Army Corps of Engineers: Budget Formulation Process Emphasizes Agencywide Priorities, but Transparency of Budget Presentation Could Be Improved
Published: 2010-04-02T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Army Corps of Engineers (Corps) is the world's largest public engineering, design, and construction management agency. In fiscal year 2006 it began incorporating performance information into its budget process, but Congress raised concerns that the criteria used by the Corps to prioritize projects are not transparent and the budget formulation process could achieve a higher return on investment. GAO was asked to (1) describe the information the Corps uses in its budget formulation process and the implications of the process, and (2) evaluate whether the President's recent budget requests for the Corps are presented so that agency priorities are clear and proposed use of funds transparent. GAO reviewed the Corps' internal budget guidance, documentation of its project rankings and budget formulation process, performance review materials, and budget presentation materials. GAO also interviewed Corps and Office of Management and Budget officials.
section_title: What GAO Found
paragraphs: With the introduction of performance-based budgeting in fiscal year 2006, the Corps began emphasizing projects with the highest anticipated returns on investment. Previously, Corps division officials sought to provide continued funding to all ongoing projects that fit within administration guidelines. Now, under the current process, Corps headquarters plays an increased role in selecting projects, and evaluates projects using certain performance metrics. The Corps gives priority to those projects with the highest anticipated returns for the economy and the environment, as well as those that reduce risk to human life. The Corps' use of performance metrics makes projects in certain geographic areas more likely to be included in the budget request. For example, the benefit-cost ratio, a measure of economic benefit that is used to rank certain projects, tends to favor areas with high property values. Another effect of the Corps' use of performance-based budgeting is that fewer construction and investigation projects--studies to determine whether the Corps should initiate construction projects--have been included in the budget request in recent years. In contrast, the number of projects in the Operation and Maintenance account has been relatively stable, which Corps officials attributed partially to its emphasis on routine activities. While the metrics used by the Corps in its budget formulation process focus on anticipated benefits, the Corps monitors the progress of ongoing projects through review boards at the headquarters, division, and district levels. However, the Corps does not have written guidance establishing a process for incorporating information on demonstrated performance, such as review board findings, into budget formulation decisions. In the absence of such a process, the Corps may miss opportunities to make the best use of this performance information. The budget presentation for the Corps lacks transparency on key elements of the budget request. It focuses on requested construction and investigations projects, but does not describe how the decisions made during the budget formulation process affected the budget request. For example, the budget presentation does not include an explanation of the relative priority given to project categories or how they are evaluated against each other. Also, while the number of construction and investigations projects receiving appropriations is typically much greater than the number requested, the budget presentation does not include detailed information on all projects with continuing resource needs. The budget presentation also lacks detail on the amount of the balance of unobligated appropriations (carryover) that remain available for each project. Users of the budget presentation told GAO that these two types of project information would be useful.

section_title: Letter
paragraphs: The U.S. Army Corps of Engineers (Corps) is the world’s largest public  engineering, design, and construction management agency. The Corps  provides vital public engineering services in peace and war to strengthen  the nation’s security, energize the economy, and reduce risks from  disasters. In fiscal year 2010 the Corps’ civil works program received $5.4  billion to plan, construct, operate, and maintain a wide range of water  resource projects. In fiscal year 2006, the Corps began incorporating  performance information in its civil works budget formulation process.  The Corps uses performance information both (1) to gauge overall  progress in performing its civil works mission and (2) to prioritize and  select civil works projects for inclusion in its funding request.  Performance information is a broad term that often includes a variety of  measures. These measures may be based on the demonstrated  performance of a program or project and on estimates of future outcomes.  The Corps’ performance measures primarily focus on estimates of future  outcomes such as providing economic benefits, addressing risk to human  life, and restoring ecosystems. Congress has raised concerns that the  criteria the Corps uses to prioritize projects are not transparent and the  Corps’ budget formulation process could achieve a higher return on  investment for the nation’s water resource projects.
In this context, you asked that we (1) describe the information the Corps  uses in its budget formulation process and the implications of the process,  and (2) evaluate whether the President’s recent budget requests for the  Corps are presented so that agency priorities are clear and proposed use  of funds transparent.
To identify the information used in the Corps’ budget formulation process  since the Corps began incorporating performance information in fiscal  year 2006, we reviewed documentation of its project rankings and budget  formulation process, as well as budget presentation materials from fiscal  years 2006 through 2010. While we did not evaluate in detail the fiscal year  2011 budget submitted in February of 2010, we did review it to gain a  sense of key changes. We also reviewed the Corps’ internal budget  guidance for fiscal year 2011 and examples of its performance review  materials. We interviewed officials at Corps headquarters and all eight U.S.  division offices about the budget formulation process and the information  developed and used for it, as well as the impacts of the process. To  examine the implications of the Corps’ budget formulation process, we  also analyzed Corps budget and project data from fiscal years 2001  through 2010, the 5 years before and the 5 years after the Corps introduced  performance-based budgeting. We reviewed the metrics and measures  used to rank Corps projects and how they have changed since fiscal year  2006. We reviewed Corps guidance on calculating the benefit-cost ratio  (BCR) of projects and interviewed Corps officials about their use of the  BCR and other metrics in formulating the agency’s budget and the related  effects these metrics have on the budget. We did not evaluate the accuracy  of the Corps’ calculations for the BCR or other metrics.
To evaluate how the President’s budget request for the Corps is presented,  we reviewed the President’s budgets and appendixes, and budget  presentation materials for the Corps, including the budget justifications  and Press Books for fiscal years 2006 through 2010. We also reviewed the  Corps’ Five Year Development Plans for fiscal years 2007 through 2011,  2008 through 2012, and 2009 through 2013. To obtain input from users of  the budget presentation, we interviewed staff from relevant congressional  committees. We also reviewed appropriations committee reports from  fiscal years 2005 through 2010. We interviewed Corps officials and staff at  the Office of Management and Budget (OMB) about the reasons for the  structure of the budget presentation, the information provided in it, and  the feasibility of making specific changes to it. Appendix I contains more  detailed information on our scope and methodology.
We conducted this performance audit from March 2009 to March 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.
subsections: section_title: Background
paragraphs: The “Support for Others” business line covers the Corps’ activities related to interagency  and international support.
Corps headquarters, divisions, and districts are all involved in developing  the President’s budget request for the Corps. As part of the executive  budget formulation process, Corps headquarters staff, with input and data  from division and district offices, develop a budget request for the agency.  Once the Corps completes its internal review, the Assistant Secretary of  the Army for Civil Works approves and submits its budget to OMB for  review. OMB recommends to the President whether to support or change  the Army’s proposals and the decisions made during OMB’s budget review  process culminate in the President’s budget request transmitted to  Congress at the beginning of February. Shortly thereafter the Corps  provides budget justification materials that support the President’s request  in more detail to the House and Senate Appropriations committees’  subcommittees.
The documents that typically make up the budget presentation for the  Corps are the congressional budget justification, the Press Book, and the  Five Year Development Plan. The budget justification for the fiscal year  2010 budget request includes details on construction projects and  investigations projects—studies to determine whether the Corps should  initiate construction projects—included in the budget request, including a  narrative description and such details as the total estimated federal cost  and amount allocated in prior years. It also provides some information on  other Corps accounts such as the Flood Control and Coastal Emergencies  account. The information included in the Press Book has varied in recent  years, but the Press Book accompanying the fiscal year 2010 budget  request consisted primarily of a listing of all construction, investigations,  and operation and maintenance (O&M) projects included in the budget  request. The listing is organized by state and specifies the amount  requested for each project. Finally, the Corps has in the past included a  Five Year Development Plan as part of the budget presentation, though it  did not for the fiscal year 2010 or 2011 budget requests. The most recent  Five Year Development Plan contained descriptions of nine civil works  accounts and summaries of its business line programs, including past  accomplishments and future challenges. It also included project-level  details for the Construction and Investigations accounts with projected  funding requirements for the current fiscal year and 4 subsequent fiscal  years. It did not include project-level details for the O&M account. In  addition to the information contained in the budget presentation,  congressional staff members may request additional information as  needed for decision making.
The submission of the President’s budget request to Congress marks the  beginning of the congressional phase of the budget process. The budget  request is often a starting point for congressional actions and Congress  typically makes changes that reflect its priorities. For example, Congress  has historically appropriated more funding to the Corps for a greater  number of projects than have been included in the President’s budget  request.
About 84 percent of the President’s fiscal year 2010 budget request for the  Corps’ civil works program was for three appropriations accounts— Construction, Investigations, and O&M—all of which are focused on  specific projects or studies.6,  The Construction account includes  construction and major rehabilitation projects related to navigation, flood  control, water supply, hydroelectric power, and environmental restoration.  The Investigations account funds studies to determine the necessity,  feasibility, and returns to the nation for potential solutions to water  resource problems, as well as design, engineering, and other work. The  O&M account focuses on preserving, operating, and maintaining river and  harbor projects that have already been constructed. Table 1 summarizes  the fiscal year 2010 budget request and appropriations for these three  accounts.
The Formerly Utilized Sites Remedial Action Program, another Corps account, is also  project-based.
Total (3 accounts)
A breakdown by account of the fiscal year 2010 budget request is shown in  figure 2.
O&M $2,504  The total civil work budet requet in fical year 2010 wa $5.125 billion.
Since fiscal year 2006 the Corps has received appropriations of over $5  billion annually for its civil works program through the Energy and Water  Development Appropriations Act. Committee and conference reports  accompanying the appropriations bills include specific allocations of  funding for individual projects. The Corps also typically receives funds,  particularly for construction projects, from each project’s local sponsor,  which may be a state, tribal, county, or local agency or government. In  addition to the funding received through annual appropriations acts, the  Corps received supplemental appropriations in 6 of the past 8 fiscal years.  Some supplemental appropriations have been designated for specific  activities. For example, a Corps official told us that in fiscal year 2009 the  agency received supplemental funding of about $5.8 billion for hurricane  protection in Louisiana. In recent years, most supplemental funding  provided to the Corps has been used for expenses related to the  consequences of 2005 Gulf Coast hurricanes, including Hurricane Katrina.  According to the Corps official, funding has also been directed to  expenses related to the consequences of hurricanes Gustav and Ike (both  2008 hurricanes), as well as the 2008 Midwest floods. The Corps also  received $4.6 billion in fiscal year 2009 through the American Recovery  and Reinvestment Act. Figure 3 shows the amount of funding the  administration has requested for the Corps’ civil works program and the  amount the Corps has received, both through annual and supplemental  appropriations, from fiscal years 2003 through 2010.
The Corps’ strategic plan for its civil works program lays out its goals and  objectives and its strategies for achieving them. The Corps’ current  strategic plan covers fiscal years 2004 through 2009, and the Corps is  planning to issue an updated version that will cover fiscal years 2010  through 2014. The goals listed in the most recent strategic plan are: (1)  provide sustainable development and integrated management of the  nation’s water resources; (2) repair past environmental degradation and  prevent future environmental losses; (3) ensure that projects perform to  meet authorized purposes and evolving conditions; (4) reduce  vulnerabilities and losses to the nation and the Army from natural and  man-made disasters, including terrorism; and (5) be a world-class  engineering organization.
section_title: The Corps’ Budget Formulation Process Favors Projects with the Highest Anticipated Outcomes and Emphasizes Agencywide Priorities
subsections: section_title: The Corps’ Use of Performance-Based Budgeting Emphasizes Anticipated Returns and Takes a Centralized Approach to Decision Making
paragraphs: Prior to fiscal year 2006, the Corps’ budget formulation process was  relatively decentralized, with divisions playing a significant role.  According to Corps officials, the Corps’ previous budget formulation  process for the Construction, Investigations, and O&M accounts started  with district staff, who developed a request for their geographic area.  Next, division staff integrated the district office projects into a single  divisionwide portfolio of projects. Finally, headquarters staff consolidated  each of the divisionwide portfolios into a single agencywide portfolio.  Under the former process, each division was authorized an amount of  funding, which division officials would allocate with two conditions: (1) all  projects were required to meet administration priorities, and (2)  construction and investigations projects that reached a certain stage were  required to have benefits that at least equaled costs. Corps officials told us  that they sought to provide continued funding to all ongoing projects that  fit within administration guidelines.
Beginning in fiscal year 2006 the Corps introduced what it refers to as  performance-based budgeting as a way to focus funding requests on those  projects with the highest anticipated return on investment, not on all  ongoing projects as it sought to do in the past. Under the new process,  Corps headquarters began playing a greater role in selecting projects,  using performance criteria that emphasize agencywide priorities.  Specifically, although districts and divisions continue to collect and  develop project data, ranking of construction and investigations projects is  now done only at the headquarters level. While division staff still rank  O&M projects, a Corps official told us that headquarters staff review these  rankings to make sure that they are consistent with Corps-wide guidance  and result in decisions that emphasize agencywide priorities. Then, they  consolidate the O&M requests across business lines and divisions to a  highest priority grouping. According to a Corps official, the use of  performance-based budgeting has allowed the Corps to present OMB with  various funding options based on performance criteria. While the Corps  also presented OMB with different options prior to fiscal year 2006, the  official told us that under that process these options reflected regional  priorities.
Under its current budget formulation process, the Corps uses performance  metrics to evaluate projects’ estimated future outcomes, and gives priority  to those with the highest expected returns for the national economy and  the environment, as well as those that reduce risk to human life. The  Corps’ written budget guidance, the Budget Engineer Circular (Budget  EC), details the data that should be developed for each project to support  budgetary decisions. For example, the Corps calculates the economic  benefits of most construction and investigations projects using a BCR.  The Corps uses projects’ BCRs to evaluate them against each other and  determine whether they will be given priority in the budget request.  According to Corps and OMB staff, each year OMB sets minimum BCR  thresholds that some construction and investigations projects must meet  to be included in the budget request. If projects do not meet the  designated BCR thresholds, they may qualify in other ways, such as by  restoring a nationally significant ecosystem or addressing risk to human  life. The use of these metrics to evaluate projects provides the Corps with  a mechanism to give priority to projects that, based on the current method  of calculation, may not generate any economic benefits or have relatively  low BCRs, but benefit nationally significant ecosystems or address risk to  human life. For O&M projects, imminent risk to human life and the amount  of commercial tonnage transported on a waterway are examples of the  types of factors described in the Budget EC that influence the priority of a  navigation project.
Additionally, the Corps’ use of performance metrics makes projects in  certain geographic areas more likely to be included in the budget request,  since they produce higher returns on investment. For example, since a  primary input in BCR calculations for Flood Risk Management projects is  the value of property for which damage would be prevented as a result of  the project, projects in areas with high property values—such as in  California—tend to have higher BCRs. Ecosystem restoration projects  with national significance are also given priority under this process. More  specifically, the Everglades in Florida has consistently been among the  projects included in this category, and over the past 5 years has been the  project with the most funding requested. In addition, the risk to human life  metric is affected by population density, so more densely populated areas  tend to be given priority.
According to Corps and OMB staff, another effect of the performance  criteria used as part of the current budget process is that fewer  construction and investigation projects have been included in the budget  request in recent years. Corps officials also attributed the decrease in  number of projects to available funding and budget cutoffs, such as the  BCR. From fiscal year 2001 to 2010, the number of construction projects  included in the budget request decreased by about 52 percent, and the  number of investigations projects decreased by about 79 percent. Though  the number of construction and investigations projects decreased, the  average amount requested per project has increased over time. For  example, the average request per construction project went from $7.0  million in fiscal year 2001 to $17.3 million in fiscal year 2010. In contrast  to trends in the Construction and Investigations accounts, the use of the  ranking metrics does not appear to have had a significant effect on the  O&M account; the number of projects within the O&M account has  remained relatively stable. From fiscal year 2001 to 2010, the number of  O&M projects requested increased by about 7 percent. Corps officials told  us that the relative consistency of the O&M account is partially due to the  emphasis on critical routine projects and activities. Because the  performance metrics used to evaluate O&M projects—such as the amount  of commercial tonnage transported on a waterway—tend to be consistent,  and a large portion of projects are routine (occurring every year or on an  otherwise cyclical basis), the projects given priority tend to be the same  from year to year. Additionally, they told us that because there are more  project activities of lower value in the O&M account, changes to specific  projects generally do not affect the overall request amount as significantly  as variations in the projects in the Construction account do. In fiscal year  2010, the average amount requested per O&M project was $2.8 million.  Budget trends are discussed in more detail in appendix IV. OMB staff that  review the budget request for the Corps concurred that the nature of the  O&M account results in more stability in project selection than in the  Construction and Investigations accounts.
section_title: The Corps’ Budget Formulation Process Focuses on Projects’ Anticipated Outcomes, Rather than Demonstrated Performance
paragraphs: The Corps uses performance metrics in its budget formulation process  that primarily focus on anticipated outcomes with limited evidence of how  performance information measuring demonstrated performance factors  into decisions on budget requests. In part, the Corps focuses on  anticipated outcomes because most of the construction and investigations  projects being considered in the budget request are new or have not yet  been completed, and thus have not generally begun to achieve benefits.  Because the O&M account includes projects that have already been  constructed, the Corps incorporates ongoing performance information,  such as assessments of whether infrastructure meets current engineering  and industry standards, to a greater extent when budgeting for these  projects. Even though the overall focus for budget formulation of the three  accounts is on anticipated outcomes, Corps officials told us that they  monitor the progress of projects underway through review boards  established at the district, division, and headquarters levels within the  agency. These review boards generally meet monthly and focus on project  management issues. These issues include whether projects are meeting  financial goals and other milestones, such as awarding contracts on  schedule. Review boards also discuss progress on two of the nine business  lines each month and, on average, each business line is reviewed at least  twice annually. A Corps headquarters official told us that the  performance metrics presented at review boards demonstrate good  performance, areas that need improvement, and situations where focused  leadership attention would be useful. For example, Corps documentation  showed that in a meeting in which it focused on the Flood Risk  Management business line, the headquarters-level program review board  looked at measures such as the number of dam safety assessments  completed and the percentage of dams rated as unsafe. Although review  boards collect a variety of performance information, the Corps does not  have written guidance establishing a process for incorporating their  findings into budget formulation decisions. Our previous work on  performance-based budgeting found that federal agencies that were  successful in measuring their performance worked to ensure that  decisions were based on complete information. The Corps collects  numerous data and has detailed processes for evaluating projects during  the budget formulation process; however, in the absence of a documented  process for considering information on demonstrated performance—such  as the performance information discussed during review board meetings  on whether projects are on time and on budget—the Corps may miss  opportunities to make the best use of this information. Additionally,  without a documented process it is not clear how information from the  review boards shapes program priorities and affects decision making.
section_title: The Corps’ Budget Presentation Lacks Transparency on Key Elements of Its Budget Request
paragraphs: Our prior work has emphasized the importance of transparency in federal  agencies’ budget presentations. While the budget presentation for the  Corps includes summaries of project categories, business lines, and  accounts, it lacks summary-level information on the relationships and  trade-offs made across these groups. For example, the presentation for the  fiscal year 2010 budget request describes the primary criteria used to  evaluate both construction and O&M projects. However, it does not  include an explanation of how the Corps makes trade-offs among the  project types in these accounts—for example, the budget presentation  does not include an explanation of the priority given to dam safety  projects over other construction project categories, or the effects that this  has on the other categories. It also lacks an explanation of the impact of  emphasizing one account over another. Congressional users of the budget  presentation told us that having summary information on how decisions  that significantly affect the budget request are made would enhance their  understanding of the budget process.
The projects that received appropriations and the projects for which funding was  requested included both new and ongoing projects. Project numbers do not include  construction or investigations projects in the Mississippi River and Tributaries (MR&T)  account. projects receiving funds than were included in the budget request, an  information gap is created when an administration highlights its priority  projects, but does not provide sufficient information on other ongoing  projects that may continue to have resource needs. Congressional users of  the Corps’ budget presentation told us that they are interested in  previously funded projects not included in the budget request, and that not  having information on these projects limits the ability of Congress to make  fully informed decisions when making appropriations decisions. A Corps  official told us that the Corps would be able to include in the budget  presentation information on projects funded in the previous year.
Senate appropriators have also expressed interest in greater project level  information for the O&M account. Specifically, the Senate conference  report accompanying the fiscal year 2010 Energy and Water Development  Appropriations bill requested that the Corps provide in the fiscal year 2011  budget presentation, at a minimum, detailed project information justifying  the need for each O&M project. For example, although the fiscal year 2010  budget request for the Corps included $2.5 billion for the O&M account  (approximately 49 percent of the total request), the budget presentation  for the Corps did not include detailed project-level information for this  account or sufficient summary information to understand the status of  O&M project implementation against agency projections or other  benchmarks. Similarly, the Press Book lists all O&M projects in the  request and the amount requested for each, but it does not provide any  detailed information on how requested funding will be used. Furthermore,  although the fiscal year 2010 budget justification provided detailed project- level information, such as narrative descriptions and previous funding  allocations, for construction and investigations projects, it did not include  any information on requested O&M projects. Congressional users of the  budget presentation told us that such information would increase the  usefulness and transparency of the presentation. Following up on the  Senate’s request, the fiscal year 2011 budget request for the Corps included  summary-level information describing how funding for each requested  O&M project would be used. The Senate did not specify whether its  request applies to fiscal years beyond 2011.
Finally, the budget presentation for the Corps does not include  information on how much carryover of unobligated appropriations is  available to potentially offset new requests for projects that were  previously funded, which congressional users of the budget presentation  stated would be useful. With this information, they can consider how  much of the previous year’s funding remains available for obligations.  Moreover, Corps officials told us that carryover amounts have increased in  recent years. The budget request for the Corps includes aggregate  information on carryover balances by account, but neither it nor the  budget presentation includes information on how much carryover is  available for specific projects. Accordingly, Congress has not been able to  consider the full level of resources available for projects when making its  appropriations decisions. Corps review boards routinely review whether  projects are meeting financial milestones, so carryover balance  information is available. However, a Corps official told us that project- level carryover estimates would not be available until after budget  materials are submitted to Congress. According to this official, while the  Corps is not able to include this information in the budget presentation,  the Corps would be able to provide Congress with project carryover  amounts separately and before final appropriations decisions are made.
section_title: Conclusions
paragraphs: The Corps’ move toward including performance information in the budget  formulation process has given priority to the projects with the highest  anticipated returns on investment. Although the Corps collects data on the  demonstrated performance of ongoing projects and on a case-by-case  basis may use this information in budget decisions, it does not have a  documented process to incorporate this type of information in budget  formulation decisions. Without an established process to ensure that  decision makers are aware of this information, relevant information may  not always be considered in budget decisions.
The current budget formulation process emphasizes agencywide priorities  and focuses on projects with the highest estimated returns; however, the  budget presentation for the Corps continues to lack transparency and key  information that could be of use to congressional decision makers. While  the budget presentation for the Corps includes a description of the  primary metrics used to evaluate projects, it does not include a description  of how decisions and trade-offs were made across project categories,  business lines, or accounts.
Although annual appropriations and accompanying committee and  conference reports sometimes designate funds to be used for specific  construction, investigations, and O&M projects, the budget presentation  for the Corps lacks two types of project-level information that could be  useful to congressional decision makers. First, the budget presentation  lacks information on many projects that were previously funded and may  continue to have resource needs. Because appropriators are likely to  consider these projects for funding again, information on these projects is  relevant and useful in the decision-making process. Second, the budget  presentation lacks information on the amount of unobligated  appropriations that remain available for each project. Such project-level  information would help congressional decision makers make better  informed appropriations and oversight decisions.
Without such information it is unlikely that Congress can have a clear  understanding of (1) how key trade-off decisions affected the budget  request, (2) how new funding requests relate to funding decisions for  existing projects with continuing resource needs, and (3) whether a given  budget request and the underlying projects support longer term goals and  priorities across component operations.
section_title: Recommendations for Executive Action
paragraphs: To ensure that all relevant information is considered during the budget  formulation process, we recommend that the Secretary of Defense direct  the Chief of Engineers and Commanding General of the U.S. Army Corps  of Engineers to take the following action:    Establish a documented process to incorporate assessments of ongoing  project performance, such as information from review boards, into the  budget formulation process.
To improve the transparency and usefulness of the Corps’ budget  presentation to Congress, building on the information the appropriators  have requested the Corps provide, we recommend that the Secretary of  Defense direct the Chief of Engineers and Commanding General of the  U.S. Army Corps of Engineers to work with OMB and Congress to take the  following four actions:  Include in the annual budget presentation for the Corps summary-level  information on how the budget request reflects decisions made across  project categories, business lines, and accounts.
Continue to include in the annual budget presentation for the Corps  project-level details for the O&M account, including an explanation of how  the requested funding for each project will be used.
Provide project-level information on all projects with continuing resource  needs, either as part of the budget presentation or as supplementary  information.
As a supplement to the budget presentation, provide Congress with  information on the estimated carryover of unobligated appropriations that  remain available for each project.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Department of Defense for official  review and comment. The department provided us with written comments,  which are summarized below and reprinted in appendix V. The department  concurred with four of our recommendations and did not concur with one.  Specifically, the department concurred with our recommendations that the  Corps include additional information in the budget presentation, including  summary-level information on how the budget request reflects decisions,  project-level details for the O&M account, and project-level information on  all projects with continuing resource needs. The department also  concurred with our recommendation that the Corps provide Congress with  information on the estimated carryover of unobligated appropriations that  remain for each project. The department did not agree, however, with our  recommendation that the Corps establish a documented process to  incorporate assessments of ongoing project performance, such as  information from review boards, into the budget formulation process. The  department stated that its existing mechanisms to incorporate  assessments of project performance into the budget formulation process  are adequate and that project review findings are used in making  budgeting decisions. It also provided an example of how actual  performance of O&M projects is used to determine budget priority.  While  we agree that the Corps’ current processes may incorporate project review  findings, we continue to believe that establishing a documented process  for the use of such information in the Corps’ budget formulation would  ensure that the Corps routinely makes the best use of all available  information. Additionally, having a documented process would improve  understanding of how information from the review boards shapes program  priorities and affects decision making. Moreover, our report discusses the  Corps’ use of information on project progress, such as whether schedule  and budgetary milestones are being met, through review boards at the  district and division levels. However, according to Corps officials, this  review board information affects funding decisions on a case-by-case  rather than routine basis. Finally, we have clarified in our report that we  agree that the Corps’ budget formulation process for the O&M account  reflects actual performance. Nonetheless, we continue to believe that the  overall emphasis of the Corps’ budget process is on anticipated rather than  demonstrated performance.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, and the Chief of Engineers and  Commanding General of the U.S. Army Corps of Engineers. In addition,  this report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact Denise M. Fantone, (202) 512–6806 or fantoned@gao.gov or Anu K.  Mittal at (202) 512-3841 or mittala@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  VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To analyze the U.S. Army Corps of Engineers’ (Corps) budget formulation  process, we examined (1) the information the Corps uses in its budget  formulation process and the implications of the process and (2) whether  the President’s budget request for the Corps is presented so that agency  priorities are clear and the proposed use of funds transparent. We focused  our review on three of the Corps’ accounts—Construction, Investigations,  and Operation and Maintenance (O&M). Most civil works funding is  designated to be used for specific projects, and projects are classified  mainly into these accounts. The Formerly Utilized Sites Remedial Action  Program (FUSRAP) is also project-based, but we did not include it in our  review because of its specialized focus on sites contaminated during the  development of atomic weapons and relatively small size (the fiscal year  2010 budget request for the Corps included 24 FUSRAP projects).
To understand the Corps’ budget formulation process and identify the  information used to evaluate projects, we reviewed documentation related  to the process. We examined the Corps’ Budget Engineer Circular used in  formulation of the fiscal year 2011 budget request. This document guides  the formulation of the budget within the Corps. We reviewed Corps  construction project rankings from fiscal year 2006, the first year in which  the Corps ranked construction projects using performance information,  through fiscal year 2010, the most recent year from which ranking  information was available at the time of our review. In addition, we  reviewed records of the agency’s internal project performance reviews and  documentation of the data collected as part of the budget formulation  process. We also interviewed Corps headquarters officials in the Program  Integration Division, including those responsible for budget formulation  and execution, and officials at all eight U.S. division offices. In our  interviews with division officials we used a common set of questions that  focused on officials’ perspectives on the effects at the division level of  performance-based budgeting, as compared to the previous budget  formulation process. To examine the effects of the Corps’ budget  formulation process, we also analyzed Corps budget and project data from  fiscal years 2001 through 2010, the 5 years before and the 5 years after the  implementation of performance-based budgeting. We did not review in  detail the fiscal year 2011 budget for the Corps, as it was released after our  audit work concluded, though we did examine it for key changes from the  previous year. We reviewed the metrics and measures used to rank Corps  projects and how they have changed since fiscal year 2006. We examined  Corps guidance on calculating the benefit-cost ratio (BCR) of projects and  interviewed Corps officials about the BCR and other metrics used in  budgeting and the related effects on the budget request. In reviewing  budgeting metrics and rankings, we did not evaluate the accuracy of the  Corps’ calculations for BCR or other metrics. Our recommendation related  to the budget process is based on previous GAO work which identified  leading practices for performance-based budgeting.
To evaluate how the President’s budget request for the Corps is presented,  we reviewed budget presentation materials, including the President’s  budgets and appendices and the budget justifications and Press Books  from fiscal years 2006 through 2010. We also reviewed the Corps’ Five  Year Development Plans for fiscal years 2007 through 2011, 2008 through  2012, and 2009 through 2013. We reviewed past GAO work on best  practices of performance-based budgeting and examples of budget  presentations for other agencies. To obtain input from users of the budget  presentation for the Corps, we interviewed staff from relevant  congressional committees. We also reviewed appropriations committee  reports from fiscal years 2005 through 2010. We interviewed Corps and  Office of Management and Budget (OMB) officials about the reasons for  the structure and information provided in the budget presentation, and  about the feasibility of making specific changes to it. Our  recommendations related to budget presentation are based on information  from users of the budget presentation, as well as previous GAO work on  performance-based budgeting.
We conducted this performance audit from March 2009 to March 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.
section_title: Appendix II: Project Prioritization in the Construction, Investigations, and O&M Accounts
subsections: section_title: The Construction Account
paragraphs: According to a U.S. Army Corps of Engineers (Corps) official, for the  Construction account, projects are systematically classified into  established categories and headquarters officials use specific metrics,  outlined in the Budget Engineer Circular, to rank projects within these  categories. Corps documentation shows that construction projects are  ranked within seven categories: (1) dam safety assurance, seepage control,  and static instability correction projects; (2) projects with mitigation or  environmental requirements; (3) projects with substantial life-saving  benefits; (4) high-performing ongoing projects; (5) high-performing new  start projects; (6) qualifying ongoing projects with continuing contracts;  and (7) projects scheduled to be completed in the fiscal year of the budget  request. The primary metrics that are to be used to rank projects within  each of these categories are listed in table 2, along with a breakdown of  funding by project type in the fiscal year 2010 budget request for the  Corps. However, according to Corps officials, the metrics alone do not  always determine the priority given to a project in the budget request, as  varying degrees of professional judgment are involved in ranking  individual projects. For example, high-performing projects (excluding  those related to ecosystem restoration) are ranked primarily using the  benefit-cost ratio (BCR). Once a project’s BCR has been calculated, Corps  officials have minimal discretion because, according to Corps and Office  of Management and Budget (OMB) staff, OMB establishes minimum BCR  thresholds and projects that do not meet the threshold cannot be included  in the budget request in the high-performing category. On the other hand,  while some metrics are applied to rankings of ecosystem restoration  projects, a Corps official described these as more subjective. For example,  a greater amount of professional judgment is used in evaluating the  significance of one habitat against others.
A Corps headquarters official told us that headquarters officials largely  evaluate construction projects across categories on a case-by-case basis.  Although performance-based budgeting has made ranking projects within  categories more systematic, the Corps official added that professional  judgment is still needed to compare projects across categories. For  example, while formal written guidance documenting priorities across  categories does not exist, dam safety projects are generally the highest  priority among the project categories because these dams are already built  and need to be maintained to provide continued protection to people living  in the area. This is supported by Corps ranking data from the past 5 fiscal  years, as the highest priority dam projects have generally been budgeted  for the maximum amount of funding that the Corps determines can be  effectively used. According to our analysis of Corps data, in most years  since performance-based budgeting was begun, the funding requested for  dam safety projects has been among the highest of the construction  categories. In addition, the agency requests enough funding for projects  with environmental or mitigation requirements to meet annual targets laid  out in environmental plans. Other than dam safety and projects with  environmental requirements, the Corps official could not generalize about  the relative priority or level of funding requested for the remaining project  categories, noting that they are decided on a case-by-case basis. A Corps  official told us that administration priorities influence budget formulation,  and may be communicated to the Corps through OMB’s written feedback  on the budget submission or in a letter from the Assistant Secretary of the  Army for Civil Works.
section_title: The Investigations Account
paragraphs: For the Investigations account, information used to make budgetary  decisions varies depending on the phase of the project—reconnaissance  study, feasibility study, and preconstruction engineering and design. In the  first two phases, a Corps headquarters official told us that the Corps relies  primarily on professional judgment and other factors, but that by the last  phase, data are available to guide decision making. More specifically, the  first phase of an investigation is a reconnaissance study, which is  conducted to understand the nature of a water resources problem and  determine the federal government’s interest. To determine if a potential  project warrants a reconnaissance study, he also stated that the  headquarters business line managers meet with the Chief of Budget  Development to discuss the merits of conducting the study. They make  funding decisions based on a narrative description of the proposed study.  At this point in the process, since the study is still prospective and there is  no performance information available, agency officials rely primarily on  their professional judgment, as they did prior to the use of performance- based budgeting. If the Corps determines through the reconnaissance  study that there is a federal interest in the study, and local sponsors are  available, as required by law, a feasibility study is conducted. This type of  study is done to formulate and recommend specific solutions to a water  resources problem.
At the end of the feasibility study phase, performance information, such as  BCR and returns for the environment, is available to inform decisions  about which projects will move on to the final phase of the investigation,  preconstruction engineering and design. Corps officials consider the same  metrics used to evaluate construction projects since the purpose of this  phase is to determine whether a project should be authorized for  construction.
section_title: The Operation and Maintenance Account
paragraphs: For the Operation and Maintenance (O&M) account, the divisions have a  greater role in selecting projects in certain funding increments. Although  the budget formulation process for the O&M account is less centralized  than it is for Construction and Investigations, Corps headquarters and  division officials described how the process is more centralized than it  was prior to the introduction of performance-based budgeting, when the  divisions could largely distribute funding as they saw fit. Corps officials  noted that for increments 1 and 2, the highest priority increments, Corps  division officials identify critical projects, equaling up to 75 percent of the  average of their previous 5 years’ budget requests. According to the Budget  Engineer Circular (EC), the first increment should represent critical  routine projects, meaning projects that are done every year or on a cyclical  basis, or projects that are required in order to meet legal and  environmental requirements or for historic preservation. For example, the  ongoing operation of a powerhouse and the biennial dredging of a channel  could be included in this increment. The Budget EC notes that the second  increment should also represent critical projects, though these do not take  place on a regular basis. An example of this would be the replacement of a  potable water well or a broken gate on a lock. In addition, a Corps official  stated that business line managers at Corps headquarters provide  oversight to ensure the divisions include projects in the first two  increments that reflect Corps-wide priorities. They read the divisions’  narrative descriptions of how they plan to use the requested funding and  what the consequences would be if the projects did not receive the  funding. In addition, as stated in the Budget EC, the projects in increment  3—equaling up to 25 percent of the average of the previous 5 years’ budget  requests for each division—are also considered critical, but are of lower  priority than the first increments. A Corps official noted that headquarters  officials play a greater role by evaluating increment 3 projects across  divisions to determine which projects will be included in the ceiling level  of funding. Unlike increments 1 and 2, in which the divisions can generally  be assured of a certain level of funding, some increment 3 projects may  only be funded if the Corps receives more than the ceiling level of funding.  Finally, increments 4 and 5 are lower priority projects above the ceiling  level of funding.
The Corps’ Budget EC provides detailed guidance to divisions on the  metrics that should be considered to determine which O&M projects and  activities receive priority. Imminent risk to human life, court mandates,  strategic importance to the Department of Defense, and the amount of  commercial tonnage transported on a waterway are among the factors that  would give a waterway higher priority status. For example, the Budget EC  provides specific tonnage ranges to assess the relative levels of commerce  on particular waterways. Thus, all else being equal, a project that is critical  to the operation of a waterway with a high level of commercial tonnage  will be given priority over a project that is equally critical to the operation  of a waterway with a low level of commercial tonnage. The Budget EC  also specifies that, even if waterways do not support a high level of  commercial tonnage, they can be included in the budget request if they  support significant commercial fishing and public transportation, or are  subsistence harbors, which local communities depend on for survival, or  harbors of refuge, which are protected from heavy seas.
section_title: Decision Making Across Accounts
paragraphs: Although the Budget EC provides guidance on the metrics that should be  considered in determining which projects and activities receive priority,  the Corps does not have formal guidance for making trade-off decisions  while formulating the budget across Construction, Investigations, O&M,  and the other accounts. According to a Corps official, however, the agency  does have an informal process for making these trade-off decisions. First,  the Corps headquarters business line managers and the Chief of Budget  Development meet to consider the construction and investigations  projects in the prior year’s budget request. The goal is to maintain  continuity of ongoing projects, provided they still meet the performance  criteria, so these projects’ minimum needs are met. Next, the managers of  the nonproject-based accounts and the Chief of Budget Development  consider these accounts, including General Expenses and the Regulatory  Program, and determine what it would take to maintain the existing level  of service. Then, with the remaining funds, headquarters business line  managers and the Chief of Budget Development consider O&M projects  above increments 1 and 2, since these initial increments are included in  the ceiling level of funding. Finally, they consider high-performing new  start construction projects after the ceiling level of funding has been  reached.
section_title: Appendix III: Methodology for Calculating Benefit-Cost Ratio and Changes in Requirements Over Time
paragraphs: Benefit-cost ratio (BCR) is calculated differently for various types of  projects, but generally represents the value of damages avoided as a result  of constructing a project, divided by the life-cycle cost of the project for  the U.S. Army Corps of Engineers (Corps). Table 3 summarizes the  primary inputs used to calculate benefits.
Table 4 shows a simplified example of how BCR would be calculated for  two alternative construction projects aimed at reducing the transportation  costs to users of a channel. The first example, channel deepening, would  generate benefits due to several factors. First, a deeper channel would  accommodate larger vessels, which are more efficient and have a lower  per-unit cost. Additionally, vessels sometimes have to wait for tidal  changes so that there is sufficient channel depth. Deepening the channel  reduces or eliminates the need to do this and thus creates savings. Finally,  if a channel is not deep enough to accommodate a vessel, the cargo must  sometimes be transferred to a vessel with a more shallow draft. If  deepening reduces or eliminates this need, cargo handling savings are  created.
The second example, channel widening, would generate benefits due to  reductions in vessel delays. This would occur if the widening allowed  more vessels to use the channel at one time. For example, the channel  might currently only permit one-way vessel traffic, but the widening would  allow two-way traffic. The reduction in delays generates savings. Similarly,  sometimes weather-related factors such as fog require wider channels. If a  wider channel permits increased vessel traffic during foggy conditions,  savings are also generated. According to a Corps official, channel  widening projects are typically less expensive than channel deepening  projects, though their benefits also tend to be lower.
The minimum BCR has been higher for new start construction projects  than ongoing projects, reflecting the administration’s preference for fewer  new start projects. Prior to fiscal year 2008, a different measure was used  instead of BCR as the primary economic metric. Table 5 shows the  changes in the BCR requirements over the past 5 years. Office of  Management and Budget (OMB) staff stated they recommended changing  the measure to create more stability. Nevertheless, according to Corps  division officials, there is still uncertainty about whether particular  projects will be included in the budget request. Since, according to Corps  and OMB staff, the BCR threshold set by OMB can change from year to  year, a project may meet the BCR threshold 1 year but fail to meet it in  future years, making it difficult for the Corps to make long-term  commitments. For example, one division cited a hydropower plant that  had been funded since 2005, but was not included in the President’s 2010  budget request because it had a BCR of 1.7 and the BCR threshold for  ongoing projects that year was 2.5. Officials at another division estimated  that three to four projects in their jurisdiction had been put on hold since  the introduction of performance-based budgeting because they could not  meet the BCR threshold. Officials at some divisions told us that this  uncertainty and the failure of a project to be budgeted has negatively  affected the Corps’ relationship with local sponsors. Some division  officials also told us that this increased uncertainty has made workforce  planning more challenging.
section_title: Appendix IV: Trends in Budget Requests for the Corps
subsections: section_title: Numbers of Projects Requested
paragraphs: Over the past decade the number of projects included in the budget  request for the U.S. Army Corps of Engineers (Corps) has varied. The  number of construction projects has in general decreased, though it has  been more stable in recent years, as shown in figure 4.
The number of investigations projects included in the budget request has  followed a similar trend to the Construction account, though the degree of  the decrease over time has been greater, as shown in figure 5.
Compared to the Construction and Investigations accounts, the Operation  and Maintenance (O&M) account has been relatively stable, as shown in  figure 6.
section_title: Appendix V: Comments from the Department of Defense
subsections: section_title: GAO Comments
paragraphs: 1. While we agree that the Corps’ current processes may incorporate  project review findings, we continue to believe that establishing a  documented process for the use of such information in the Corps’ budget  formulation would ensure that the Corps routinely makes the best use of  all available information. Additionally, having a documented process  would improve understanding of how information from the review boards  shapes program priorities and affects decision making. Moreover, our  report discusses the Corps’ use of information on project progress, such as  whether schedule and budgetary milestones are being met, through review  boards at the district and division levels. However, according to Corps  officials, this review board information affects funding decisions on a  case-by-case rather than routine basis.  2. We have clarified in our report that we agree the Corps’ budget  formulation process for the O&M account reflects actual performance.  Nonetheless, we continue to believe that the overall emphasis of the  Corps’ budget process is on anticipated rather than demonstrated  performance.
section_title: Appendix VI: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to the individuals listed above, Carol M. Henn, Assistant  Director; Vondalee R. Hunt, Assistant Director; Kathleen Padulchick; and  Kelly A. Richburg made significant contributions to this report. Joshua  Archambault, Virginia Chanley, Robert L. Gebhart, Chelsa Gurkin, Felicia  Lopez, and Vasiliki Theodoropoulos also made key contributions.