. 2). A one-time initial preventive care examination covered by Medicare may offer opportunity to deliver some preventive services but alone is not enough to ensure better health among beneficiaries. Information from a CMS demonstration and from other related studies shows that ensuring receipt of follow-up care will be important to improving beneficiaries’ health. A proposed CMS demonstration, currently in design, will explore another preventive care delivery option and examine the value of linking beneficiaries to needed follow-up services. As proponents of a one-time “Welcome to Medicare” examination told us, such an examination could be a means to better ensure that health care providers have enough time to identify individual Medicare beneficiaries’ health risks and provide preventive services appropriate for their risks. It could be used to orient new beneficiaries to Medicare and encourage them to make informed choices about providers and plans. Nevertheless, a one- time examination does not ensure delivery of the full range of preventive services. Primary care physicians typically cannot provide services such as mammography screenings for breast cancer or colonoscopies for colon cancer, because these services usually require specialists. It also is uncertain whether a one-time or periodic examination would be an effective way to improve beneficiaries’ health. For example, one previous CMS initiative that included preventive health care visits ended with mixed results. In the late 1980s and early 1990s, the agency conducted a congressionally mandated demonstration to test varied health promotion and disease prevention services, such as free preventive visits, health risk assessment, and behavior counseling, to see if they would increase use of preventive services, improve health, or lower health care expenditures for Medicare beneficiaries. The agency’s final report, published in 1998, concluded that the demonstration services were marginally effective in raising the use of some simple disease-prevention measures, such as immunizations and cancer screenings, but did not consistently improve beneficiary health or reduce the use of hospital or skilled nursing services. The report tempered these results by pointing out that the relatively brief period during which the services were provided (roughly 2 years) and the limited number of follow-ups and beneficiary contacts with providers (one to two) may have been inadequate to achieve measurable outcomes. Determining how to better ensure adequate follow-up once health risks are identified is a concern that a new CMS project aims to evaluate. CMS is exploring an alternative for Medicare preventive care that would provide systematic health risk assessments to fee-for-service beneficiaries through a means other than examination by a physician. In the late 1990s, the agency commissioned the RAND Corporation to evaluate the potential effectiveness of health risk assessment programs. Such programs collect information from individuals; identify their risk factors; and refer the individuals to at least one intervention to promote health, sustain function, or prevent disease. The study concluded that health risk assessment programs have increased beneficial behavior (particularly exercise) and improved physiological variables (particularly diastolic blood pressure and weight) and general health. In addition, the study stated that to be effective, risk assessment questionnaires must be coupled with follow-up interventions, such as referrals to appropriate services. The study recommended that CMS conduct a demonstration to test cost- effectiveness and other aspects of the health risk assessment approach for Medicare beneficiaries. Following through on the study’s findings, CMS has begun designing a demonstration project focused on Medicare fee-for-service beneficiaries, called the Medicare Senior Risk Reduction Program, to identify health risks and follow up with preventive services provided by means other than examinations by physicians. The program will use a beneficiary-focused health risk assessment questionnaire to assess health risks, such as lifestyle behaviors, and use of clinical preventive and screening services. The program will test different approaches to administering health risk assessments, creating feedback reports, and providing follow-up services, such as referring beneficiaries to health-promoting community services including physical activity and social support groups. According to project researchers, the program will tailor preventive interventions to individual risks; track patient risks and health over time; and provide beneficiaries with self-management tools and information, health behavior advice, and end-of-life counseling where appropriate. The design phase had not been finalized as of last week and, according to a CMS official, still required approval from HHS and the Office of Management and Budget. Current data indicate that many opportunities exist for Medicare beneficiaries to receive preventive care, but many beneficiaries nonetheless fail to receive the full range of recommended services. Although some beneficiaries may not choose to seek these services, others may not be aware that these services are available and covered by Medicare. Our work shows that more needs to be done to deliver preventive services to those beneficiaries who need them, because many people may have a health condition that preventive services can easily diagnose, and yet they may not know that they have this condition. A one-time preventive care examination will add a dedicated opportunity for delivering preventive care and could help reduce the gap in the preventive services that Medicare beneficiaries receive. At the same time, it is not a panacea. Ensuring that beneficiaries receive needed services and follow-up care is likely to remain a challenge. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or Members of this Committee may have. For future contacts regarding this testimony, please call Janet Heinrich at (202) 512-7119. Katherine Iritani, Matt Byer, Ellen W. Chu, Lisa Lusk, and Behn Miller Kelly also made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Preventive care depends on identifying health risks and on taking steps to control these risks. In contrast, Medicare, the federal health program insuring almost 35 million beneficiaries age 65 or older, was established largely to help pay beneficiaries' health care costs when they became ill or injured. Congress has broadened Medicare coverage over time to include specific preventive services, such as flu shots and certain cancer-screening tests, and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) added coverage for several preventive services, including a one-time preventive care examination for new enrollees, which will start in 2005. GAO's work, done before MMA, included analyzing data from four national health surveys to examine the extent to which Medicare beneficiaries received preventive services through physician visits. GAO also interviewed officials from the Centers for Medicare & Medicaid Services (CMS) and other experts and reviewed the results of past demonstrations and studies to assess expected benefits and limits of different delivery options for preventive care, including a one-time preventive care examination. Most Medicare beneficiaries receive some but not all recommended preventive services. Our analysis of year 2000 data shows that nearly 9 in 10 Medicare beneficiaries visited a physician at least once that year; beneficiaries made, on average, six visits or more within the year. Still, many did not receive recommended preventive services, such as flu or pneumonia vaccinations. Moreover, many are apparently unaware that they may have conditions, such as high cholesterol, that preventive services are meant to detect. In one 19992000 nationally representative survey where people were physically examined and asked a series of questions, nearly one-third of people age 65 or older whom the survey found to have high cholesterol measurements said they had not before been told by a physician or other health professional that they had high cholesterol. Projected nationally, this percentage translates into about 2.1 million people who may have had high cholesterol without knowing it. A one-time preventive care examination may help orient new beneficiaries to Medicare and provide further opportunity for beneficiaries to receive some preventive services. Covering a one-time preventive care examination does not ensure, however, that beneficiaries will receive the recommended preventive services they need over the long term or consistently improve health or lower costs. CMS is exploring an alternative that would provide beneficiaries with systematic health risk assessments by means other than visits to physicians. A key component of this early effort involves the coupling of risk assessments with follow-up interventions, such as referrals for follow-up care.

Section 550 of the DHS appropriations act for fiscal year 2007 requires DHS to issue regulations establishing risk-based performance standards for the security of facilities that the Secretary determines to present high levels of security risk, among other things. The CFATS rule was published in April 2007 and Appendix A to the rule, published in November 2007, listed 322 chemicals of interest and the screening threshold quantities for each.including assessing potential risks and identifying high-risk chemical facilities, promoting effective security planning, and ensuring that final high- risk facilities meet the applicable risk-based performance standards through site security plans approved by DHS. ISCD is managed by a Director and a Deputy Director and operates five branches that are, among other things, responsible for information technology operations, policy and planning, and providing compliance and technical support. From fiscal years 2007 through 2012, DHS dedicated about $442 million to the CFATS program. During fiscal year 2012, ISCD was authorized 242 full-time- equivalent positions. For fiscal year 2013, DHS’s budget request for the CFATS program was $75 million and 242 positions. Our review of the ISCD memorandum and discussions with ISCD officials showed that the memorandum was developed during the latter part of 2011 and was developed primarily based on discussions with ISCD staff and the observations of the ISCD former Director in consultation with the former Deputy Director. In November 2011, the former Director and Deputy Director provided the Under Secretary with the ISCD memorandum entitled “Challenges Facing ISCD, and the Path Forward.” These officials stated that the memorandum was developed to inform leadership about the status of ISCD, the challenges it was facing, and the proposed solutions identified to date. In transmitting a copy of the memorandum to congressional stakeholders following the leak in December 2011, the NPPD Under Secretary discussed caveats about the memorandum, including that it had not undergone the normal review process by DHS’s Executive Secretariat and contained opinions and conclusions that did not reflect the position of DHS. The former ISCD Director stated that the memo was intended to begin a dialog about the program and challenges it faced. The former Director confirmed that she developed the memorandum by (1) surveying division staff to obtain their opinions on program strengths, challenges, and recommendations for improvement; (2) observing CFATS program operations, including the security plan review process; and (3) analyzing an internal DHS report on CFATS operations, which, according to the former Director served as a basis for identifying some administrative challenges and corrective action. The senior ISCD and NPPD officials we contacted said that they generally agreed with the material that they saw, but noted that they believed the memorandum was missing context and balance. For example, one NPPD official stated that that the tone of the memorandum was too negative and the problems it discussed were not supported by sound evaluation. However, the official expressed the view that the CFATS program is now on the right track. The ISCD memorandum discussed numerous challenges that, according to the former Director, pose a risk to the program. The former Director pointed out that, among other things, ISCD had not approved any site security plans or carried out any compliance inspections on regulated facilities. The former Director attributed this to various management challenges, including a lack of planning, poor internal controls, and a workforce whose skills were inadequate to fulfill the program’s mission, and highlighted several challenges that have had an impact on the progress of the program. In addition, the memorandum provided a detailed discussion of the issues or problems facing ISCD, grouped into three categories: (1) human capital management, such as poor staffing decisions; (2) mission issues, such as the lack of an established inspection process; and (3) administrative issues, such as a lack of infrastructure and support, both within ISCD and on the part of NPPD and IP. ISCD is using an action plan to track its progress addressing the challenges identified in the memorandum, and, according to senior division officials, the plan may be helping them address some legacy issues that staff were attempting to deal with before the memorandum was developed. The January 2012 version of the proposed action plan listed 91 actions to be taken categorized by issue—human capital management issues, mission issues, or administrative issues—that, according to the former ISCD Director, were developed to be consistent with the ISCD memorandum. However, the January 2012 version of the action plan did not provide information on when the action was started or to be finished. Eleven of the 12 ISCD managers (other than the former Director and Deputy Director) assigned to work as the coordinators of the individual action items told us that even though they were not given the opportunity to view the final version of the ISCD memorandum, the former Director provided them the sections of the action plan for which they were responsible to help them develop and implement any corrective actions. They said that they agreed that actions being taken in the plan were needed to resolve challenges facing ISCD. Our discussions with these officials also showed that about 39 percent (37 of 94) of the items in the March and June 2012 action plans addressed some legacy issues that were previously identified and, according to these officials, corrective actions were already underway for all 37 of these items. Our analysis of the June 2012 version of the ISCD action plan showed that 40 percent of the items in the plan (38 of 94) had been completed. The remaining 60 percent (56 of 94) were in progress. Of the 38 completed items, we determined that 32 were associated with human capital management and administrative issues, including those involving culture and human resources, contracting, and documentation. The remaining 6 of 38 action items categorized by ISCD as completed were associated with mission issues. Figure 1 shows the status of action items by each of the three categories as of June 2012. For the remaining 56 items that were in progress as of June 2012, 40 involved human capital management and administrative issues. According to ISCD officials, these 40 issues generally involved longer- term efforts—such as organizational realignment—or those that require approval or additional action on the part of IP or NPPD. Sixteen of 56 remaining actions items in progress covered mission issues that will likely also require long-term efforts to address. As of August 2012, ISCD reported that it had completed another 21 action items, of which 8 were to address mission-related issues. We did not verify ISCD’s efforts to complete actions since June 2012. However, we have recently begun a follow-up review of CFATS at the request of this and other committees, which will focus on DHS’s efforts to address mission-related issues. We expect to report the results of these efforts early in 2013. Our analysis of the April and June versions of the plan shows that the division had extended the estimated completion dates for nearly half of the action items. Estimated completion dates for 52 percent (48 of 93 items) either did not change (37 items) or the date displayed in the June 2012 plan was earlier than the date in the April 2012 version of the plan (11 items). Conversely, 48 percent (45 of 93) of the items in the June 2012 version of the plan had estimated completion dates that had been extended beyond the date in the April 2012 plan. Figure 2 shows the extent to which action plan items were completed earlier than planned, did not change, or were extended, from April 2012 through June 2012, for the human capital management, mission, and administrative issues identified in the plan. ISCD officials told us that estimated completion dates had been extended for various reasons. For example, one reason for moving these dates was that the work required to address some items was not fully defined when the plan was first developed and as the requirements were better defined, the estimated completion dates were revised and updated. In addition, ISCD officials also stated that timelines had been adversely affected for some action items because staff had been reassigned to work on higher priority responsibilities, such as reducing the backlog of security plans under review. ISCD, through its action plan, appears to be heading in the right direction towards addressing the challenges identified, but it is too early to tell if the action plan is having the desired effect because (1) the division had only recently completed some action items and continues to work on completing more than half of the others, some of which entail long-term changes, and (2) ISCD had not yet developed an approach for measuring the results of its efforts. ISCD officials told us that they had not yet begun to plan or develop any measures, metrics, or other documentation focused on measuring the impact of the action plan on overall CFATS implementation because they plan to wait until corrective action on all items has been completed before they can determine the impact of the plan on the CFATS program. For the near term, ISCD officials stated that they plan to assess at a high level the impact of the action plan on CFATS program implementation by comparing ISCD’s performance rates and metrics pre-action plan implementation and post-action plan implementation. However, because ISCD will not be completing some action items until 2014, it will be difficult for ISCD officials to obtain a complete understanding of the impact of the plan on the program using this comparison only. In our July 2012 statement, we recommended that ISCD look for opportunities, where practical, to measure results of their efforts to implement particular action items, and where performance measures can be developed, periodically monitor these measures and indicators to identify where corrective actions, if any, are needed. The agency concurred with our recommendation and developed a new action item (number 95) intended to develop metrics for measuring, where practical, results of efforts to implement action plan items, including processes for periodic monitoring and indicators for corrective actions. This action item is in progress. According to ISCD officials, almost half of the action items included in the June 2012 action plan either require ISCD to collaborate with NPPD and IP or require NPPD and IP to take action to address the challenges identified in the ISCD memorandum. NPPD, IP, and ISCD officials have been working together to identify solutions to the challenges the memorandum identified and to close pertinent action items. According to division officials, 46 of the 94 action items included in the June 2012 action plan required action either by NPPD and IP or collaboration with NPPD and IP. This includes collaborating with NPPD officials representing the NPPD human capital, facilities, and employee and labor relations offices, among others, and with IP’s Directorate of Management Office. As of June 2012, 13 of the 46 items that require action by or collaboration with NPPD or IP were complete; 33 of 46 were in progress. As of August 2012, ISCD reported that it had completed 8 more of these action items, such that 21 of the 46 were complete and 25 were in progress. We did not verify ISCD’s efforts to close these additional action items. Chairman Aderholt, Ranking Member Price, and members of the subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For information about this statement please contact Steven L. Caldwell, Director, Homeland Security and Justice, at (202) 512-9610 or CaldwellS@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals making key contributions include John F. Mortin, Assistant Director; Ellen Wolfe, Analyst-in-Charge; Charles Bausell; Jose Cardenas; Andrew M. Curry; Michele Fejfar; Tracey King; Marvin McGill; Mona E. Nichols-Blake; and Jessica Orr. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The events of September 11, 2001, triggered a national re-examination of the security of facilities that use or store hazardous chemicals in quantities that, in the event of a terrorist attack, could put large numbers of Americans at risk of serious injury or death. As required by statute, DHS issued regulations that establish standards for the security of high-risk chemical facilities. DHS established the CFATS program to assess the risk posed by these facilities and inspect them to ensure compliance with DHS standards. ISCD, a division of IP, manages the program. A November 2011 internal ISCD memorandum, prepared by ISCD senior managers, expressed concerns about the management of the program. This statement addresses (1) how the memorandum was developed and any challenges identified, (2) what actions are being taken in response to any challenges identified, and (3) the extent to which ISCD's proposed solutions require collaboration with NPPD or IP. GAO's comments are based on recently completed work analyzing the memorandum and related actions. GAO reviewed laws, regulations, DHS's internal memorandum and action plans, and related documents, and interviewed DHS officials. In a July 2012 report, GAO recommended that ISCD explore opportunities to develop measures, where practical, to determine where actual performance deviates from expected results. ISCD concurred and has taken action to address the recommendation. The November 2011 memorandum that discussed the management of the Chemical Facility Anti-Terrorism Standards (CFATS) program was prepared based primarily on the observations of the former Director of the Department of Homeland Security's (DHS) Infrastructure Security Compliance Division (ISCD), a division of the Office of Infrastructure Protection (IP) within the National Protection and Programs Directorate (NPPD). The memorandum was intended to highlight various challenges that have hindered ISCD efforts to implement the CFATS program. According to the former Director, the challenges facing ISCD included not having a fully developed direction and plan for implementing the program, hiring staff without establishing need, and inconsistent ISCD leadership--factors that the Director believed place the CFATS program at risk. These challenges centered on three main areas: (1) human capital issues, including problems hiring, training, and managing ISCD staff; (2) mission issues, including problems reviewing facility plans to mitigate security vulnerabilities; and (3) administrative issues, including concerns about NPPD and IP not supporting ISCD's management and administrative functions. ISCD has begun to take various actions intended to address the issues identified in the ISCD memorandum and has developed a 94-item action plan to track its progress. According to ISCD managers, the plan appears to be a catalyst for addressing some of the long-standing issues the memorandum identified. As of June 2012, ISCD reported that 40 percent (38 of 94) of the items in the plan had been completed. These include requiring ISCD managers to meet with staff to involve them in addressing challenges, clarifying priorities, and changing ISCD's culture; and developing a proposal to establish a quality control function over compliance activities. The remaining 60 percent (56 of 94) that were in progress include those requiring longer-term efforts--i.e., streamlining the process for reviewing facility security plans and developing facility inspection processes; those requiring completion of other items in the plan; or those awaiting action by others, such as approvals by ISCD leadership. ISCD appears to be heading in the right direction, but it is too early to tell if individual items are having their desired effect because ISCD is in the early stages of implementing them and has not yet established performance measures to assess results. According to ISCD officials, almost half of the action items included in the June 2012 action plan require ISCD collaboration with or action by NPPD and IP. The ISCD memorandum stated that IP and NPPD did not provide the support needed to manage the CFATS program when the program was first under development. ISCD, IP, and NPPD officials confirmed that IP and NPPD are now providing needed support and stated that the action plan prompted them to work together to address the various human capital and administrative issues identified.

JVA amended Title 38 of the U.S. Code, the legislation that governs the DVOP and LVER programs, and by doing so, introduced an array of reforms to the way employment, training, and placement services are provided to veterans under the DVOP and LVER programs. (See table 1.) The act also required increased veterans’ access to electronic services as well as to different types of Labor employment and training programs by requiring them to give veterans priority in receiving their services. In addition, it required federal contractors to advertise job openings at the appropriate employment service delivery system and report on their veteran hiring practices. Within Labor, VETS has primary responsibility for helping the nation’s veterans find employment. Among the programs that VETS administers are the DVOP and LVER programs, which were funded at about $162 million in fiscal year 2005. VETS administers the agency’s activities through representatives in each of Labor’s six regional offices and within each state. The state directors are the link between VETS and each state’s employment service system that is overseen by the ETA. The DVOP and LVER staff, whose positions are funded by VETS, are part of the state’s public employment service system. Employment services fall under the purview of ETA, which administers the Wagner-Peyser-funded Employment Services program within each state, providing a national system of public employment services to any individual seeking employment who is authorized to work in the United States. Like VETS, ETA carries out its employment service program through staff in Labor’s six regions and workforce agencies in each state. In fiscal year 2005, ETA requested about $700 million for the Wagner- Peyser program. The DVOP and LVER programs, along with the Employment Services program, are all mandatory partners in the one-stop center system created in 1998 by WIA and overseen by Labor, in which services provided by numerous employment and training programs are made available through a single network. Labor and states have taken action to implement most JVA provisions to reform veterans’ services since the law was enacted in November 2002, but challenges remain particularly in implementing reforms to improve accountability for the DVOP and LVER programs. Labor issued guidance clarifying the new roles and responsibilities for veterans’ staff and allocated funding to states for an incentive program. Labor has also established performance measures aligned with state workforce systems under WIA as required by JVA. However, Labor reports that states will not be held accountable to a common national standard for veterans’ employment until 2007. (See table 2.) States also report good progress in implementing provisions, but challenges remain in some local areas in terms of integrating veterans’ staff with other employment services staff in local workforce centers. Many states also have not implemented an incentive program as provided in JVA for recognizing quality services to veterans. VETS took several steps to prepare veterans’ staff for their new roles and responsibilities under the law, and while the majority of state workforce administrators reported that these staff had transitioned to a greater focus on intensive services for veterans and employer outreach as required by JVA, challenges remained in the areas of training and integrating staff in some one-stop offices. VETS began issuing guidance to transition staff to their new roles in 2002, and a training program soon followed in 2003. Both Labor’s formal written guidance and technical assistance was well- received, with almost three-quarters of the 50 state workforce officials reporting on our survey that the quality was good or excellent in facilitating implementation of new staff duties. VETS officials cited challenges, however, in meeting all training needs for veterans’ staff informing them of their new roles and responsibilities under the act. While Labor’s training institute continues to conduct and fund training, it estimated that the current funding would cover training for only about 16 percent of all veterans’ staff each year, while annual staff turnover was averaging about 18 percent. In terms of staff integration, Labor officials said that integrating staff into the one-stop offices has been a persistent challenge and the DVOP and LVER staff we interviewed cited a wide variation of integration in local areas. Reasons these staff cited for poor integration included a lack of support by the local office manager, the lack of education and training for other one-stop staff members on serving veterans, and only fair to poor quality of Labor’s guidance and technical assistance to states in how to integrate veterans’ staff into the local one- stop offices. VETS issued guidance in time to establish an incentive program in the first fiscal year after JVA, and 32 of the 50 state workforce administrators we surveyed reported implementing the program. State workforce officials in 17 states that did not implement the program cited various reasons. California, for example, cited that state law prohibited monetary or other gifts to employees for performing their duties. Idaho cited potential morale problems among one-stop staff that have limited opportunities to serve veterans. Four other states cited that the awards were incompatible with the states’ collective bargaining agreements. VETS officials said that some states had been more successful than others in designing their awards system and state opinions were mixed on the extent that the incentive programs resulted in improved services. Administrators in 16 states with award programs in place reported that their program had a positive effect on improving or modernizing veterans’ services. On the other hand, administrators in 15 other states either said that their incentive program had no effect (7 states) or that it was too early to say (8 states). Labor has taken action to establish a new accountability system as required by JVA, but reports that more time is needed under the new system before it can hold all states accountable to the same standard for veterans’ employment. As required by the act, Labor established some new performance measures for the DVOP and LVER grant programs in 2003 consistent with state performance measures under WIA. VETS officials told us they made additional modifications to the performance accountability system when they adopted the Office of Management and Budget’s new common performance measures in July 2005. As these new systems were put in place, VETS officials said they also changed the method they use to calculate the entered employment measure and collect source data. However, VETS anticipates it will need at least 3 years under these measures—until 2007—to collect comparable trend data needed to establish the national performance standard holding all states accountable to the same minimum goal for the rate veterans enter employment. While data are not available to link the JVA reforms to changes in veterans’ services and employment outcomes, most state workforce administrators we surveyed believed that the reforms have improved the quality of services to veterans, and have improved their employment outcomes. Overall, 33 of the 50 state workforce administrators reported that veterans’ employment services have improved in their respective states since the law’s enactment. Among six different services we asked about, administrators most often reported that DVOP staff were spending more time on case management since JVA, although somewhat fewer states reported that services to disabled veterans had similarly improved. (See fig. 1.) Workforce administrators in 33 states also reported improvement in veterans’ employment results. These respondents attributed the improvement both to the law’s reforms and to other factors. The reform cited most often as helping veterans obtain employment was the increased availability of case management or other intensive services through the DVOP program. Other than the reforms themselves, administrators said veterans’ employment was influenced by employer willingness or desire to hire veterans and by the strength of the local job market. (See fig. 2.) In terms of barriers to employment, state administrators reported that federal contractor failure to list job openings at the local one-stop centers was a factor under most likely to delay or prevent some employment. Other factors also presented obstacles to employment, the most frequent one being a poor local job market. This factor was cited nearly twice more often as other factors, such as non-transferability of skills or employer reluctance to hire veterans with National Guard or Reserve commitments. (See fig. 3.) Labor oversight and accountability for the DVOP and LVER programs has been affected by the lack of data available from local workforce offices in some states, as well as the lack of coordination among Labor agencies in monitoring and sharing information gathered on program performance. While state VETS directors responding to our survey most often reported that their monitoring role under JVA has had a positive effect on local accountability, 19 directors reported their monitoring role either had no effect or a negative effect. Our survey showed two main reasons for the lack of a stronger effect. Lack of Local Level Data. In our survey, state VETS directors reported that performance data from local offices are not available in many states, limiting federal oversight and weakening local level accountability. State VETS directors reported in our survey that among four different tools used to monitor local office performance, the most beneficial were analysis and use of data captured in states’ performance reports, along with on-site reviews of local offices. Under JVA, states took on greater responsibility for assessing their own performance, and VETS modified its monitoring practices in response by extending the time between site visits to local offices from 1 year to 5 years. VETS directors in 21 states, however, noted that data were not available to monitor performance of local offices, and in these states, federal oversight may be limited to the on-site monitoring visits by VETS directors required once every 5 years. Lack of Coordinated Oversight. While Labor agencies are jointly responsible for monitoring employment and training services, little or no effort has been made to coordinate oversight or use the monitoring results to target assistance to states and localities that are most in need. For example, while VETS is responsible for monitoring performance of the DVOP and LVER programs, ETA oversees other workforce programs that serve veterans as well as nonveterans, such as WIA and Wagner-Peyser Employment Services. However, the two agencies do not generally coordinate their monitoring activities or share the results. Only five state VETS directors reported that they met with ETA officials to share monitoring results and take joint action to address problems. Labor also lacks a strategy for using the monitoring information it gathers to improve performance across states and local areas. While Labor has authority under JVA to provide technical assistance to states that are deficient in performance or need help, VETS has yet to begin addressing the significant variation in performance levels among states, as reflected by their widely divergent performance goals. For example, in program years 2004 and 2005, states’ negotiated goals for the rate at which veterans entered employment ranged from 38 to 65 percent, while Labor’s national employment goal for veterans was 58 percent. Although more than half of the state goals fell short of Labor’s national target, VETS has not been proactive in determining why certain states are falling behind and in targeting them for assistance. Our report recommended that the Secretary of Labor provide clear guidance to integrate veterans’ staff into the one-stops and foster state use of incentives. We also recommended that Labor’s program offices coordinate their oversight of JVA provisions, and that Labor use monitoring results to develop program improvements. Labor agreed with our recommendations. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information regarding this testimony, please contact me at (202) 512-7215. Lacinda Ayers, Meeta Engle, and Stan Stenersen were key contributors to this testimony. Veterans’ Employment and Training Service: Labor Actions Needed to Improve Accountability and Help States Implement Reforms to Veterans’ Employment Services. GAO-06-176. Washington, D.C.: December 30, 2005. Unemployment Insurance: Better Data Needed to Assess Reemployment Services to Claimants. GAO-05-413. Washington, D.C.: June 24, 2005. Veterans’ Employment and Training Service: Preliminary Observations on Changes to Veterans’ Employment Programs. GAO-05-662T. Washington, D.C.: May 12, 2005. Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. Veterans’ Employment and Training Service: Flexibility and Accountability Needed to Improve Service to Veterans. GAO-01-928. Washington, D.C.: September 12, 2001. Veterans’ Employment and Training Service: Proposed Performance Measurement System Improved, but Further Changes Needed. GAO-01-580. Washington, D.C.: May 15, 2001. Veterans’ Employment and Training Service: Strategic and Performance Plans Lack Vision and Clarity. GAO/T-HEHS-99-177. Washington, D.C.: July 29, 1999. Veterans’ Employment and Training Service: Assessment of the Fiscal Year 1999 Performance Plan. GAO/HEHS-98-240R. Washington, D.C.: September 30, 1998. Veterans’ Employment and Training: Services Provided by Labor Department Programs. GAO/HEHS-98-7. Washington, D.C.: October 17, 1997. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The number of service members leaving active duty is likely to increase by 200,000 yearly, according to the Department of Labor. To improve employment and training services for veterans and to encourage employers to hire them, Congress passed the Jobs for Veterans Act in 2002, which reformed Labor's Disabled Veterans' Outreach Program (DVOP) and Local Veterans' Employment Representative (LVER) program. This testimony summarizes GAO's recent review of progress implementing the act, including the development of new staff roles and responsibilities, incentive awards, and performance accountability system. GAO examined (1) actions taken to improve performance and accountability since the law's enactment and any associated challenges, (2) whether available data indicate that such action has resulted in improved employment outcomes for veterans, and (3) factors affecting program oversight an accountability. Labor implemented most reforms under the Jobs for Veterans' Act (JVA) to improve the DVOP and LVER programs within the first 2 years of its enactment. However, it has not yet fully implemented measures to improve state accountability for these programs. Specifically, Labor reports that states will not be held accountable to the same standard for veterans' employment until 2007. States also report substantial progress implementing the law, but integrating veterans' staff with other one-stop staff remains challenging in some local areas. In addition, about one-third of the states did not establish incentive programs for their workforce personnel because state laws, policies, or agreements conflict with this JVA provision. Most state workforce administrators surveyed reported that the new legislation has improved both the quality of services to veterans and their employment outcomes. For example, they reported that services provided to disabled veterans have improved. They also credited the greater availability of case management and outreach to new employers for much of the improvement in employment outcomes under JVA. Aside from the law's influence, state administrators cited the willingness of employers to hire veterans and the strength of the local job market as significant factors affecting veterans' employment. About half of state directors of Veterans' Employment and Training reported their new monitoring role had strengthened local program accountability. However, just over a third reported that accountability had either lessened or not improved. Some partly attributed this to absence of local performance data and fewer annual visits to one-stop centers. GAO found, as well, that a lack of coordination among Labor's agencies responsible for certain JVA provisions has weakened accountability. Also, while Labor has developed a system to monitor program performance, it lacks a strategy for using the information it gathers to make improvements and to help states.

Transitioning technologies from defense research organizations and technology development programs, such as the SBIR program, to military users has been a long-standing challenge for DOD. To address technology transition challenges in DOD’s SBIR program, Congress and DOD have established several program provisions and mechanisms over the past decade, including the following: Congress directed the establishment of the Commercialization Pilot Program, subsequently renamed the Commercialization Readiness Program, in fiscal year 2006 to accelerate the transition of SBIR- funded technologies to Phase III, especially those that lead to acquisition programs and high priority military requirements, such as fielded systems. As part of the program, Congress authorized the military departments to use up to 1 percent of SBIR funding to administer the program. This funding is used to provide assistance to SBIR awardees, including efforts to enhance networking and build relationships among small businesses, prime contractors, and DOD science and technology and acquisition communities. Each military department’s SBIR program also has a network of transition facilitators who manage the Commercialization Readiness Program and other SBIR activities that support technology transition. The facilitators are located at military laboratories, acquisition centers, and program executive offices and work directly with government stakeholders to help ensure projects are responsive to warfighter needs. Although the roles and responsibilities vary somewhat across the military departments, in general, transition facilitators foster ties among small businesses, military research laboratories, and the acquisition community in support of transition opportunities, and monitor project progress, including outcomes. Further, the military departments conduct conferences and workshops to provide opportunities for SBIR companies to interact with users and showcase their projects. In the fiscal year 2012 reauthorization of the SBIR program, Congress authorized a pilot effort to allow the DOD SBIR program the opportunity to use more of their SBIR funds (up to 3 percent) for program administration, technical assistance, and commercialization and outreach activities. In addition, DOD SBIR components may offer special awards that supplement or extend Phase II projects. The military departments have developed mechanisms to do this, which provide awardees additional SBIR funding to move Phase II projects closer to transition. In some cases, the military departments require formal technology transition agreements or matching funding from intended military users as a condition to receiving the additional Phase II funding. Technology transition agreements, which Air Force and Navy officials reported using, help manage project expectations and formalize stakeholder commitments by outlining cost, schedule, and performance expectations for transition to occur. Matching funds from intended users, which are required by the Navy for some projects, can help create greater buy-in for transition because the intended users have a monetary stake in the project. In fiscal year 2011, Congress required the Secretary of Defense to establish a program to accelerate the fielding of technologies developed pursuant to Phase II of the SBIR program, technologies developed by defense laboratories, and other innovative technologies.established the Rapid Innovation Program, which received about $430 million in fiscal year 2011 and $175-$225 million annually in subsequent years. According to DOD officials, the majority of projects awarded in the first few years of the program have been to SBIR Phase II awardees. We are currently conducting a review of the program and its transition outcomes for the Senate Armed Services Committee. As a result of this new requirement, the Secretary Sometimes technologies are not ready to transition when needed because they may still be too risky or costly to adopt. Further, at other times, promising technologies are not taken advantage of because their potential has not been adequately demonstrated or recognized, they do not meet military user requirements, or users are unable to fund the final stages of development and testing. As we have reported in the past on DOD science and technology programs, factors that facilitate successful transition outcomes include selecting the right projects—those that address military needs, have realistic cost and schedule expectations, and have technologies that can be matured or demonstrated—and ensuring early and sustained commitments from intended users and other key stakeholders throughout projects. In our 2013 review, we found that the military department SBIR programs have identified some technologies that successfully transitioned into acquisition programs or fielded systems over the past several years, but the extent of transition is unknown because comprehensive and reliable transition data are not collected. The military departments collect information on selected transition “success stories” on a somewhat ad hoc basis from SBIR program officials, acquisition program officials, prime contractors, or directly from small businesses. These success stories cover a broad range of technologies and products. One SBIR transition example from the Air Force was an antenna that transitioned to an unmanned air system that was undergoing operational evaluations in Afghanistan to demonstrate identification and detection capabilities for improvised explosive devices. Another transition success reported by the Army was a sensor system for identifying structural fatigue or damage on Black Hawk helicopters that was undergoing further testing. In addition to less formal transition tracking efforts, the military departments use, to varying degrees, two data systems—Company Commercialization Reports (CCR) and the Federal Procurement Data System-Next Generation (FPDS-NG)—to identify transition results for their programs. While these systems provide high-level commercialization information that the departments use to track progress in achieving overall program goals, the systems have significant gaps in coverage and data reliability concerns that limit their transition tracking capabilities. In addition, the systems are not designed to capture detailed information on acquisition programs, fielded systems, or on projects that did not transition. Table 2 more fully describes these transition data sources and their limitations. New reporting requirements in the NDAA for fiscal year 2012 directed DOD to begin reporting new SBIR-related transition information to SBA, which is to be included in SBA’s annual report to designated congressional committees. This requirement includes reporting on the number and percentage of Phase II SBIR projects that transitioned into acquisition programs or to fielded systems, effectiveness of incentives provided to DOD program managers and prime contractors, and additional information specific to the transition of projects funded through the Commercialization Readiness Program. This type of information is not currently captured by the existing data sources described in table 2. At the time of our 2013 review, DOD was still assessing how to comply with the new transition reporting requirements directed by Congress, and no specific plan that included a time line for meeting the requirements had been established. DOD acknowledged that it may need to modify its existing data systems or develop new tools to compile more complete and accurate technology transition data, but cited several challenges to obtaining better data. One challenge we found in 2013 was that the military departments and components define technology transition differently—with definitions ranging from any commercialization dollars applied to a project, to only when a technology is actually incorporated into a weapon system or in direct use by the warfighter—and no consensus had been reached on a standard definition to use. We recommended that DOD establish a common definition of technology transition for all SBIR projects as a key step to support annual reporting requirements. Additionally, according to DOD SBIR officials, tracking transition outcomes can be challenging because of the sometimes lengthy period that can occur between SBIR project completion and transition to a DOD user. In some cases, the time lag can be several years and make it difficult to track projects and obscure a project’s SBIR linkages. Time lags can occur because of delays in funding availability, additional development or testing needs before transition, or schedule delays encountered by intended users. Officials also stated that limited resources for administrative activities constrain the SBIR program’s ability to effectively follow up on the transition outcomes for completed projects. Conversely, military users, such as weapon system acquisition programs, often do not dedicate resources to monitor or track SBIR projects and their likelihood to transition. In 2013, DOD officials indicated that addressing the transition reporting requirements would be a long-term effort because of data collection challenges such as those identified in table 2. As a first step, DOD initiated an assessment last year of different options for enhancing transition data, which included examining whether CCR or other existing DOD data sources could be modified to improve reporting, such as Selected Acquisition Reports—annually required for major defense acquisition programs. In addition, opportunities to build more SBIR awareness directly into acquisition program activities were being considered, such as including SBIR-specific provisions in acquisition strategy documents or formal program reviews. Despite these activities, DOD had not established a plan for how and when it would be able to meet the reporting requirements and begin to provide the technology transition information expected by Congress. As such, we recommended in 2013 that DOD develop a plan to meet new technology transition reporting requirements that will improve the completeness, quality, and reliability of SBIR transition data, and report this plan to Congress, including specific steps for improving the technology transition data. In a recent update to our 2013 work, DOD officials confirmed that alternatives are still being evaluated and no plan for how and when it would improve the tracking and reporting of technology transition has been completed. While we recognize there are challenges to improving transition data, we continue to believe it is important for DOD to develop and implement a plan for obtaining more comprehensible and reliable measures of transition. Without better information on technology transition, questions will remain as to whether the DOD SBIR program is providing the right technologies at the right time to users, using effective approaches to select, develop, and transition technologies, and providing tangible benefits. As we have reported in the past through other work on DOD science and technology activities, tracking technology transitions and the impact of those transitions, such as cost savings or deployment of the technology in a product, provides key feedback that can inform the management of programs. In particular, we found that leading commercial companies tracked technology transition not only to enable them to measure success, but also to assess their processes and determine what changes are necessary to improve transition rates. In addition, we found a few examples of unique efforts within DOD where transition outcomes were being effectively monitored and documented. The Navy, for instance, uses a Transition Review Board to assess whether projects in its Future Naval Capabilities technology development program are being utilized in systems that support Navy warfighters. For example, the Navy determined that of the 155 technology products the Future Naval Capabilities program delivered to acquisition programs between fiscal years 2006-2011, 21 percent were subsequently deployed to fleet forces, 35 percent were still with the acquisition programs, and 44 percent failed to deploy. For projects that did not successfully deploy, the board assessed whether there were other benefits achieved, such as whether technologies were leveraged for follow-on science and technology work. The board also identifies obstacles to transition, such as loss of interest by the user or inadequacy of funding. These findings are then used to inform the Navy’s annual review process and inform future science and technology investment decisions. Overcoming the challenges to obtaining better technology transition information may ultimately require closer collaboration between the DOD SBIR and acquisition communities. While incremental improvements may be possible by modifying the existing CCR and FPDS-NG data systems and increasing SBIR program managers’ capacity to track projects, greater insights into transition outcomes and the benefits the technologies provide to military users may not be achieved without additional information obtained from users, such as acquisition program managers. In an environment of declining budgets, it is important that information on technology transition outcomes for SBIR projects be improved for DOD to identify the extent to which the program is supporting military users and determine whether existing monitoring and transition efforts are working effectively. We recognize that the goal is not to transition all technologies funded through SBIR, because not all technologies will be demonstrated successfully. Nonetheless, it is important to ensure that the right technologies are transitioning and to not allow these technologies to fail for the wrong reasons. Chairman Graves, Ranking Member Velázquez, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time.

DOD relies on its research and development community to identify, pursue, and develop new technologies that improve and enhance military operations and ensure technological superiority over adversaries. The SBIR program is a key mechanism for DOD to use small businesses to meet its research and development needs; stimulate technological innovation; foster and encourage participation by minority and disadvantaged persons in technological innovation; and increase private sector commercialization of innovations derived from federal research and development funding. DOD is the largest SBIR participant in the federal government, with over $1 billion spent annually on the program. This testimony is based primarily on a report GAO issued in December 2013 and addresses: (1) practices the military departments use to facilitate the transition of SBIR technologies, (2) the extent to which these technologies are successfully transitioning to military users, such as weapon system programs or warfighters in the field, and (3) DOD's efforts to meet fiscal year 2012 NDAA transition reporting requirements. This statement draws from the 2013 report and other work GAO has conducted on technology transition activities in DOD's science and technology programs. Transitioning technologies from defense research and technology development programs, such as through the Small Business Innovation Research (SBIR) program, to military users has been a long-standing challenge for the Department of Defense (DOD). Over the past decade, Congress and DOD have taken several steps to address transition challenges in DOD's SBIR program. For example, the military departments can offer additional SBIR funding to certain awardees to supplement or extend technology development projects in order to move them closer to transition. Additionally, each of the military departments has a network of transition facilitators who work directly with small businesses, military research laboratories, and the acquisition community to foster transition opportunities. Further, in fiscal year 2012, Congress provided federal agencies the opportunity to use more of SBIR funding (up to 3 percent) for program administrative purposes, including activities that facilitate transition. However, at times, promising technologies are not taken advantage of because their potential has not been adequately demonstrated, they do not meet military requirements, or users are unable to fund the final stages of development and testing. GAO found that DOD's SBIR program has developed some technologies that successfully transitioned into acquisition programs or fielded systems, but the extent of transition is unknown because comprehensive and reliable transition data are not collected. The military departments collect information on selected transition “success stories” on a somewhat ad hoc basis from SBIR program officials, acquisition program officials, prime contractors, or directly from small businesses. In addition to these less formal transition tracking efforts, the military departments use, to varying degrees, two data systems—Company Commercialization Reports and the Federal Procurement Data System-Next Generation—to identify transition results program-wide. While these systems provide high-level commercialization information that the departments use to track progress in achieving overall program goals, the systems have significant gaps in coverage and data reliability concerns that limit their transition tracking capabilities. In addition, the systems are not designed to capture detailed information on acquisition programs, fielded systems, or on projects that did not transition. The National Defense Authorization Act (NDAA) for fiscal year 2012 directed DOD to begin reporting the number and percentage of SBIR projects that transition into acquisition programs or to fielded systems, among other things. DOD acknowledged that it may need to modify its existing data systems or develop new tools to compile more complete and accurate technology transition data. At the end of 2013, DOD was still assessing how to comply with the new transition reporting requirements, and had not established a specific plan, as GAO had recommended, for how and when it would be able to meet the requirements. In a recent update, DOD officials confirmed that alternatives are still being evaluated and no plan for improving the tracking and reporting of technology transition has been completed. Without better information on technology transition outcomes, questions will remain as to whether the DOD SBIR program is providing the right technologies at the right time to users, using effective approaches to select, develop, and transition technologies, and providing tangible benefits.

The purpose of the HUBZone program, which was established by the HUBZone Act of 1997, is to stimulate economic development, through increased employment and capital investment, by providing federal contracting preferences to small businesses in economically distressed communities or HUBZone areas. The types of areas in which HUBZones may be located are defined by law and consist of census tracts, nonmetropolitan counties, Indian reservations, redesignated areas (that is, census tracts or nonmetropolitan counties that no longer meet the criteria but remain eligible until after the release of the 2010 decennial census data), and base closure areas. To be certified to participate in the HUBZone program, a firm must meet the following four criteria: must be small by SBA size standards; must be at least 51 percent owned and controlled by U.S. citizens; principal office—the location where the greatest number of employees perform their work—must be located in a HUBZone; and at least 35 percent of the full-time (or full-time equivalent) employees must reside in a HUBZone. There are more than 14,000 HUBZone areas, and as of January 2009, 9,300 certified firms participated in the HUBZone program. More than 4,200 HUBZone firms obtained approximately $8.1 billion in federal contracts in fiscal year 2007. The annual federal contracting goal for HUBZone small businesses is 3 percent of all prime contract awards—contracts that are awarded directly by an agency. SBA relies on its map to publicize HUBZone areas and to determine, in part, whether firms are eligible for the program. Our June 2008 report found problems with SBA’s HUBZone map. First, the map included 50 metropolitan counties as difficult development areas that did not meet this or any other criterion for inclusion as a HUBZone area. As a result of these errors, from October 2006 through March 2008, federal agencies obligated about $5 million through HUBZone set-aside contracts to 12 firms located in these ineligible areas. In addition, we found that the HUBZone map had not been updated since August 2006. Our analysis of 2007 Bureau of Labor Statistics unemployment data indicated that 27 additional nonmetropolitan counties should have been identified on the map, allowing qualified firms in these areas to participate in the program. Because firms are not likely to receive information on the HUBZone status of areas from other sources, firms in the 27 areas would have believed from the map that they were ineligible to participate in the program and could not benefit from contracting incentives that certification provides. In our June 2008 report, we recommended that SBA take immediate steps to correct and update the map and implement procedures to ensure that it is updated with the most recently available data on a more frequent basis. In response to our recommendation, SBA stated that, through a contract, the map was updated in September 2008. However, SBA has not implemented procedures to ensure that the map remains accurate. SBA officials stated it is currently re-engineering its internal processes, which include its mapping efforts, and plans to develop a competitive procurement that will include test plans and technical support for future map updates. Because SBA is in the early stages of both efforts, the map may not remain accurate. Therefore, if the map is not regularly updated, ineligible small businesses may be able to participate in the program, while eligible businesses may not be able to participate. In June 2008, we reported that the policies and procedures upon which SBA relies to certify firms provided limited assurance that only eligible firms participated in the HUBZone program. Specifically, we found that, for certification and recertification, firms self-reported information on their applications. Rather than providing specific guidance or criteria for when HUBZone program staff should request supporting documentation, SBA’s policy allowed the staff to determine what circumstances warranted a request for supporting documentation. Internal control standards for federal agencies require that agencies collect and maintain documentation and verify information to support their programs; however, we found that SBA requested documentation or conducted site visits of firms to validate the self-reported data in limited instances. Our analysis of the 125 applications submitted in September 2007 showed that SBA requested supporting documentation for 36 percent of the applications and conducted one site visit. As a follow-on to our previous fraud investigation, we also identified cases of fraud and abuse in the program and examined actions SBA has taken to establish an effective fraud prevention system; we are publicly reporting the results of this investigation today in a separate publication. To improve its ability to ensure that only eligible firms participate in the program, we recommended in our June 2008 report that SBA develop and implement guidance to more routinely and consistently obtain supporting documentation upon application and conduct more frequent site visits, as appropriate, to ensure that firms applying for certification are eligible. Subsequent to our report and testimony, SBA issued a desktop guide for analysts to use when they review applications. This guide provides examples of the types of documents to request and when to request them. In addition, since July 2008, SBA officials stated that they have been consistently collecting supporting documentation from each new applicant. However, the agency has not conducted more frequent site visits to verify the information firms submit. SBA officials stated that they do plan to conduct site visits of all HUBZone firms that received a contract in fiscal year 2007 during fiscal year 2009. As of March 2009, SBA conducted 7 site visits of those firms. Because of SBA’s limited progress, ineligible firms may still be able to participate in the HUBZone program and receive federal contracts based on their HUBZone certification. In our June 2008 report, we noted that SBA did not follow its own policy of recertifying all firms every 3 years. We found that SBA failed to recertify 4,655 of the 11,370 firms (more than 40 percent) that had been in the program for more than 3 years. Of the 4,655 firms that should have been recertified, 689 had been in the program for more than 6 years. According to HUBZone program officials, the agency lacked sufficient staff to complete the recertifications. As a result of the backlog, the periods during which some firms went unmonitored and reviewed for eligibility were longer than SBA policy allowed, increasing the risk that ineligible firms were participating in the program. We recommended that SBA establish a specific time frame for eliminating the backlog of recertifications and take the necessary steps to ensure that recertifications were completed in a more timely fashion in the future. In response to our recommendation, SBA temporarily obtained additional staff for the HUBZone program and eliminated the backlog by September 30, 2008. However, SBA has not implemented processes or procedures to ensure that future recertifications will be completed in a more timely fashion. SBA officials stated that its ongoing business process re- engineering includes an assessment of the recertification process. However, as of March 2009, SBA has made limited progress in this effort. As a result, there is still an increased risk that ineligible firms may continue to participate in the program. Our July 2008 report also noted that SBA did not have a policy that included specific time frames for processing decertifications—the determinations subsequent to recertification reviews or examinations that firms are no longer eligible to participate in the HUBZone program. We found that although SBA did not have written guidance for the decertification time frame, the HUBZone program office had negotiated an informal (unwritten) goal of 60 days with the SBA Inspector General in 2006. From fiscal years 2004 through 2007, SBA failed to resolve proposed decertifications within its goal of 60 days for more than 3,200 firms. While SBA’s timeliness had improved, in 2007 more than 400 (or about 33 percent) of decertifications were not resolved in a timely manner. As a consequence of generally not meeting its 60-day goal, lags in the processing of decertifications increased the risk of ineligible firms participating in the program. In our report, we recommended that SBA formalize and adhere to a specific time frame for processing firms proposed for decertification. In response, SBA issued a procedural notice in December 2008 that formalized the 60-day time frame for processing decertifications. Because SBA recently formalized this time frame, we were unable to verify whether SBA staff are adhering to it. In June 2008, we reported that SBA had taken limited steps to assess the effectiveness of the HUBZone program. We found that SBA’s three performance measures for the HUBZone program were not directly linked to the program’s mission of stimulating economic development and creating jobs in economically distressed communities. The Office of Management and Budget also noted in its 2005 Program Assessment Rating Tool (PART) that SBA needed to develop baseline measures for some of its HUBZone performance measures and encouraged SBA to focus on more outcome-oriented measures that better evaluate the results of the program. In addition, the PART assessment documented plans that SBA had to conduct an analysis of the economic impact of the HUBZone program on a community-by-community basis using data from the 2000 and 2010 decennial census. However, SBA officials indicated that the agency lacked the resources necessary to develop baseline measures or to assess the results of the program. In our report, we recommended that SBA further develop measures and implement plans to assess the effectiveness of the HUBZone program. In addition, in May 2008, after the completion of the audit work for our June 2008 report, SBA’s Office of Advocacy (Advocacy) issued a report assessing the economic impacts of the HUBZone program. In our view, the Advocacy’s report could provide, in part, a foundation for further assessments. In August 2008, in response to our recommendation, SBA published a Notice of Methodology in the Federal Register for measuring the economic impact of the HUBZone program. Rather than conducting a comprehensive effort that considered relevant literature, input from experts in economics and performance measurement, and the methodological contributions of the Advocacy’s evaluation, SBA officials planned to rely on public comments to refine the planned methodology. Two comment letters were submitted. Based on our review, we do not believe this effort was a sound process for developing measures to assess the effectiveness of the program. During subsequent discussions we held with agency staff about this issue, they stated that they have initiated a new effort to address this issue. However, because the agency has not evaluated the HUBZone program’s benefits, SBA continues to lack key information that could help it better manage the program and inform the Congress of its results. Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact William B. Shear at (202) 512-8678 or shearw@gao.gov. Individuals making key contributions to this testimony included Paige Smith (Assistant Director), Triana Bash, Tania Calhoun, Julia Kennon, and Terence Lam. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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This testimony discusses the Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program. Created in 1997, the HUBZone program provides federal contracting assistance to small businesses located in economically distressed communities, or HUBZone areas, with the intent of stimulating economic development in those areas. In fiscal year 2007, federal agencies awarded contracts valued at about $8 billion to HUBZone firms. Firms that participate in the program must be located in a HUBZone and employ residents of HUBZones to facilitate the goal of bringing capital and employment opportunities to distressed areas. My statement today is based on work we performed to update the status of recommendations we made in our June 2008 report on the HUBZone program and reiterated in a July 2008 testimony. These recommendations called for SBA to improve its controls over the HUBZone program and assess the program's effectiveness. Specifically, this testimony discusses SBA's progress in (1) ensuring that the HUBZone map is accurate; (2) developing and implementing guidance to ensure that participating firms are eligible; (3) eliminating the backlog of recertifications; (4) formalizing and adhering to time frames for decertifying ineligible firms; and (5) developing measures and implementing plans to assess the effectiveness of the program. At the time of the July 2008 testimony and in subsequent correspondence we received from SBA, we observed that the agency did not recognize the commitment required to address the HUBZone program's deficiencies and implement our recommendations. SBA officials told us that they recognize the commitment required to implement our recommendations. Consistent with this recognition, SBA is now working with a contractor to re-engineer its HUBZone program. In summary, SBA has initiated some steps to address the HUBZone program's deficiencies and implement our recommendations.