Civil Penalties: Agencies Unable to Fully Adjust Penalties for Inflation Under Current Law
Published: 2003-03-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Civil penalties are an important element of regulatory enforcement, allowing agencies to punish violators appropriately and to serve as a deterrent to future violations. In 1996, Congress enacted the Inflation Adjustment Act to require agencies to adjust certain penalties for inflation. GAO assessed federal agencies' compliance with the act and whether provisions in the act have prevented agencies from keeping their penalties in pace with inflation.
section_title: What GAO Found
paragraphs: As of June 2002, 16 of 80 federal agencies with civil penalties covered by the Inflation Adjustment Act had not made the required initial adjustments to their penalties. Nineteen other agencies had not made required subsequent adjustments, and several other agencies had made incorrect adjustments. The act does not give any agency the authority to monitor compliance or to provide guidance to agencies. More important, several provisions of the act have prevented some agencies from fully adjusting their penalties for inflation. One provision limited the agencies' first adjustments to 10 percent of the penalty amounts, even if the penalties were decades old and hundreds of percent behind inflation. The resultant "inflation gap" can never be corrected under the statute and grows with each subsequent adjustment. Also, the act's calculation and rounding procedures require agencies to lose a year of inflation each time they adjust their penalties, and can prevent some agencies from making adjustments until inflation increases by 45 percent or more (i.e., 15 years or more at recent rates of inflation). Finally, the act exempts penalties under certain statutes from its requirements entirely. Consequently, more than 100 exempted penalties have declined in value by 50 percent or more since Congress last set them.

section_title: Letter
paragraphs: Civil monetary penalties are one method by which agencies enforce federal  laws and regulations, with penalty assessments and collections totaling  hundreds of millions of dollars per year.  Dozens of federal agencies are  currently authorized to levy such penalties for violations involving such  issues as public health and safety, environmental protection, securities  transactions, and international trade.  For example, within the past few  years,   a major automobile manufacturer agreed to pay $425,000 in civil  penalties to settle charges that it failed to promptly recall vehicles with  ignition-switch problems and withheld information in investigations into  fires in its vehicles,    a furniture manufacturer agreed to pay a $900,000 civil penalty to settle  allegations that it knowingly failed to report a substantial hazard in  cedar chests involved in the suffocation deaths of five children, and     a company agreed to pay civil penalties totaling $30,000 to settle  allegations that it violated export control and antiboycott laws by  shipping chemicals to Iran through the United Arab Emirates.
Congress generally establishes civil penalty maximums in the underlying  statutes, and those maximum penalties are generally reserved for the worst  offenses.  In 1996, Congress amended the Federal Civil Penalties Inflation  Adjustment Act of 1990 to require agencies to issue regulations adjusting  their covered penalties for inflation.  The statute as amended (hereinafter  referred to as the “Inflation Adjustment Act”) required agencies with  covered penalties to publish initial penalty adjustments in the Federal  Register by October 23, 1996, and to examine their penalties for additional  inflation adjustments at least once every 4 years thereafter.  The act  limited the first such adjustment to 10 percent of the penalty amount and  required specific calculation and rounding procedures to be followed, but  excluded penalties under certain statutes from coverage (e.g., the  Occupational Safety and Health Act of 1970 and the Internal Revenue Code  of 1986).
This report examines the implementation of the Inflation Adjustment Act.   Specifically, our objectives were to determine (1) whether, as of June 30,  2002, agencies with penalties covered by the act had made the required  penalty adjustments and (2) whether provisions in the act have prevented  agencies from keeping their penalties in pace with inflation.  A complete  discussion of our scope and methodology is included later in this report.  In  brief, we focused part of our work on six agencies that the most recent data  available indicated had large penalty assessments.  We also focused on the  five agencies that levy penalties under the excluded statutes. We conducted  this review under our basic legislative authority to undertake work  supporting Congress, and are reporting the results to you as the current  Chairmen and Ranking Minority Members of the two Committees that  sponsored the Federal Civil Penalties Inflation Adjustment Act of 1990.
subsections: section_title: Background
paragraphs: Prior to 1996, agencies generally did not have the authority to adjust civil  penalty maximums that were established in statute.  Congress would  occasionally adjust individual penalties or specific groups of penalties, but  not all civil penalties.  As a result, by 1990, many penalties had not been  changed for decades.  When the Federal Civil Penalties Inflation  Adjustment Act of 1990 was enacted, Congress noted in the “Findings”  section of the legislation that inflation had weakened the deterrent effect of  many civil penalties.  The stated purpose of the 1990 act was “to establish a  mechanism that shall (1) allow for regular adjustment for inflation of civil  monetary penalties; (2) maintain the deterrent effect of civil monetary  penalties and promote compliance with the law; and (3) improve the  collection by the Federal Government of civil monetary penalties.”   However, the act did not give agencies the authority to adjust their civil  penalties for inflation.  Instead, the 1990 act required the President to  report to Congress every 5 years on how much each covered civil penalty  had to be increased to keep pace with inflation.  In addition, the act  required the President to report annually on penalty assessments and  collections.
In July 1991, the Office of Management Budget (OMB) submitted the first  (and ultimately the only) report to Congress under the Federal Civil  Penalties Inflation Adjustment Act describing the penalty increases needed  to keep pace with inflation. Based on submissions from dozens of  agencies, the report identified almost 1,000 civil monetary penalties that  were covered by the act, and listed, by agency, the statutory modifications  that were required to fully adjust the penalties for inflation.  Also, in  satisfaction of the annual reporting requirement, the report also provided  information on civil penalty assessments and collections during fiscal year  1990.  At the request of OMB’s Office of Federal Financial Management, the  Department of the Treasury’s Financial Management Service (FMS)  published those reports until 1998 (providing information on assessments  and collections through fiscal year 1997).  Congress abolished this annual  reporting requirement as part of the Federal Reports Elimination Act of  1998.
Congress amended the 1990 act in 1996, replacing the 5-year reporting  obligation with a requirement that agencies publish regulations in the  Federal Register adjusting each of their covered civil penalties for inflation.   The act as amended required each agency’s first inflation adjustment  regulation to be published by October 23, 1996, and requires the agencies to  examine their covered penalties at least once every 4 years thereafter and,  where possible, make penalty adjustments.  However, the act limited the  agencies’ initial penalty adjustments to 10 percent of the penalty amounts.   The Inflation Adjustment Act also exempted penalties under the Internal  Revenue Code of 1986, the Tariff Act of 1930, the Occupational Safety and  Health Act of 1970, and the Social Security Act.
subsections: section_title: Adjustment Procedures
paragraphs: The Inflation Adjustment Act requires agencies to follow specific  procedures when making penalty adjustments.  For example, section 5 of  the act defines a “cost-of-living adjustment” as the following: …the percentage (if any) for each civil monetary penalty by which -   (1) the Consumer Price Index for the month of June of the calendar  year preceding the adjustment, exceeds (2) the Consumer Price Index  for the month of June of the calendar year in which the amount of such  civil monetary penalty was last set or adjusted pursuant to law.
Therefore, if an agency made its first round of adjustments in October 1996  and the penalty was last set or adjusted in October 1990, the agency was  required to calculate the unrounded cost-of-living adjustment by comparing  the June 1995 Consumer Price Index (CPI) with the CPI for June 1990.
The Inflation Adjustment Act also provides specific criteria for how  agencies should round any penalty increase. Section 5 of the act says the  following: Any increase determined under this subsection shall be rounded to the  nearest (1) multiple of $10 in the case of penalties less than or equal to  $100; (2) multiple of $100 in the case of penalties greater than $100 but  less than or equal to $1,000; (3) multiple of $1,000 in the case of  penalties greater than $1,000 but less than or equal to $10,000;  (4) multiple of $5,000 in the case of penalties greater than $10,000 but  less than or equal to $100,000; (5) multiple of $10,000 in the case of  penalties greater than $100,000 but less than or equal to $200,000; and  (6) multiple of $25,000 in the case of penalties greater than $200,000.
For example, if a maximum civil penalty of $5,000 was last set in 1990, and  there had been 17 percent inflation from June 1990 through June 1995 (the  relevant time frame for an adjustment in 1996), the unrounded increase  would be $850 ($5,000 times 0.17).  Because the $5,000 penalty was greater  than $1,000 but less than or equal to $10,000, the statute indicates that the  $850 increase should be rounded to the nearest multiple of $1,000, which is  $1,000.  Therefore, the adjusted penalty after rounding would be $6,000.
However, section 6 of the Inflation Adjustment Act states that the first  penalty adjustment under these procedures “may not exceed 10 percent of  such penalty.”  Therefore, in the above example the $1,000 rounded  increase would be limited to 10 percent of the $5,000 penalty amount, or  $500.  As a result, the adjusted penalty after the 10 percent cap would be  $5,500.  The legislative history of the Inflation Adjustment Act does not  explain why Congress established the 10 percent cap, the penalty  exemptions, or the particular adjustment procedures.
section_title: Prior GAO Work on Civil Penalties
paragraphs: Our previous work has indicated that the establishment and adjustment of  civil penalty maximums is only one part of the penalty process.  Civil  penalty maximums are generally reserved for the most egregious cases  (e.g., those involving willful intent to violate the law and/or fatalities).   Agencies investigate potential violations and determine the amount of  penalty to be sought based on a variety of factors, including the severity of  the incident, whether the individual or organization involved has a previous  history of violations, and the individual or organization’s ability to pay the  fine.  In February 2001, we reported on the implementation of a statutory  provision that required federal agencies to provide small entities (e.g.,  small businesses and small governments) with civil penalty relief.  We  concluded that the requirement was being implemented by the agencies  differently, and that small entities may not be receiving any more relief than  larger entities.
We have reported several other times on the assessment of civil penalties  and the collection of civil penalty debt.  For example, see the following.
In August 1994, we reported on the enforcement of the Employee  Retirement Income Security Act of 1974 (ERISA), noting that the  Pension and Welfare Benefits Administration’s (PWBA) enforcement  program could be strengthened by increasing the use of penalties  authorized by the statute to deter plans from violating the law.
In March 1996 we said “penalties play a key role in environmental  enforcement by deterring violators and by ensuring that regulated  entities are treated fairly and consistently so that no one gains a  competitive advantage by violating environmental regulations.”
In March 1999, we reported that the potential usefulness of civil  monetary penalties in relation to noncompliant nursing homes was  being hampered because of delays in the application of the sanctions by  the Health Care Financing Administration.
In May 2000, we reported that the Office of Pipeline Safety (OPS) had  decreased the number and amount of fines while increasing the use of  less severe corrective actions.  We questioned this approach, and  recommended that the agency determine the impact of the reduced use  of fines on compliance with safety requirements.  We subsequently  reported that OPS had increased its use of fines.
In December 2001, we reported on the growth in civil monetary penalty  receivables at the Centers for Medicare and Medicaid Services (CMS).   In that report, OMB stated that it has broad oversight responsibility in  monitoring and evaluating governmentwide debt collection activities.   However, OMB said it is the agencies’ responsibility to monitor, manage,  and collect the debt, and the agency’s Office of the Inspector General’s  responsibility to audit debt collection activities.
We have also specifically commented on the adjustment of civil penalties  for inflation.  In September 1993, the National Performance Review (NPR)  recommended that federal civil monetary penalties be adjusted for  inflation.  Specifically, NPR recommended that a “catch-up” penalty  adjustment be made to bring penalties up to date, and that the need for  additional inflation adjustments be automatically reassessed every 4 years.   NPR estimated that implementation of the recommendation would  increase federal receipts by nearly $200 million during the fiscal year 1994  through fiscal year 1999 period. In our December 1994 report on NPR, we  generally agreed with the recommendation, noting that civil penalties  should be periodically adjusted so that they do not lose relevancy.
section_title: Objectives, Scope, and Methodology
paragraphs: The objectives of this report are to determine (1) whether, as of June 30,  2002, agencies with penalties covered by the Inflation Adjustment Act had  made the required penalty adjustments and (2) whether provisions in the  act have prevented agencies from keeping their penalties in pace with  inflation.  To address the first objective, we electronically searched the  Federal Register and determined whether the required penalty adjustment  regulations had been published by all federal agencies that the 1991 OMB  report and the 1997 Department of the Treasury report indicated had civil  penalty authorities that were covered by the Inflation Adjustment Act.  We  defined an “agency” to be each organizational unit that was separately  listed in those reports or that separately published penalty adjustment  regulations in the Federal Register.
We also examined the adjusted penalties and determined whether any of  them were eligible for a second round of adjustments.  We focused part of  our analysis on six agencies with large penalty assessments in 1997 (the  most recent data available)—the Environmental Protection Agency (EPA);  the Mine Safety and Health Administration (MSHA) and PWBA within the  Department of Labor; and the Federal Aviation Administration (FAA), the  National Highway Traffic and Safety Administration (NHTSA), and the  United States Coast Guard (USCG) within the Department of  Transportation.
We also focused on those six agencies in the second objective, comparing  the amount of penalty adjustments made under the 10 percent cap with the  amount of inflation that had occurred since the agencies’ penalties were  last set or adjusted.  As called for by the act, we used the CPI for urban  workers during the month of June in the relevant years as our measure of  the historical rates of inflation.  We then calculated the amount of inflation  that had not been accounted for by the agencies’ initial adjustments—what  we refer to in this report as the “inflation gap.”  We interviewed officials in  each agency to determine their views regarding the effect of the 10 percent  cap on their agencies’ civil penalties and enforcement efforts.
We also focused on those six agencies to examine the effects of the  adjustment calculation requirements and rounding rules in the statute.   Specifically, we used certain commonly occurring penalty amounts to  demonstrate how the statute requires the penalties to be adjusted and  rounded, and developed projections of how closely the resultant penalties  tracked a possible rate of inflation.  Our projections assume an annual rate  of inflation of 2.5 percent—about the average rate since the Inflation  Adjustment Act was enacted in 1996.
We focused another part of our review on the five agencies responsible for  penalties that are exempted from the act’s requirements—CMS within the  Department of Health and Human Services, the Occupational Safety and  Health Administration (OSHA) within the Department of Labor, the U.S.  Customs Service (Customs) and the Internal Revenue Service (IRS) within  the Department of the Treasury, and the Social Security Administration  (SSA).  We interviewed officials in each of the five agencies, asking if they  knew why their agencies’ penalties had been excluded, the effect of the  exclusions on their ability to keep their penalties in pace with inflation, and  whether they believed their penalties should now be adjusted for inflation.  We also contacted officials from OMB, the Department of Justice, and FMS  within the Department of the Treasury to obtain their views regarding the  need for central management oversight of the act.
We focused part of our review on the extent to which the Inflation  Adjustment Act permits agencies to keep their civil penalties in pace with  inflation.  However, we made no attempt to ascertain whether any  individual penalty was set at a sufficient level to deter violations of federal  law or regulation.  We also did not attempt to determine the extent to which  the agencies’ maximum civil penalties are administered.  Also, because  there is no current comprehensive database that identifies each agency  with civil penalty authority subject to the provisions of the Inflation  Adjustment Act, we cannot be sure that we have identified all of the  agencies or penalties covered by the act. We did not attempt to verify  whether a penalty adjusted for inflation by an agency appropriately met the  definition of a covered penalty in the Inflation Adjustment Act.  We  conducted our work from March 1, 2002, through September 1, 2002, at the  headquarters offices of the above-mentioned agencies in accordance with  generally accepted government auditing standards.
We provided a draft of this report to OMB, the Department of Justice, and  the Department of the Treasury for their review and comment. The  comments that we received are reflected in the “Agency Comments and  Our Evaluation” section of this report.
section_title: Many Agencies Did Not Make Required Penalty Adjustments
paragraphs: Our review indicated that lack of compliance with the Inflation Adjustment  Act has been widespread.  As of June 2002, 16 of 80 federal agencies with  civil penalties covered by the act had not adjusted any of their penalties for  inflation.  Only 9 of the 64 agencies that made initial penalty adjustments  did so by the statutory deadline of October 23, 1996, and some of the  adjustments were not made until years after the deadline.  Also, 19 of the 64  agencies that made initial adjustments had not made required subsequent  adjustments for eligible penalties, and several other agencies made the  adjustments incorrectly.  The act does not give any agency the authority or  responsibility to monitor agencies’ compliance or provide guidance on its  implementation.  Representatives from the six agencies with covered  penalties that we contacted all supported giving some federal entity that  authority and responsibility.
subsections: section_title: Sixteen Agencies with Covered Penalties Did Not Make Initial Penalty Adjustments
paragraphs: As noted previously, the Inflation Adjustment Act required each federal  agency with covered civil penalties to publish a regulation in the Federal  Register by October 23, 1996, making initial inflation adjustments to its civil  penalties (to a maximum of 10 percent).  We reviewed OMB’s 1991 report to  Congress and other sources and determined that 80 federal agencies had at  least one civil penalty that was covered by the act’s requirements.  Our  review of the Federal Register indicated that, as of June 30, 2002, 16 of the  80 agencies had not published the required penalty adjustment regulations.   (See app. I for a list of the 80 agencies and which ones did and did not  publish regulations.)
We contacted 4 of the 16 agencies that had not published regulations, those  that appeared to have multiple civil penalties and/or active civil penalty  programs—the Department of Education, the Federal Energy Regulatory  Commission, the Food and Drug Administration within the Department of  Health and Human Services, and Customs.  In separate reports published  during this review, we recommended that each of the four agencies publish  the required initial penalty adjustment regulations.  Each of the agencies  agreed to do so, and some have since published the required adjustments.
Officials in these agencies said they did not know why their agencies had  not adjusted their penalties earlier.
Some of the penalty adjustment regulations that were published covered all  of the department or agency’s civil penalties, but others covered only a  particular subunit within the department or agency.  For example, the  Department of Agriculture’s initial inflation adjustment regulation covered  eight different agencies within the department (e.g., the Agricultural  Marketing Service, the Animal and Plant Health Inspection Service, and the  Food Safety and Inspection Service).  In contrast, nine agencies within the  Department of Transportation (e.g., FAA, USCG, and NHTSA) each  published separate penalty adjustment regulations.
Only 9 of the 64 agencies making penalty adjustments published their  regulations by the statutory deadline of October 23, 1996.  Most of the other  55 agencies published their regulations by the end of 1997, but 7 agencies  did not do so until 1998 or later.  For example, the Office of the Attorney  General within the Department of Justice did not publish its initial Inflation  Adjustment Act regulation until August 30, 1999.  The Wage and Hour  Division within the Department of Labor’s Employment Standards  Administration did not publish its initial regulation until December 7,  2001—more than 5 years after the statutory deadline.
All six of the agencies that we focused on in this part of our review had  published a first round of penalty adjustment regulations by June 2002.   However, none of the agencies published their regulations by the October  23, 1996, statutory deadline.  For example, MSHA did not publish its initial  penalty adjustments until April 22, 1998—nearly 18 months after the  deadline.
section_title: Nineteen Agencies Did Not Make Required Second- Round Adjustments
paragraphs: The Inflation Adjustment Act required agencies with covered civil penalties  to examine those penalties and, where possible under the act’s procedures,  make at least one more round of penalty adjustments within 4 years after  the initial adjustments.  Therefore, if an agency published its initial penalty  adjustments on October 23, 1996, it should have examined those penalties  and, where possible, published a second round of adjustments by October  23, 2000.  However, as we viewed the act, if the agency did not publish the  initial adjustments until 2 years after the deadline (i.e., October 23, 1998),  the agency was not required to publish a second round of adjustments for  eligible penalties until October 23, 2002.
As appendix I shows, 29 of the 64 agencies that published initial penalty  adjustment regulations under the Inflation Adjustment Act had not  published a second round of adjustments by June 30, 2002.  However, in  some cases, 4 years had not elapsed since the agencies’ initial penalty  adjustments.  In other cases, the agencies’ penalties were not eligible for a  second round of adjustments under the procedures prescribed in the  Inflation Adjustment Act.  In total, 19 agencies had at least one penalty that  was eligible for a second adjustment as of June 30, 2002, but the agencies  had not adjusted those penalties.
Among the six agencies that we focused on in this part of our review, two  agencies—FAA and NHTSA—had published a second round of adjustments  for all of their eligible penalties by June 30, 2002.  One agency—PWBA— had no penalties that were eligible for adjustment under the Inflation  Adjustment Act’s procedures.  The three remaining agencies—EPA, USCG,  and MSHA—had penalties that were eligible for a second round of  adjustments as of June 30, 2002, but had not adjusted those penalties in a  manner consistent with the act’s requirements.
EPA published a second round of adjustments on June 18, 2002 (nearly   5 ½ years after its first adjustments), but later withdrew the rule after we  advised EPA that the adjustments were inconsistent with the Inflation  Adjustment Act’s requirements.  EPA officials told us that the agency  would publish another adjustment regulation in 2003.
USCG could have adjusted 56 of its 122 previously adjusted penalties by  June 2002.
MSHA could have adjusted at least 2 of its 5 previously adjusted  penalties by June 2002.
In separate reports published during this review, we recommended that  USCG and MSHA publish a second round of penalty adjustments, and each  agency subsequently agreed to do so.
section_title: No Agency Is Responsible for Monitoring Compliance or Providing Guidance
paragraphs: Several provisions in the Inflation Adjustment Act are unclear, and  agencies raised a number of questions during our review regarding some of  the act’s requirements.
The act does not clearly indicate whether second-round adjustments  should be made within 4 years of the October 23, 1996, deadline, or  within 4 years of the initial adjustment—whenever it occurred.
Although it is clear that the Inflation Adjustment Act covers penalty  maximums and minimums set in statute, it is not clear whether penalties  set administratively by the agencies are covered by the act’s  requirements.
It is not clear whether the term “last set or adjusted” refers to the date  an adjustment was published in the Federal Register or the date the  adjustment took effect.
Officials in several agencies raised questions during our review  regarding how the rounding rules in the statute should be interpreted. In  January 2002, the Federal Election Commission’s General Counsel  developed a memo examining various interpretations of those  provisions and indicating that agencies were interpreting the  requirements differently.
Officials in one agency said it was unclear whether future inflation  adjustments should be based on the penalty prior to or after rounding.
When the Inflation Adjustment Act was enacted in 1996, Congress did not  give any federal agency the authority or responsibility to monitor agencies’  compliance with the act or to provide guidance to agencies on how the act  should be implemented.  In November 1996, at the request of OMB’s Office  of Federal Financial Management (OFFM), FMS developed written  guidance on the Inflation Adjustment Act and held a workshop on how the  act should be implemented.  As noted previously, FMS also reported on  agencies’ civil penalty assessments and collections until 1998 at the request  of OFFM.  However, FMS has not provided any guidance to agencies on the  Inflation Adjustment Act since 1996 and has never monitored agencies’  compliance with the act.
In contrast, other crosscutting regulatory reform statutes make a particular  executive branch agency responsible for monitoring compliance and  providing guidance to other agencies.  For example, the Paperwork  Reduction Act gives OMB the authority and responsibility to approve  agencies’ proposed information collections and to provide guidance to the  agencies on how the act should be implemented.  Also, the Regulatory  Flexibility Act requires the Small Business Administration’s Chief Counsel  for Advocacy to monitor and report at least annually on agencies’  compliance with the act.
Representatives from all six of the agencies with covered penalties that we  contacted supported giving some federal entity the authority and  responsibility to monitor agencies’ compliance with the Inflation  Adjustment Act and to provide guidance to the agencies on the act’s  implementation.  One representative said that FMS had been very helpful  during the act’s early implementation, but since then there had been no  entity that the agencies could turn to for advice and guidance.
section_title: The Inflation Adjustment Act Has Prevented Agencies from Keeping Certain Penalties in Pace with Inflation
paragraphs: Several provisions in the Inflation Adjustment Act have limited agencies’  ability to keep their penalties in pace with inflation.  The 10 percent cap on  initial adjustments prevented some agencies from fully adjusting for  hundreds of percent of inflation that had occurred since certain penalties  were last set or adjusted by Congress.  The resultant “inflation gap” cannot  be corrected under this statutory authority through subsequent  adjustments and, in fact, grows with each adjustment.  Also, the act’s  requirements on how the penalty adjustments should be calculated and  rounded prevents agencies from capturing all of the inflation that occurs  between adjustments, and can prevent agencies from increasing certain  penalties until inflation increases by 45 percent or more.  In addition, the  act exempted hundreds of penalties from inflation adjustment, some of  which have not been adjusted for decades.
subsections: section_title: Ten Percent Cap Results in Penalty “Inflation Gaps”
paragraphs: The Inflation Adjustment Act limited covered agencies’ first adjustments  under the statute to 10 percent of the penalty amount.  In the six agencies  that we focused on in this portion of our review, all 232 initial penalty  adjustments were capped at 10 percent.  As table 1 shows, none of these  10 percent adjustments were sufficient to fully account for the amount of  inflation that had occurred since the underlying penalties were last set or  adjusted.  The size of the inflation gap varied by agency and by penalty  within agencies.  In some cases, the cap did not severely limit the agencies’  ability to account for inflation.  For example, the 10 percent adjustment  that MSHA made to its five penalties in 1998 (using the June 1997 CPI)  accounted for all but 4 percent of the inflation that occurred since those  penalties were last adjusted in 1992.
However, in other cases the 10 percent cap on agencies’ initial adjustments  resulted in sizable inflation gaps.  For example, one of the civil penalties  that FAA adjusted in 1996 was a maximum $1,000 penalty for, among other  things, possession of a firearm discovered at a baggage security  checkpoint.  The penalty was set in 1958 and, until 1996, had not been  changed.  As figure 1 illustrates, if adjusted for inflation in 1996 (using the  June 1995 CPI), this penalty would have increased by more than 400  percent to $5,277.  However, because the Inflation Adjustment Act limited  agencies’ first adjustments to 10 percent, FAA was only able to increase  this penalty by $100 to $1,100—$4,177 less than it would have been if fully  adjusted for the amount of inflation that occurred from 1958 through 1995.
The 10 percent cap on initial adjustments also resulted in sizable inflation  gaps for several other penalties in the six selected agencies.  For example,  see the following.
If fully adjusted for inflation in 1996, a NHTSA penalty last set in 1972 at  $800,000 for a series of violations involving the failure to meet bumper  standard testing criteria would have increased by 275 percent to more  than $3 million.  However, the 10 percent cap limited the increase to  $80,000, leaving an inflation gap of more than $2.1 million.
An EPA penalty last set at $25,000 in 1976 for violation of the Toxic  Substances Control Act would have increased by nearly 170 percent to  more than $67,000 if fully adjusted for inflation in 1995.  However, the 10  percent cap meant that the penalty could only increase by $2,500,  leaving an inflation gap of nearly $40,000.
A PWBA penalty was last set at $100 per day in 1974 for refusal to  provide information in a timely manner needed to determine  compliance with certain requirements in ERISA.  If fully adjusted for  inflation in 1996, the penalty would have increased to more than $300  per day.  However, with the 10 percent cap, the penalty could only  increase by $10, leaving an inflation gap of more than $200.
subsections: section_title: Size of Inflation Gap Resulting from the 10 Percent Cap Grows with Subsequent Adjustments
paragraphs: Because of other provisions in the Inflation Adjustment Act, the inflation  gap resulting from the 10 percent cap on initial adjustments cannot be  corrected under this statutory authority—and, in fact, grows with each  penalty adjustment.  The act defines the term “cost of living adjustment” as  the percentage by which the CPI for the year preceding the adjustment  exceeds the CPI for the year in which the penalty was last set or adjusted.   Therefore, agencies’ second adjustments under the statute could only take  into consideration the amount of inflation since the first adjustment.  As a  result, any inflation gap remaining as a result of the 10 percent cap  becomes permanent.  Furthermore, because the capped penalties are  smaller than they would have been without the 10 percent restriction, the  size of subsequent adjustments using that smaller base are also smaller,  resulting in a widening of the inflation gaps.
For example, in the previously mentioned FAA penalty, the 10 percent cap  on the agency’s December 1996 adjustment resulted in an adjusted penalty  of $1,100 and an inflation gap of $4,177.  Under the Inflation Adjustment  Act, FAA was required to examine this penalty by December 2000 and to  calculate the cost of living adjustment needed to account for inflation from  June 1996 through June 1999.  Inflation increased by about 6 percent during  this period, so the unrounded increase in this penalty would have been $66  ($1,100 times .06), resulting in an unrounded adjusted penalty of $1,166.   However, FAA could not go back and recapture any of the $4,177 inflation  gap that resulted from the 10 percent cap on the 1996 adjustment.
As figure 2 shows, by June 1999, the $1,000 penalty set in 1958 would have  been $5,750 if fully adjusted for inflation. Therefore, the inflation gap  resulting from the 10 percent cap would have increased from $4,177 to  $4,584 ($5,750 minus $1,166).
The limited legislative history that exists regarding the 1996 amendment to  the Inflation Adjustment Act does not explain why the 10 percent cap was  established.  Until the 1996 amendment, no earlier executive branch or  congressional initiative had called for any cap on the amount of inflation  adjustments.  In fact, legislation passed by the House of Representatives in  1993 included a provision for an immediate one-time catch-up adjustment.   Officials in the six selected agencies said that they did not know why  Congress established the 10 percent cap on initial penalty adjustments.
In its second inflation adjustment regulation, NHTSA expressed concern  that even with two inflation adjustments, some of the agency’s penalty  amounts may be inadequate because of the 10 percent cap.  Specifically,  NHTSA said the following:  Upon review, we concluded that application of the formulae permit  some of our penalties to be increased at this time. We are doing so  before the passage of four years in order to enhance the deterrent  effect of these penalties because of their importance to our  enforcement programs. Even with these increases, these penalties  appear less than adequate as a full deterrent to violations of the statutes  that we enforce. For example, the maximum penalty for a related series  of violations under the National Traffic and Motor Vehicle Safety Act of  1966 as amended in 1974 was $800,000. It would have increased more  than threefold, to $2.45 million, in June 1996 if (fully) adjusted for  inflation. However, the adjustment was capped at $880,000. Further,  under this aggregate penalty ceiling, on a per vehicle basis the  maximum penalty amounts to less than one dollar per vehicle where a  substantial fleet was in violation of the Safety Act.
We asked representatives from each of the six agencies that we focused on  in this part of our review whether their agencies believed the 10 percent  cap should be lifted and agencies either required or allowed to make catch- up adjustments.  Although the agency representatives generally agreed that  the 10 percent cap was a significant limitation on the maximum amount of  the civil penalty that could be assessed on the “worst offenders,” they were  generally noncommittal with regard to this issue, neither supporting nor  opposing the elimination of the cap.   One representative said he was not  aware of any instance in which his agency had imposed its largest penalty  (an $1,100 penalty for each day a violation occurred), so he did not believe  a catch-up adjustment to account for lost inflation would have any effect on  the agency’s enforcement actions.  However, he indicated that the same  situation might not be true for the agency’s other civil penalties.  The  Department of Labor representative said his department would not support  changing the statute to require agencies to make catch-up adjustments, but  said it would have no problem changing the statute to allow agencies to do  so.
section_title: CPI Lag Reduces Amount of Inflation That Can Be Considered
paragraphs: When determining whether adjustments to their penalties are permitted,  the Inflation Adjustment Act requires agencies to compare the CPI from  June of the year preceding the adjustment with the CPI in June of the year  in which the penalty was “last set or adjusted pursuant to law.”  Therefore,  if an agency made its first round of penalty adjustments in October 1996  and examined those penalties in October 2000 to determine if further  adjustments were warranted, the agency would have to compare the CPI  for June 1996 with the CPI for June 1999—not the most current CPI data  available or even the most recent June CPI data.  As figure 3 shows, this  “CPI lag” feature in the statutory adjustment procedures reduces the  amount of inflation that can be accounted for from 10 percent (the amount  of inflation from June 1996 through June 2000) to 6.1 percent (the amount  of inflation from June 1996 through June 1999).
The inflation lost as a result of the CPI lag in the statute cannot be  recovered later because the statute requires each subsequent adjustment to  be calculated from the CPI for the year in which the penalty was last set or  adjusted (i.e., June 2000 in the above example)—not from the CPI used to  make the last adjustment (June 1999).  Therefore, as figure 4 shows, each  time an agency makes an adjustment the agency loses a year of inflation  that can never be recovered.
Also, the amount of inflation lost as a result of the CPI lag in the Inflation  Adjustment Act increases in proportion to the frequency with which the  agency makes penalty adjustments.  Each time that an agency adjusts its  penalties, the agency loses a year of inflation.  As figure 5 illustrates, if the  agency in the above example had examined and been able to adjust its  penalties twice during the period from 1996 to 2000, once in 1998, and again  in 2000, the agency would have only been able to consider the amount of  inflation that occurred from June 1996 through June 1997 (2.3 percent) and  from June 1998 through June 1999 (2.0 percent)—a total of 4.3 percent— not the full amount of inflation that occurred from June 1996 through June  2000 (10 percent) or even the amount that occurred from June 1996  through June 1999 (6.1 percent).
Representatives from the six agencies with covered penalties that we  focused on in this part of our review generally said the CPI lag in the  Inflation Adjustment Act should be corrected.  One official from  Department of Labor said that it “doesn’t make much sense” to have a  system in which agencies lose a year of inflation each time they make an  adjustment, and supported changing the act in this area.
section_title: Rounding Rules Can Prevent Adjustments for Long Periods
paragraphs: The rounding rules in the Inflation Adjustment Act can also significantly  affect the size and the timing of agencies’ penalty adjustments.  As noted  previously, the act requires agencies to round penalty increases to certain  dollar amounts, depending on the size of the penalty (not the size of the  penalty increase).  Specifically, the act provides that any increase should  be rounded to the nearest  multiple of $10 in the case of penalties less than or equal to $100,   multiple of $100 in the case of penalties greater than $100 but less than  or equal to $1,000,   multiple of $1,000 in the case of penalties greater than $1,000 but less  than or equal to $10,000,  multiple of $5,000 in the case of penalties greater than $10,000 but less  than or equal to $100,000,  multiple of $10,000 in the case of penalties greater than $100,000 but less  than or equal to $200,000, and  multiple of $25,000 in the case of penalties greater than $200,000.
For example, if the CPI increased by 10 percent during the relevant period  since a $7,500 penalty was last set or adjusted, the resultant penalty  increase ($750) would be rounded to the nearest multiple of $1,000—which  is $1,000.  Therefore, the new rounded penalty would be $8,500 ($7,500 plus  $1,000).
Our analysis indicated that these requirements can prevent agencies from  adjusting certain penalties until inflation increases substantially— sometimes 45 percent or more.  At recent rates of inflation that can mean  that agencies cannot make penalty adjustments for 15 years or more.  For  example, after a first round of adjustments in July 1997, one of PWBA’s  seven civil penalty maximums at the time was $11, five were $110, and one  was $1,100.  Under the statute, any effort by the agency to increase its  penalties during calendar year 2001 (4 years after the agency’s last  adjustment) could include any increase in inflation that occurred from June  1997 through June 2000.  During that period, the CPI increased by about 7.5  percent.  However, as table 2 shows, multiplying each of the 1997 penalty  amounts by 7.5 percent and applying the rounding rules in the act does not  result in a penalty adjustment for any of the agency’s penalties.
In fact, PWBA’s penalties are not eligible for an increase under the rounding  rules in the Inflation Adjustment Act until the CPI increases by 45.5  percent.  Assuming a 2.5 percent annual rate of inflation in the future  (about the average rate since the Inflation Adjustment Act was passed in  1996), PWBA would not be able to increase any of its civil penalties for 17  years.
Appendix II shows the maximum civil penalty amounts in each of the six  selected agencies after the first round of adjustments, the number of  penalties at each maximum penalty amount, the inflation trigger points for  each penalty amount, and the number of years that would have had to  elapse before those penalties could be adjusted again (assuming a 2.5  percent rate of inflation).  Of the 232 penalties in the six agencies, 208  (about 90 percent) could not be adjusted under the statute within the 4-year  period contemplated in the statute.  Ninety-eight of the penalties (about 42  percent) could not be adjusted for at least 10 years, and 44 (about 19  percent) could not be adjusted for 17 years or more.  For example, after the  first round of adjustments (assuming a 2.5 percent inflation rate), see the  following:  Six NHTSA penalties at the $1,100 level could not be adjusted under the  statute for 17 years.  These penalties include statutory violations  involving failure to comply with requirements to reduce traffic deaths  and injuries, the tracing and recovery of stolen vehicles and component  parts, and the providing of information needed to determine the  crashworthiness of motor vehicles.  One NHTSA penalty at the $5.50  level (for each 0.1 mile per gallon exceeding the fuel standard for  automobiles under the standard times the number of those automobiles)  could not be adjusted for 28 years.
Two EPA penalties at the $1,100 level could not be adjusted under the  statute for 17 years.  These include penalties for certain violations of the  Clean Water Act and the Federal Insecticide, Fungicide, and Rodenticide  Act.
Twenty-seven USCG penalties at the $1,100 and $110 levels could not be  adjusted under the statute for 17 years.  The penalties involve violations  related to the reporting of marine casualties, hazardous substance  discharges, bridge maintenance and operation, and other statutory  violations.
In general, penalties that are just over the lower end of the rounding  categories (e.g., $110 or $1,100) take longer to adjust than penalties at the  upper end of those categories (e.g., $1,000 or $10,000).
subsections: section_title: Rounding Can Result in Penalty Adjustments That Outpace Inflation
paragraphs: When the agencies are finally able to adjust their penalties for inflation, the  size of the adjustments permitted under the rounding rules in the statute  can be significantly larger than the amount of inflation that has occurred.   For example, as illustrated in table 3 for the PWBA penalties discussed  above, although the CPI must increase 45.5 percent before the agency can  make an adjustment, the adjustment that is ultimately provided will be  twice that amount—90.9 percent.
Figure 6 illustrates the 17-year period that may be required for an  adjustment of the $1,100 penalty and the overcompensation that can occur  because of the rounding rules.  Assuming a 2.5 percent annual rate of  inflation and applying the adjustment formula in the statute, in 2014 (17  years after the agency’s first adjustment) PWBA’s $1,100 penalty could be  increased by $1,000 to $2,100.  However, if the penalty had just kept pace  with inflation (i.e., increased 2.5 percent each year for 17 years) the penalty  would have only increased by about $574 to $1,674—about $426 less than  the rounded adjustment pursuant to the Inflation Adjustment Act.
The figure also shows that in subsequent penalty adjustments under the  statute (again assuming a 2.5 percent annual rate of inflation), the size of  the rounded penalty is almost always above the penalty amount if it had  just kept pace with inflation.  For example, applying the rounding rules, the  $2,100 rounded penalty would be eligible for another $1,000 increase to  $3,100 in the year 2024—10 years after the previous adjustment.  However,  if the original $1,100 penalty had just kept pace with inflation from 1997  through 2024 it would be $2,143—$957 less than the rounded penalty.  By  the fifth adjustment in 2038, the rounded civil penalty ($5,100) is projected  to be more than $2,000 larger than the penalty if it had simply kept pace  with inflation ($3,027).
section_title: Rounding Based on the Size of the Increase Yields More Frequent, Accurate Adjustments
paragraphs: During our review, we determined that several agencies were rounding  their penalty adjustments incorrectly.  Specifically, the agencies were  rounding the increases based on the size of the unrounded penalty increase  rather than the size of the penalty.  Although this method is inconsistent  with the requirements of the Inflation Adjustment Act, as figure 7 shows  (again using the $1,100 penalty for illustration and assuming a 2.5 percent  annual rate of inflation), rounding based on the size of the increase yields  more frequent results than the statutory approach (rounding based on the  size of the penalty), and the results more closely track the actual changes in  inflation over time.  The agency could make adjustments every 2 years (as  illustrated in the figure), but must do so at least once every 4 years.
Although rounding based on the size of the increase produces improved  results, the resulting penalty adjustments are less than they would be if the  actual rates of inflation were used.  For example, as figure 7 shows, by the  year 2021, the penalty amount derived by rounding based on the size of the  increase would be $1,480—$510 less than if the penalty had just kept pace  with the projected rate of inflation ($1,990). However, virtually all of the  difference between these two figures is caused by the CPI lag feature  discussed earlier (in which only a portion of the amount of inflation  occurring during an adjustment period is counted).  As figure 8 shows,  rounding penalty adjustments based on the size of the increase without the  CPI lag allows the agency to make adjustments each year, and the result is  a much closer fit to the projected rate of inflation.  By the year 2021, the  rounded penalty is only $10 more ($2,000 versus $1,990) than if it had  directly kept pace with inflation.
Representatives from all six of the agencies that we focused on in this part  of our review strongly supported changing the rounding rules in the  Inflation Adjustment Act.  All of them said the rules were problematic  because of their complexity and/or their effects on the agencies’ ability to  make timely and accurate adjustments.  Alternatives that they suggested to  the current approach included rounding based on the size of the penalty  increase (rather than the size of the penalty itself) and elimination of  rounding altogether.
section_title: Some Exempted Penalties Have Not Been Adjusted in Decades
paragraphs: The Inflation Adjustment Act requires each agency to adjust its civil  penalties for inflation, but explicitly exempts penalties established under  certain statutes:  (1) the Social Security Act, (2) the Occupational Safety  and Health Act of 1970, (3) the Internal Revenue Code of 1986, and (4) the  Tariff Act of 1930.  As table 4 shows, the exemptions in the act account for  at least 238 penalties enforced by five federal agencies: CMS within the  Department of Health and Human Services, OSHA within the Department  of Labor, Customs and IRS within the Department of the Treasury, and SSA.
The legislative history of the act does not indicate why these statutes were  exempted from the inflation adjustment requirements.
All of OSHA’s six exempted civil penalties were last adjusted by Congress in  1990.  Therefore, as of June 2002, all of them were 38 percent less than if  they had fully kept pace with inflation since 1990.  However, as table 5  illustrates, the dates that the other agencies’ exempted penalties were last  set or adjusted vary substantially.  As a result, the amount of inflation that  has elapsed since the agencies’ last adjustments also varies.  For example,  eight IRS penalties have not been changed since 1954, but three other IRS  penalties were set in 1998.  As a result, by June 2002 the amount of inflation  that had occurred since the agency’s penalties were last set or adjusted  ranged from 10 percent (for the 1998 penalties) to 569 percent (for the 1954  penalties).  One Customs penalty had not been adjusted since 1879— resulting in an inflation gap of more than 1,700 percent.  Overall, 142  (nearly 60 percent) of the 238 exempted penalties would need to be  increased by 50 percent or more to be fully adjusted for inflation as of June  2002. Twenty-six of the penalties (about 11 percent) would need to be  adjusted by at least 100 percent.
These inflation gaps notwithstanding, officials in four of the five agencies  with exempted penalties—CMS, IRS, Customs, and OSHA—said that their  penalties did not need to be adjusted for inflation.
CMS officials said that, despite their age, some of the maximum  penalties in the Social Security Act are still fairly high, thereby giving the  agency the flexibility it needs when deciding on the size of the penalty  imposed.  They also said that some of the penalties could be  compounded monthly, weekly, or daily, resulting in even higher penalty  maximums if needed.  As a result, they said that CMS has the leverage it  needs to counteract the effects of inflation on penalty amounts that  were set by Congress, in some cases, decades earlier.
IRS officials said that the agency’s penalties for fixed dollar amounts can  be compounded daily.  As a result, they said, the maximum penalty  assessed could be substantial even without adjusting for inflation.  In  addition, they said that IRS penalties sometimes contain formulas (e.g.,  a percentage of the amount invested or of the amount of tax due) that  implicitly account for inflation.
Customs officials said that they are satisfied with the adequacy of the  fixed amount penalties provided for within the Tariff Act and the  deterrent effect that they provide.  For example, the most commonly  assessed fixed amount penalty—a $5,000 penalty for violation of 19  U.S.C. 1436 assessed against a master of a vessel, operator of a vehicle,  or pilot of an aircraft for failing to comply with statutory requirements  concerning report of arrival of conveyances and presentation of  accurate cargo and passenger manifest information—has proven to be  an effective deterrent.
OSHA officials said that Congress increased the agency’s penalties  seven-fold in 1990—far in excess of the amount of inflation that had  occurred since those penalties were previously set in 1970.  As a result,  they said, the 1990 penalty amounts were still sufficient to keep their  penalties in pace with the amount of inflation that has occurred since  1970. In addition, they said the agency’s policy allows penalties to be  assessed on a violation-by-violation basis that allows the agency to  create a multiplier effect.  They indicated that this multiplier effect  could raise the penalty to an amount that would exceed the inflation- adjusted levels.
In contrast, SSA officials said that inflation adjustments are currently  needed for at least some of their penalties because they have become  eroded by inflation over time and become less effective.
section_title: Conclusions
paragraphs: Civil monetary penalties are an important element of regulatory  enforcement. Suitably severe maximum penalties allow agencies to punish  willful and egregious violators appropriately and serve as a deterrent to  future violations.  However, civil penalties can lose their ability to punish  and deter if unadjusted for inflation.  Therefore, as we have said previously,  we believe that civil penalties should be periodically adjusted for the  effects of inflation so that they do not lose their relevancy.  Doing so can  also increase federal receipts from those penalties, perhaps by tens of  millions of dollars per year.
Our review indicated that the Inflation Adjustment Act limits agencies’  ability to keep their civil penalties in pace with inflation.
Because of the 10 percent cap on initial penalty adjustments, some civil  penalties are hundreds of percent less than they would be if fully  adjusted for the amount of inflation since Congress last set or adjusted  them.  Viewed another way, those penalties currently represent only a  fraction of their original value.  The inflation gap resulting from the 10  percent cap can never be recovered under the statutory authority and  grows each year.
Because of the rounding rules in the statute, agencies can be prevented  from making a second round of penalty adjustments until inflation  increases 45 percent or more.  Therefore, at recent rates of inflation,  agencies may not be able to readjust their penalties for 15 years or more  after their initial adjustments.
Because of the way that the statute requires the agencies to use CPI data  to calculate the raw adjustment, agencies will lose a year of inflation  each time they make an adjustment.  That lost inflation that can never be  recaptured in subsequent adjustments.  Also, the statute requires  agencies to use CPI data that are at least 7 months old, and perhaps as  much as 18 months old.
Because the statute exempted certain penalties from the act’s  requirements, the agencies administering those penalties are unable to  make even the modest adjustments permitted as a result of the 10  percent cap, rounding rules, and CPI lag features discussed above.  More  than 100 of these exempted penalties have declined in value by 50  percent or more since Congress last set them.
Our review also indicated widespread lack of compliance with and  confusion about the Inflation Adjustment Act’s requirements.  Agencies’  failure to comply with those requirements may have cost the government  millions of dollars in lost penalties from individuals and organizations that  are the worst offenders of health, safety, environmental, and other statutes.   We believe that an agency charged with monitoring agencies’ compliance  with the Inflation Adjustment Act could have identified the compliance  problems earlier in the act’s implementation, and may have been able to  prevent them from occurring.  For example, an oversight agency could  have developed a database that would determine when penalties were due  for an adjustment and notified the agencies of their responsibilities under  the act.  The agency could also suggest ways to make implementation of  the act’s requirements better or easier.  For example, the agency could  provide a standard format by which agencies could explain how their  penalties were adjusted and list the new penalty amounts, and/or could  have provided agencies with computer programs to facilitate the  computation of penalty adjustments and revised penalty amounts.  In  addition, detailed guidance to the agencies regarding the Inflation  Adjustment Act’s requirements might have prevented some of the questions  and problems that have arisen during its implementation.  Finally, an  oversight agency could collect information regarding civil penalty  assessments and collections that has been unavailable for the past 5 years.   That information could help Congress understand which agencies have  civil penalty authority, the extent to which certain penalties are being used,  and the extent to which agencies are developing alternatives to the  exemptions from the Inflation Adjustment Act and the limitations imposed  by the act on their penalty adjustments.
section_title: Matters for Congressional Consideration
paragraphs: If Congress wants federal civil penalties to regain their full impact and  deterrent effects, it should consider amending the Inflation Adjustment Act  to require agencies to adjust their penalties for the full amount of inflation  that has occurred since they were last set or adjusted by Congress.  This  catch-up adjustment could occur all at once or in a series of adjustments.   Alternatively, Congress could amend the act to permit (but not require)  agencies to make catch-up adjustments.
If Congress wants federal civil penalties to be adjusted on a more timely  and accurate basis, it should consider amending the Inflation Adjustment  Act to   allow agencies to use more current CPI data to calculate the size of  penalty increases, and require that changes in the CPI be calculated  without losing a year of inflation and    either eliminate the rounding provisions altogether (e.g., adjust  penalties for the actual amount of inflation that occurred) or change the  way in which penalty increases are rounded (e.g., round based on the  size of the increase rather than the size of the penalty itself).
If Congress wants penalties currently exempted from the act to be covered,  it should consider amending the Inflation Adjustment Act and permitting  agencies to adjust those penalties for inflation.
Finally, Congress should consider giving one or more executive branch  agencies the authority and responsibility to monitor the act’s  implementation and provide guidance to the agencies.  A single agency  could be made responsible for both providing guidance to agencies on the  implementation of the Inflation Adjustment Act and monitoring compliance  with the act.  Alternatively, those functions could be given to separate  agencies.  The agency or agencies could also collect basic information on  which agencies have civil penalty authority, the amount of penalty  assessments and collections, and the agencies’ use of alternative  mechanisms to increase assessments and collections.
section_title: Agency Comments and Our Evaluation
paragraphs: On February 11, 2003, we provided a draft of this report to OMB, the  Department of Justice, and the Department of the Treasury for their review  and comment.  We also provided a draft for technical review to the six  selected agencies with covered penalties and the five agencies with  penalties not covered by the Inflation Adjustment Act.  Two of the agencies  with covered penalties—NHTSA and PWBA—provided us with technical  comments, which we incorporated as appropriate.  For example, in  response to a comment from NHTSA, we clarified that both FAA and  NHTSA had published a second round of penalty adjustments by June 30,  2002, for all of the agencies’ eligible penalties.
On February 26, 2003, we received written comments on the draft report  from the Director of the Audit Liaison Office within the Department of  Justice.  On behalf of the department, she suggested that we change our  matter for congressional consideration to state that Congress should  provide not only the authority and responsibility to monitor the act’s  implementation, but also the “necessary resources.”  We did not make this  change because we do not believe that these roles will require significant,  dedicated resources.  The Director did not comment on the other proposed  changes to the act’s requirements (e.g., elimination of the inflation gap  created by the 10 percent cap or changes to the rounding rules).
On February 27, 2003, we received written comments on the draft report  from the Commissioner of FMS within the Department of the Treasury.  The  Commissioner said that FMS is “not the appropriate organization” for  monitoring compliance with the Inflation Adjustment Act given the act’s  “unique and complex features” and because such monitoring is not directly  related to the agency’s responsibility for overseeing the collection of  delinquent debt.  He said it is FMS’s view that each federal agency is  responsible for managing and collecting civil monetary penalty debt.  He  also said that each federal agency’s inspector general has a responsibility  for overseeing agency compliance with the Inflation Adjustment Act.  We  agree that inspectors general can help oversee the act’s implementation  within particular agencies.  However, we also believe that some type of  central oversight and guidance function is also needed to ensure  consistency in how the act is interpreted and applied, and to gather  information about civil penalty assessments and collections throughout the  government.  In addition, several of the departments and agencies with  inspectors general did not make the required penalty adjustments—an  indication that reliance on inspectors general alone may not result in  improved compliance with the act.  Also, at least two agencies with  penalties covered by the act do not have inspectors general, so it is unclear  what entities would oversee implementation in these agencies.  Therefore,  we did not change our matter for congressional consideration.
The Commissioner of FMS also provided comments on specific sections of  the draft report, which we incorporated as appropriate.  For example, he  suggested that we clarify that FMS developed written guidance on the  Inflation Adjustment Act and held a workshop on how the act should be  implemented at the request of OFFM, not at the agency’s initiative.  The  Commissioner did not comment on the other proposed changes to the act’s  requirements.
On March 7, 2003, we received written comments on the draft report from  OMB staff in OFFM and the Office of the General Counsel.  The OMB staff  agreed with the report’s conclusions on the Inflation Adjustment Act’s  requirements, namely that Congress directly assigned to each federal  agency the responsibility to comply with the act’s requirements and did not  assign to any agency the responsibility to provide centralized  governmentwide guidance and oversight.  As such, the staff said that it is  the responsibility of each agency to comply with the act’s requirements,  and that oversight of each agency’s compliance with the act resides first  with that agency’s inspector general office.  The OMB staff also said they  did not agree that a centralized role of providing guidance and oversight of  governmentwide compliance with the act was necessarily needed.   However, they said that if it were concluded that a federal agency should  take on this added responsibility, an agency other than OMB would likely  be more appropriate for serving this role.  As we indicated in our response  to a similar comment from the Commissioner of FMS, we agree that agency  inspectors general can help oversee the act’s implementation within  particular agencies. However, we also believe some type of central  oversight and guidance function is also needed to ensure consistency in  how the act is interpreted and applied.  Therefore, we did not change our  matter for congressional consideration.
We are sending copies of this report to the Secretary of the Treasury, the  Attorney General, and the Director of OMB.  We are also sending copies to  each of the six agencies with covered penalties that we focused on in this  review, and to each of the five agencies with penalties that are not covered  by the act.  It will also be available at no charge on GAO’s homepage at  http://www.gao.gov.  If you have any questions concerning this report,  please call Curtis Copeland or me at (202) 512-6806.  Major contributors to  this report include Andrea Levine, Joe Santiago, John Tavares, and Michael  Volpe.
section_title: Final Rules That Adjust Civil Penalties for Inflation as of June 30, 2002
paragraphs: Tables 6 and 7 identify the departments and agencies that the Office of  Management and Budget’s (OMB) 1991 report or other sources indicated  have civil penalty authority and that are covered by the requirements of the  Federal Civil Penalties Inflation Adjustment Act, as amended (Inflation  Adjustment Act).  The tables also identify the initial and subsequent penalty  adjustment final rules that had been published as of June 30, 2002.  Because  there is no current comprehensive database that identifies each agency  with civil penalty authority subject to the provisions of the Inflation  Adjustment Act, we cannot be sure that we have identified all of the  covered agencies or penalties.  Also, the adjustment regulations listed  reflect the results of our search of the Federal Register from 1996 through  June 30, 2002.  Other penalty adjustment regulations may have been  published that we did not discover.
In some cases, cabinet departments published a single rule that adjusted  penalties for all subagencies/offices within the department (e.g., the  Department of Agriculture’s July 31, 1997, initial adjustment).  In other  cases, agencies within the departments each made their own adjustments  (e.g., the Department of Transportation). The phrase “not made” in a cell  indicates that a required initial or subsequent adjustment had not been  made as of June 30, 2002, for at least one eligible penalty. The phrase “not  required” in a cell in the “subsequent adjustment” column indicates that no  adjustment was required as of June 30, 2002, either because 4 years had not  elapsed since the initial adjustment or because not enough inflation had  occurred to permit an adjustment under the rounding rules in the statute.
section_title: Amount of Inflation and Estimated Length of Time Needed to Trigger Penalty Adjustments in Selected Agencies
paragraphs: Table 8 illustrates, for six selected agencies, the (1) size of the agencies’  penalty amounts after the first round of adjustments, (2) the number of  covered penalties at each amount, (3) the relevant rounding category in the  Federal Civil Penalties Inflation Adjustment Act, as amended (Inflation  Adjustment Act), for each penalty amount, (4) the amount of inflation  needed to trigger a second round of penalty adjustments at that penalty  amount, (5) the rounded penalty amount after adjustment, (6) the  percentage increase that rounded penalty represents (when compared to  the earlier amount), and (6) the number of years it will take (at 2.5 percent  inflation per year) to trigger this adjustment.  The amount of inflation  needed to trigger an adjustment is calculated by taking half of the rounding  multiple and dividing that by the size of the penalty.  For example, for the  $11 Pension and Welfare Benefits Administration penalty, half of the $10  rounding multiple is $5, which when divided by $11 equals 45.4 percent.  As  the table shows, some of the agencies’ penalties cannot be adjusted for  more than 15 years under the rounding rules, and the rounded increases are  twice the amount of actual inflation to trigger an adjustment.
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