Federal User Fees: Substantive Reviews Needed to Align Port-Related Fees with the Programs They Support
Released: 2008-03-24T00:00:00

Letter

Background

User financing—in the form of user fees, user charges, or targeted excise taxes—is one approach to financing federal programs or activities. User fees assign part or all of the costs of the benefits and services derived from these programs and activities—above and beyond what is normally available to the general public—to readily identifiable recipients of those benefits and services.

Definition of User Fees

We have defined “user fees” or “user charges” as fees assessed on users for goods or services provided by the federal government. Some excise taxes, however, can also be described as a form of user financing. For example, the excise taxes on motor fuels, tires, and heavy vehicles accrue to the Highway Trust Fund, from which Congress appropriates funds for the interstate highway system, mass transit, and transportation projects. Similarly, Federal Aviation Administration (FAA) operations are funded in part by excise taxes assessed on airline tickets, aviation fuel, and certain cargo.

Requirements for Reviewing Fees

Both the Chief Financial Officers (CFO) Act and the Office of Management and Budget (OMB) Circular No. A-25 provide that agencies review their user fees biennially and make recommendations about any needed cost adjustments. Circular No. A-25 also states that each agency should review its programs to determine whether it could charge fees for any of its services, noting that if imposing such fees is prohibited or restricted by law, agencies will recommend legislative changes as appropriate. OMB encourages agencies to examine potential effects of design alternatives when reviewing and proposing changes to regulations, even when the regulations are mandated by statute.

The user fees considered in this report, and summarized in table 1, are assessed under specific statutory authority and levied on air and sea passengers, vessel operators, or shippers (see app. II for a summary of the fees by payer). The fees vary in the way they are set, collected, used, and reviewed, which may affect their efficiency, equity, revenue adequacy, and administrative costs.

The Inspection Process Is Largely Consolidated but the Inspection Fees Vary in How Rates Are Set and Adjusted, the Portion of Costs Recovered, and How Costs Are Assigned to Users

Although all of the fees we examined vary in how they are set and adjusted, these differences are a particular issue with the inspection fees. Specifically, the passenger and vessel inspection processes in both the air and sea environments have been largely consolidated within CBP, but the legacy fees supporting these inspections are still governed by separate, dissimilar authorizing legislation and vary significantly in how they are set and adjusted and how they link fee rates to the cost of services. APHIS uses the federal regulatory process to propose rate increases and invites comments on its proposals and implementing regulations via a public notice and comment in the Federal Register. Although various Congressional committees oversee this process, Congress has delegated to APHIS the authority and responsibility to set and adjust AQI fee rates to match program costs over time. In contrast, both the immigration and customs fee rates are set in statute. These fees can only recoup authorized program costs to the extent that total reimbursable program costs do not exceed the rate caps prescribed in statute.

The AQI fee statute grants the Secretary of Agriculture broad discretion to prescribe and collect fees sufficient to cover the cost of providing agricultural quarantine and inspection services. In spite of this, in 2006 we reported that financial management issues at CBP and APHIS adversely affect the AQI program’s ability to perform border inspections and that, in fiscal years 2003 through 2005, user fees were not sufficient to cover program costs. Moreover, prior to fiscal year 2006, CBP was unable to provide APHIS with information on the actual costs of CBP’s portion of the AQI program broken out by user-fee type—for example, fees paid by international air passengers or vessels. In 2007, APHIS and CBP further improved the AQI cost estimates by agreeing on a common set of assumptions used to forecast the cost of AQI activities.

According to APHIS finance officials, the fee rates are now set to recover all program costs except for certain indirect and imputed costs, such as the cost of employee retirement benefits. We have previously found that OMB Circular No. A-25 guidance and USDA policy require the inclusion of indirect and imputed costs in setting full-cost recovery fees, and that unless otherwise specified in statute such collections should be deposited in the Department of the Treasury’s general fund. However, APHIS finance officials said that because the AQI authorizing statute does not authorize APHIS to spend fee collections on such expenses, APHIS does not include these costs when calculating the fee rate. APHIS also does not list these costs in the Federal Register when proposing rate increases, but noted that more transparency in this area could better inform users of the full cost of the program. APHIS estimates that these indirect and imputed costs for the AQI user fee program totaled approximately $18.9 million in fiscal year 2006.

In contrast, the customs and immigration inspection fees are structured to recover partial costs. While both the immigration and customs statutes contain language that fees equal or be reasonably related to the cost of services, the two statutes actually prescribe an exact amount in law to be charged for their respective inspection services. That is, the immigration and customs user fees actually limit cost recovery to a sum certain. The customs statute further restricts cost recovery by limiting the set of activities for which collections may reimburse appropriations. The immigration statute makes immigration user fee collections available to refund any appropriation for expenses incurred in providing immigration inspection and pre-inspection services as well as certain other expenses, at least one of which—administration of debt recovery—is not directly related to immigration inspections according to CBP officials.

According to CBP data, in fiscal year 2006, commercial vessel customs inspections fee collections covered about 66 percent of related program costs. DHS does not know the portion of total immigration inspection costs covered by immigration fee collections. CBP and ICE share responsibility for reimbursable, immigration-related inspection activities and, to date, DHS has not reported final costs for ICE’s inspection-related activities. According to CBP data, in fiscal year 2006, CBP’s portion of vessel inspection fee collections covered about 67 percent of CBP’s share of immigration vessel inspection costs, but until ICE’s cost data are finalized, DHS will not know the total portion of immigration costs covered by total fee collections, or whether the fees are properly divided between CBP and ICE.

Since the fees can pay for only some inspection activities and only under certain circumstances, ensuring proper use of fee collections can require detailed cost data. Collecting these data, however, can be particularly costly given the disparate fee structures. For example, to be reimbursed for time spent on authorized activities for various fees, CBP must track the time spent on these activities. Because the inspection processes have been largely combined but the separate distinct fees supporting these activities are not uniform, correctly tracking which activities can be reimbursed by which fees can be difficult. To help address the concern that timekeeping was taking time away from officers’ inspection duties, CBP implemented a standard process for tracking time in early 2007. The process includes estimating the amount of time officers conducting different functions (e.g., vessel or passenger inspections) spend on different activities, including customs, immigration, and agriculture inspections. This process, however, has not completely addressed the problem. At one port we visited, on each shift, a full-time CBP officer was assigned solely to tracking staff time. Even with an efficient process for tracking time spent on different activities, the need to separately track three inspections that have largely been consolidated adds complexity and increases the potential for error.

In general, the three fees are not levied uniformly, and sometimes involve cross-subsidization (see table 2). For example, although air passengers are charged an AQI fee, sea passengers (generally cruise ship passengers) are not. According to APHIS finance officials, the costs of these passenger inspections are imbedded in the cost of the AQI fee levied on vessel owners and operators.

According to APHIS finance officials who calculate the fee rates, the costs of inspecting sea passengers, fee-exempt vessels, and vessels that have met the annual fee cap are spread among all payers of the AQI vessel fees. They said that although it is rare for most commercial vessels to exceed the annual fee cap of $7,380—a total of 15 payments—cruise ships routinely exceed the cap because they arrive in the U.S. far more than 15 times each year. According to CBP data, fiscal year 2006 CBP costs for the AQI commercial vessel inspections were approximately $35 million, and included about $2.2 million for passenger inspections and about $4 million for inspections of exempt private vessels. The cost data that CBP provides to APHIS does not indicate what portion of the $35 million is associated with inspecting cruise ships that have exceeded the fee cap.

Sea and air passengers pay an immigration inspection fee, but no such fee is levied on vessel crew although they must undergo inspection. As a general rule, the costs of crew inspection are not charged to vessel owner/operators, although they may be charged for overtime immigration inspections of vessel crew at some ports. This makes fees unpredictable. Predictability of inspection fees enables users to plan, charge clients for, and account for related costs, but inconsistent rules for overtime inspections lead to uncertainty. The separate statutory and regulatory structures of the three overtime inspection charges are not aligned and overtime is not handled uniformly within some of the fees (see fig. 1). For immigration inspections conducted on a Sunday, holiday, or between the hours of 5:00 p.m. and 8:00 a.m. and when a given inspector is working overtime, CBP must charge a vessel operator, owner, or agent for the overtime cost of the immigration inspections. Because regular business hours vary by port, the hours during which an inspector might be working overtime vary. In addition, the amount charged depends on the number and pay grade(s) of the officer(s) performing the inspection and the amount of time spent on the inspection, adding to unpredictability and increasing DHS’s costs to administer the fee. Overtime charges for agriculture vessel inspections must, by regulation, be applied at an hourly rate for overtime inspections on a Sunday or holiday, or whenever the individual inspector is working overtime. According to CBP officials, collections for reimbursable overtime agriculture inspections total about $1.2 million annually. Moreover, although vessels must be charged for overtime inspections, AQI regulations explicitly prohibit charging for similar overtime inspections of aircraft when passengers have already paid an AQI fee for that flight.

Lastly, according to CBP officials, CBP has limited authority to charge for overtime for customs inspection services. CBP officials told us that as a result, in practice, overtime charges are not assessed for most customs overtime inspections.

Some payers told us that they often do not know whether or when they will incur overtime fees and what the charges will be. They said that consistent fees would offer predictability and reduce confusion. CBP officials also told us that billing vessel owners for overtime inspections is administratively burdensome. According to CBP estimates, CBP’s costs to process and bill immigration and agriculture inspection overtime charges totaled 26 percent of those collections in fiscal year 2007. The statutory authorities governing immigration overtime inspection charges mandate that the amount of the charge be dependent upon the amount paid to the inspector, subject to specified limitations. However, CBP officers are paid under a different statutory scheme, which does not contain the same limitations. Therefore, according to CBP, the agency cannot automatically bill the vessel operator or shipping agent for immigration overtime services. Instead, CBP must make calculations manually based upon the limitations contained in the immigration overtime authorities and the amount actually paid to the CBP officer performing the inspection services. CBP officials said that although charges for overtime inspections make sense because the inspections are more costly, a consistent set of overtime charges for customs, immigration, and agriculture inspections that did not vary by port or the rank of the inspecting CBP officer would increase revenue, decrease administrative costs, and improve CBP’s relations with the trade community.

Costly, Ineffective Collection Methods and Lack of Interagency Coordination Increase Noncompliance for Harbor Maintenance and Vessel Inspection Fees

Ineffective and outdated collection methods for vessel inspection fees increase administrative costs for both agencies and payers. Furthermore, a lack of coordination between the Corps and CBP inhibits oversight of HMF payments for passenger vessels, domestic shipments, and shipments into foreign trade zones. Also, when these HMF payments are late, CBP does not charge interest or penalties and is therefore not using an important tool to encourage timely payment. Collections methods function best when they minimize administrative costs and maximize compliance, as seen in the automated system CBP uses to process the MPF as well as HMF assessed on imports. This system allows entry summaries to be electronically transmitted, validated, confirmed, corrected, and paid.

Vessel Fee Collection Methods Are Ineffective and Outdated

The method of collecting the customs and AQI commercial vessel fees imposes unnecessary administrative costs on CBP and payers and may increase the likelihood of over- or underpayments. User fees function best when they minimize, to the extent practicable, administrative costs. Recognizing this, Treasury’s Financial Management Service has made it a priority to increase the use of electronic collection methods for government collections. CBP is automating collections for several user fees but to date, the commercial vessel fees may still only be paid in person by check or cash (see fig. 2). Moreover, payers must retain each paper payment receipt and present them at each entry so that CBP can determine whether that particular vessel has reached the annual fee cap. If a payer misplaces the receipt proving that the vessel has reached the fee cap, the fee must be paid. The payer may request a refund if the receipt is later found, although several stakeholders told us this process is lengthy and burdensome. Some stakeholders and CBP field office staff expressed frustration with the paper-based system and told us that an automated payment and record-keeping system would speed the collection process, reduce the likelihood of payment errors, and reduce administrative costs for both parties.

These administrative challenges are exacerbated by the recent increase in the customs vessel inspection fee rate without a corresponding increase in the annual fee cap. Before the fee was raised in April 2007, the annual cap was equal to 15 payments. Some CBP officers told us that for both the customs and AQI fees, they simply counted the number of times the fee was paid within a given year to determine if a vessel had reached the cap. The AQI vessel fee is paid at the same time as the customs vessel inspection fee and is capped at an amount equaling 15 payments per year. Because the customs fee was increased but the cap was not, the cap is now equal to approximately 13.6 payments, meaning that the 14th payment is less than the standard, per arrival fee amount. CBP officers must be aware when processing payments that the 14th payment will be for a different amount than the typical fee rate, and that the fee cap is now structured differently than the AQI vessel fee.

Quarterly Remittance Schedule Delays Availability of Certain Passenger Inspection Fees

According to CBP officials, the quarterly remittance schedule for the passenger inspection fees contributes to a several month delay between the use of appropriated funds and receipt of reimbursement from the immigration and AQI user fee accounts, which has delayed CBP’s ability to spend funds on critical mission areas such as hiring personnel, purchasing equipment, or travel. To address this challenge, CBP told us it has developed a legislative proposal that would, in part, require monthly instead of quarterly remittance. A representative of a cruise line industry association we spoke with noted that monthly payments would increase the administrative costs to the cruise lines, but that if a steadier supply of funding helped CBP to provide better service, it would be worthwhile.

Oversight of Certain HMF Collections Is Insufficient

Insufficient coordination between CBP and the Corps inhibits CBP’s ability to ensure that certain HMF payments are properly made; without this information CBP cannot verify compliance with the fee. HMF payments for passenger vessels, domestic shippers, and shipments into foreign trade zones are paid quarterly by check to CBP (see fig. 3). According to Corps officials, the Corps gathers information on domestic vessel movements and could provide this information to CBP. However, CBP does not request and the Corps does not share information with CBP on these types of domestic freight movements, which would help ensure that proper payments are made. An official from CBP’s Revenue Division said if CBP had information on freight movements it could reconcile them to HMF payments in order to monitor compliance rather than relying on self-reported payer information. The Revenue Division receives this type of “front-end reporting” for other, similar fees and, the official noted, front- end reporting is one of the best ways to establish a receivable and ensure proper payment.

Furthermore, CBP does not systematically review late or improper HMF payments for passenger vessels, domestic shippers, and shipments into foreign trade zones or charge interest for these late payments and therefore is not using an important tool to encourage timely payment. CBP’s Revenue Division does not track whether these HMF payments are paid on time or late. During the course of our work, CBP officials said that CBP should be tracking and assessing interest and penalties on these late payments. CBP reviewed recent payment history and found that 42 percent of payments—representing approximately 18 percent of the total dollar value—were late. According to these officials, they are taking steps to begin collecting interest on past and future late payments. They estimate interest collections for last year to be about $182,000; they do not yet have an estimate for annual penalties. Further, they said that they have begun reviewing the authority related to penalties in order to determine an appropriate dollar threshold that would trigger assessment and collection actions.

Finally, CBP’s Regulatory Audits division has not conducted any audits specific to the HMF since 1996; rather, the fee is audited incidentally during the course of audits related to other fees or duties. Although CBP’s audit selection strategy includes referrals from within and outside CBP, CBP has not requested and the Corps has not offered any HMF-related referrals.

In contrast to the HMF collections process for passenger vessels, domestic shippers, and shipments into foreign trade zones, CBP’s collection process for both the MPF and HMF assessed on formal customs entries has several advantages. CBP accepts electronic payment for these fees along with customs duties, which are typically paid by a customs broker on behalf of an importer. CBP’s automated system allows entry summaries to be electronically transmitted, validated, confirmed, corrected, and paid, which expedites the release of merchandise. Customs brokers we spoke with said that the system works well, is efficient, and imposes minimal administrative costs. It is less costly for the government and payers of the fee for CBP to collect the fee as part of the formal entry process than it would be for the Corps or another entity to establish a new collections process because CBP already values cargo for the assessment of duties, so there is no duplication of effort. Further, when CBP conducts audits on the value of cargo to determine if the declared value of the goods is correct, CBP also determines if the correct amount was paid for HMF and MPF. Because these are ad valorem fees, if the value of the goods is understated, additional HMF and MPF fees may be due.

Misalignments Exist between Fee Collections and Activities for Which They May Be Used

All of the fees we reviewed suffer from some misalignment—although the nature of that misalignment varies—which affects how the fees are used. Similar to the airline passenger inspection fees, not all authorized, reimbursable activities for the sea passenger and vessel inspection customs fees and MPF are associated with conducting inspections, and not all inspection-related activities may be charged to these fees. HMF collections far exceed funds appropriated for harbor maintenance, resulting in a large and growing surplus in the Harbor Maintenance Trust Fund (HMTF), while Corps officials and port stakeholders assert that many federally managed channels are undermaintained.

For Customs Inspection and Merchandise Processing Fees There Are Disconnects between Reimbursable Activities and Activities Involved in Inspections

The customs inspection activities and the authorized uses for the customs passenger and vessel fee collections are misaligned. For example, under the customs authorizing statute, passenger inspection fee collections are only available to reimburse appropriations for a limited, prioritized set of activities—including foreign language proficiency awards and transfers to the Treasury’s General Fund of not more than $18 million for the purposes of deficit reduction. Further, as we discussed earlier, by statute customs inspection-related activities that occur while a CBP officer is earning overtime or premium pay, or during preclearance, can be funded by the user fees, but the same activities conducted during regular time cannot be funded by the fee. Therefore, not all of the activities that may be funded from the customs fee are associated with conducting customs inspections, and not all customs inspection activities are reimbursable (i.e., can be covered by funds from the user fee account). Moreover, use of the customs vessel and sea passenger fee collections is not restricted to vessel and sea passenger inspections. Rather, they may be used to reimburse authorized inspection activities conducted at air, sea, or land ports of entry.

Similar alignment issues exist with the MPF. CBP officials said that since the events of September 11, 2001, the focus of merchandise processing has shifted toward security and away from the original focus on trade compliance. They said that certain activities associated with merchandise processing and performed by CBP officers, including screening and inspecting conveyances (including nonintrusive searches), processing seized narcotics, and inspecting vessels and containers, are not reimbursable MPF activities, but should be. According to CBP officials, the legislation governing the MPF should be explicitly consistent with CBP’s mission—that revenue and commercial functions should include commercial as well as security and antiterrorism elements.

There Is No Link between the Amount of Annual HMF Collections and Expenditures

Since 2003, HMF collections have significantly exceeded funds appropriated for harbor maintenance, resulting in a large and growing surplus in the trust fund. This may be inconsistent with users’ expectations of the fee’s purpose as laid out in statute and the principles of effective user fee design. Specifically, the authorizing legislation generally designates the use of HMF collections for harbor maintenance activities. Furthermore, according to stakeholders, this misalignment between fee collections and expenditures undermines the credibility of the HMF. According to CBP data and Treasury reports, in 2001 HMF collections exceeded expenditures by about $44 million, and by 2007 that gap had grown to over $506 million (see fig. 4).

There are several reasons why growth in collections has outpaced growth in expenditures. Total collections grew 101 percent from $704 million to $1.416 billion from 2001 to 2007. Corps officials told us this was driven by the ad valorem nature of the fee—receipts grow with both volume and value of shipments. Annual harbor maintenance project expenditures, which are subject to annual appropriation, grew more slowly—from $660 million in 2001 to $910 million in 2007 (38 percent).

The difference between the amount collected and the amount expended has led to a growing balance in the HMTF. In addition, the HMTF is credited with interest on its surplus. Between fiscal years 2001 and 2007, the balance in the HMTF grew from $1.8 billion to $3.8 billion and Corps officials told us they expect it to reach $8 billion in fiscal year 2011 (see fig. 5).

Since 1996, the President has included in his annual budget requests and Congress has appropriated $3 million from the HMTF to compensate CBP for costs associated with collecting the fee. However, CBP finance officials told us that they estimate the annual cost of collecting the HMF to be approximately $2 million. Officials at the Corps and CBP were unable to explain why the President’s budget request for this activity was higher than the estimated cost of collecting the fee. The Corps prepares an annual report to Congress on the Harbor Maintenance Trust Fund, which includes a substantive review of the fee, but does not include information on these costs.

The HMTF is not the only fund for which revenues flow in automatically from earmarked taxes or fees and spending must be appropriated. In the 1990s the Highway Trust Fund also built up a surplus. At the time, Congress and the President modified the discretionary spending caps to provide for a separate cap on highway funding. In 1998, Congress specified a more automatic link between spending from the Highway Trust Fund and receipts into the Trust Fund. The experience with these annual adjustments, known as Revenue Aligned Budget Authority (RABA), highlights some problems with such links. Spending was tied to estimated receipts with a retroactive adjustment; this worked only as long as the adjustments were positive—when receipts came in below estimated levels and would have resulted in an automatic cut in highway program funding levels, the cut was overridden. A different mechanism is used for the Food and Drug Administration (FDA) prescription drug user fee: if actual FDA fee collections are higher than the amount appropriated, FDA must adjust fee rates in a subsequent year to reduce its anticipated fee collections by that amount.

Even if there were a tighter link between collections and expenditures, the HMTF should not necessarily aim for a zero balance. Corps officials and some stakeholders agreed that there are good reasons to consider maintaining a positive balance in the trust fund. Where fees are expected to cover program costs and program costs do not necessarily decline with a drop in fee revenue, a reserve can be important. For example, the AQI fees are maintained with a reserve of approximately 3 months worth of program costs in case of emergency. According to APHIS, the reserve is necessary because the AQI program is funded solely through user fee collections.

As with similar situations, deciding whether and how to link HMF collections with expenditures is complicated. On the one hand, aligning collections and expenditures can promote economic efficiency and enhance stakeholder support for the fee. On the other hand, increased spending on harbors or reduced fee collections would increase the federal deficit, unless spending in other areas was decreased or other collections or revenues were increased. Moreover, our prior work shows that providing guaranteed funding levels to any one activity in the budget protects that activity from competition with other areas for scarce resources and limits Congressional discretion to make trade-offs in spending priorities. Regardless of the approach taken, a reduction in fee receipts or an increase in appropriations—absent offsetting changes elsewhere—will increase the federal deficit. Given the fiscal pressures imposed by the nation’s large and growing structural deficits, decisions about changing the HMF should consider its continued relevance and relative priority within the context of reexamining the base of all major federal spending and tax programs.

Despite the Harbor Maintenance Trust Fund Balance, Backlogs Result in Costly Delays and Could Affect Shipping Conditions

Despite large and growing balances in the harbor maintenance trust fund, both Corps officials and other stakeholders told us that there is a backlog of harbor maintenance, which can result in costly delays and more dangerous shipping conditions. A recent Corps analysis of the 59 busiest commercial federal channels in the U.S. found that the authorized depth was available in the middle of the channel only approximately 35 percent of the time in fiscal year 2005 and 33 percent of the time in fiscal year 2006. Although ships continue to use these channels and harbors, not maintaining them to their justified design dimensions can cause problems. For example, according to Corps officials in one port we visited, some vessels are delayed because they have to wait for high tide in order to pass through the channels. They also reported instances where ships skipped a port of call altogether if such a delay would have caused the ship to miss its scheduled appointment at the Panama Canal. These types of disruptions affect both regional commerce and port profits. A 2007 report by the U.S. Committee on the Marine Transportation System (CMTS) found that vessels often deal with the challenges of poorly dredged and maintained channels and harbors by “light loading,” i.e., loading less cargo than their full capacity, in order to reduce their sailing draft; this in turn increases shipping costs. Furthermore, if a port is not well maintained, it may lack the capacity to handle increasingly larger vessels and therefore lose business or drive up costs. For example, according to South Carolina State Ports Authority officials, the authorized depth of the Port of Georgetown is 27 feet, but the channel has silted in to 25 feet on numerous occasions over the past several years. With the channel at only 25 feet, a company bringing in rock for the regional construction industry can only bring in about 24,000 tons per vessel, down from 28,000 tons with a 27-foot channel. They said that this “light-loading” of vessels significantly drives up its operating cost and impacts construction costs.

The 2007 CMTS report found that channel limitations may lead to unsafe conditions and interaction with other vessels. Consistent with this finding, according to a Corps after-action report, a full oil tanker ran aground in East Rockaway, New York, in 2006 due in part to a lack of maintenance. Corps officials said the Corps now uses a performance-based budgeting model to set harbor maintenance priorities, in which projects are prioritized primarily by the amount and value of commercial tonnage moving through the harbor or channel. As part of this effort, the Corps is developing a national estimate of the cost to make the 59 busiest channels available 95 percent of the time at their full-use dimensions, but there is no timeline for completing that study.

Lack of Substantive Review and Mechanisms for Substantive Stakeholder Input Impede Agency and Congressional Oversight and Ability to Align Program Costs and Activities

Without regular, substantive fee reviews, agencies, stakeholders, and Congress lack complete information about changing program costs and whether authorized, reimbursable activities align with program activities. For example, CBP and APHIS report separately on the customs, immigration, and AQI vessel fees, and the reviews generally do not reflect input from the other. Furthermore, CBP’s review of the MPF does not detail program costs and project fee collections, or provide enough information to determine if the amount, structure, or authorized uses of the fee should be updated. Because user fees represent a charge for a service or benefit received from a specific government program, payers may expect a tight link between payments and services, including expectations about the quality of the related service. Although there are opportunities at the local level for payers to provide input on fees and the services they support, opportunities for payers to communicate with the Corps and CBP at the national level are limited. Ineffective communication may reduce stakeholder cooperation and support for the fees, contribute to misunderstandings and confusion about how the fees work and what activities they may fund, and inhibit the agencies’ ability to obtain input from stakeholders about fees and the programs that they fund.

CBP Reviews of Inspection Fees Do Not Include Information from APHIS and ICE

Congress does not have a comprehensive view of the vessel and passenger AQI, customs, and immigration inspection fees and how they work together, and may therefore lack important context for reviewing them. As we found in our recent review of the related air passenger fees, despite integration of the inspection processes for the three sea passenger and vessel fees, the administering agencies report separately on their respective fees. DHS has acknowledged that the challenges described in our previous work extend beyond air passenger inspections to other fees managed by the agency. In the case of the AQI, customs, and immigration vessel and sea passenger fees, the agencies and Congress lack information on the total costs of the combined inspections, and therefore do not know whether fee collections cover the costs of the consolidated inspection program. We have previously reported that agencies with shared responsibilities for common outcomes or related functions should reinforce agency accountability for collaborative efforts through common planning and reporting. CBP prepares a biennial report with summaries and key points for each of the user fees that it administers. CBP’s user fee review includes the customs fee, the portion of the AQI fee CBP receives, and the immigration fee. However, the information provided about the immigration fee did not include any input from ICE, which did not have cost information about its portion of the immigration fee at the time. APHIS’s review includes the entire AQI fee, but does not include any information from CBP on its portion of the agriculture inspections and is based only on APHIS’s analysis of the fee collections and inspection costs.

CBP Reviews of the MPF Do Not Provide Sufficient Information on Collections and Program Costs

Although CBP includes the MPF in its biennial user fee review, the information provided is not sufficient to project fee collections or to provide assurance that the amount of the fee is aligned with program costs. Without this information, CBP is not able to determine if the amount, structure, or authorized uses of the fee should be updated or to recommend changes to the fee statute. According to CBP Office of Finance officials, CBP has reliable information on the extent to which MPF collections cover the costs of related activities only for the past few years. These officials noted that as recently as 2003, cost calculations have included activities that are not directly associated with processing cargo or that are covered by other fee programs. Furthermore, CBP cannot reliably project future MPF collections because the agency has not estimated the effects of exemptions, entries made through foreign trade zones, the decline in the constant dollar value of the minimum and maximum fees, or changes in import demographics on total MPF collections. CBP data on MPF collections and program costs indicate that since fiscal year 2004 collections have increased relative to program costs and in fiscal years 2006 and 2007 collections exceeded costs by a total of approximately $221 million (see fig. 6).

CBP’s most recent biennial report notes that a detailed analysis of the current and projected effects of MPF exemptions and an accurate cost estimate for processing merchandise is needed. CBP officials told us that they plan to conduct a detailed review of the MPF in the second phase of a three-phase review of the agency’s user fees. They said that they estimate beginning the MPF review in early 2008, but the timeline depends on when the first phase is completed.

Stakeholders Have Limited Opportunities for Input on Fee Programs

Agencies can accommodate stakeholder input in various ways. We have previously reported on both the need to accommodate stakeholder input as well as various models for doing so. Some Corps and CBP officials have established successful, two-way communication practices at the local level. For example, some Corps division offices publicly post survey results and maps showing the controlling depth reports for local harbors and channels. One local Corps official said this practice encourages more dialogue with stakeholders, noting that they will e-mail the office to find out when highlighted areas will be dredged. Also, several of the CBP field offices we visited hold regular meetings with port stakeholders to share information and address stakeholder concerns.

However, there is currently no formal vehicle for payers of the HMF and other port stakeholders to provide input to the Corps on the HMF itself or on national harbor maintenance projects and priorities supported by the fees. The HMF authorizing legislation did not establish an HMF advisory committee, though it did establish an advisory committee for a similar program that funds new work construction and rehabilitation on inland waterways. The purpose of this Inland Waterways Users Board is to make recommendations on priorities and spending for inland waterway construction and rehabilitation projects.

As we have previously reported, both the customs and immigration passenger inspection fee statutes required the establishment of advisory committees consisting of industry representatives to advise the agency on issues related to inspection services, including fee levels. CBP’s Airport and Seaport Inspections User Fee Advisory Committee meets biannually to advise the commissioner of CBP on issues related to the performance of airport and seaport agriculture, customs, or immigration inspections. The committee members represent entities subject to the fees, including airlines, airports, cruise lines, and industry associations. We recently reported that stakeholders felt that the advisory committee provided only limited opportunities for substantive two-way communication. As a result, they said they lack data necessary to know whether the passenger inspection fees are set fairly or accurately, or are being spent on the appropriate activities.

Our prior work found that federal advisory committees play an important role in shaping public policy by providing advice on a wide array of issues. Their advice can enhance the quality and credibility of federal decision making. Despite the strengths associated with the federal advisory committees as a means to facilitate effective stakeholder input, agencies also need to be careful to maintain their mission to promote the public interest and take measures to safeguard against actual or perceived agency capture by the entities paying the fee. According to a Congressional Research Service report on the FDA prescription drug user fees, some critics said that giving the pharmaceutical industry a role in setting program performance goals creates conflicts of interest and gives the industry too much influence over FDA actions. Agencies also need to ensure that all stakeholders are given the opportunity to engage substantively. Some smaller businesses have raised concerns that FAA only consults with selected major airlines and manufacturers, ignoring commuter airlines and smaller businesses also affected by FAA regulations.

Stakeholders Have Concerns about Port- Related Fees and the Services They Support

Many of the stakeholders we spoke with said that although the ad valorem structure of the HMF makes it relatively easy to administer, it raises concerns about equity. Specifically, they noted there is no link between the value of their cargo and the depth or width of the harbor needed by the ship on which it is carried. For example, importers of high-value goods, such as natural gas and pharmaceuticals, told us they essentially pay a much greater share of dredging costs than importers of low-value cargo. Stakeholders said that a ship’s size and draft combined with harbor conditions drive harbor maintenance costs, and therefore may more closely link benefits received with the cost of providing the benefits. Other stakeholders noted that a benefit of the ad valorem structure is that it may better reflect the users’ ability to pay.

Some stakeholders also said that because the HMF fee structure does not reflect the individual dredging needs of ports, i.e., lower for naturally deep west coast ports that require very little dredging and higher for shallower eastern seaboard and river ports that require annual dredging, the overall cost of moving goods through the nation’s marine transportation system is artificially high. On the other hand, applying the fee equally to all eligible ports offers a relatively simple collection mechanism and helps to create a level playing field for all ports, which in turn helps minimize competition between individual ports. Even so, officials from ports located near international borders told us the HMF disadvantages them relative to nearby foreign ports. For example, Seattle Port Authority officials consider the HMF to be a “punitive assessment” because they said it decreases Seattle’s competitiveness against Canadian ports (which do not charge the fee). These officials said that the Port of Vancouver actively promotes itself as not charging the HMF, and said this partly explains why the Port of Vancouver is growing at a faster rate than the Seattle port.

Whether the fee is based on the value of the cargo (ad valorem) or on the size and draft of the ship is a separate decision from whether fees should vary by the dredging needs and condition of a given port. In other words, Congress could decide to impose a uniform fee structure at all ports even if it chooses to change the design of that fee from ad valorem to one based on a ship’s size or draft.

Stakeholders expect that inspections will occur in a timely manner. Cruise lines, importers, and ships’ agents all said that delays for passenger and vessel inspections are costly to industry. Because crew members cannot disembark and, in some ports, the cargo cannot be unloaded until a ship is cleared, these delays can be expensive. One agent said that a 1-hour delay can cost a carrier $15,000 in longshoreman labor costs. Another agent said that crew changes cannot occur until a vessel has cleared its immigration inspection. During this time, the ship must pay expenses for two crews. Stakeholders told us that when multiple ships arrive at the same time, ships have waited up to 4 hours before being cleared. CBP officials told us that these types of inspection delays are generally caused by staff shortages, outdated or crowded facilities, clustered arrivals, or some combination of these factors. We recently reported similar findings related to delays for arriving international air passengers.

Conclusions

Although the need to address some of the user fee challenges presented in this report may appear obvious, how to accomplish this is less clear. Where appropriate, changes made to one fee should be designed to complement rather than conflict with the other fees. The separate, disparate fees supporting the largely consolidated inspection process appear to aggravate disconnects between the customs passenger and vessel fees and the corresponding inspection activities, and do not adequately account for the costs imposed by different users. Unless remedied, differences such as the way overtime charges are assessed for commercial vessel inspections, as well as misalignments between actual and reimbursable inspection activities, will persist, causing confusion and raising equity concerns. Moreover, unless CBP automates its collection methods, requires monthly remittance, and aligns fee rate increases with the annual fee caps, CBP will continue to incur unnecessary administrative costs and needlessly expose itself to delayed remittance and potential errors that can result in revenue losses. Similarly, until CBP fully implements a system to assess and collect interest and penalties on late HMF payments, the federal government will continue to incur revenue losses.

The extent and nature of the link between HMF collections and expenditures are policy choices only Congress can make. However, vital information about the tradeoffs associated with such a link is lacking. Further, absent a vehicle for substantive HMF stakeholder input and two- way communication at the national level, stakeholder cooperation as well as support and understanding of the fee will continue to suffer. Moreover, funds requested and appropriated in excess of CBP’s collection costs for the HMF reduces the amount of money available in the HMTF to be appropriated for other purposes.

Unless agencies present a comprehensive picture of the customs, immigration, and AQI fees, including the full scope of inspection activities and their costs, Congress will continue to lack a complete picture of whether the fees work in concert or conflict with each other, which could hamper oversight. Furthermore, agencies will be less able to develop and maintain the partnerships necessary to collect and distribute the fees as efficiently and effectively as possible.

The lack of complete, transparent cost and collections data for the MPF and AQI fees, and regular, formal opportunities to share such information can prevent the agencies from addressing existing issues, including possible misalignments between fee collections and program costs. More broadly, if agencies cannot determine the extent to which these fees are recovering costs, Congress cannot be sure that resources are allocated to the activities it most values.

The principles of effective user fee design discussed earlier in this report can both offer a framework for considering the implications of various statutory structures and help clarify and illuminate the tradeoffs associated with various policy choices available to Congress associated with amending the individual statutes related to the fees discussed in this report. Such a framework could also provide the basis for future reviews of federal user fees as Congress works to ensure that user fee financing mechanisms remain relevant and up-to-date.

Matters for Congressional Consideration

To support the efficiency and equity of the Harbor Maintenance Fee as well as its credibility among stakeholders, Congress should consider reviewing the link between the amount of the HMF and the amount of expenditures for the harbor maintenance program; and establishing an advisory committee on the HMF and the activities that it funds, that includes payers of the fee.

Recommendations for Executive Action

We recommend that the Secretary of Homeland Security take the following four actions: Develop a legislative proposal, in consultation with Congress, to harmonize the customs, immigration, and agricultural quarantine inspections fees. Harmonizing the fees could include eliminating the differences in the way charges for overtime inspections are assessed to commercial vessel operators; raising the cap on customs inspection fees for commercial vessels, in line with the 2007 increase in this fee, so that the cap once again corresponds to a whole number, rather than a fraction of payments; revising the customs passenger and vessel inspection fees so that the inspection activities the fees are authorized to fund are more closely aligned with actual inspection activities; and requiring monthly, rather than quarterly, collection of the customs and immigration inspection sea and air passenger fees.

Direct CBP to automate its systems for collecting commercial vessel fees to reduce the reliance on paper receipts for tracking payments and to support electronic payments, rather than payment by check or cash.

Direct CBP to include in its biennial report on the Merchandise Processing Fee information on total program collections relative to total program costs, over time, as well as any recommendations for updating the amount and authorized uses of the fee.

Assess interest and penalties on late HMF payments for domestic shipments, shipments into foreign trade zones, and sea passengers.

We recommend that the Secretary of Agriculture take the following two actions: Improve the transparency of the regulatory process of setting the AQI fee rates by providing clearer information about how the rates for each of the fee types (vessel, air passenger, aircraft, etc.) are determined. In accordance with OMB Circular No. A-25 guidance and U.S. Department of Agriculture policy, include in AQI fees the indirect and imputed costs currently not considered when setting AQI fee rates and either transfer the appropriate portions of those collections to the general fund of the Treasury as required, or seek Congressional approval to spend these monies on related AQI program costs.

Further, we recommend that the Secretaries of Agriculture and Homeland Security conduct joint reviews of the customs, immigration, and agricultural quarantine inspection fees and consolidate reporting, to include the activities and proportion of fees for which CBP, ICE, and APHIS are each responsible, to provide a comprehensive picture of the user fees supporting the sea passenger and vessel inspections processes.

Further, we recommend that the Secretaries of Homeland Security and the Army direct CBP and the Corps to improve oversight of the HMF collections by working together to develop a method for the Corps to provide information on domestic vessel movements to CBP; a method for the Corps to provide referrals of audit candidates to the CBP Office of Regulatory Audit to be considered in the context of CBP’s risk- based system for selecting audit candidates; information on CBP’s costs to collect and administer the HMF, for inclusion in the Corps’ annual report to Congress on the Harbor Maintenance Trust Fund; and an annual budget request for CBP-related salaries and expenses equal to, rather than in excess of, CBP’s actual costs associated with collecting the HMF.

Agency Comments and Our Evaluation

We provided a draft of this report to the Secretaries of Homeland Security and Defense, and to the Acting Secretary of Agriculture for review. We received written comments from the Department of Homeland Security (DHS), which are reprinted in appendix III, and oral comments from the Departments of Agriculture (USDA) and Defense (DOD). In addition, each agency provided technical comments, which we incorporated as appropriate. We also provided portions of the report to nonfederal stakeholders for their review and made technical corrections as appropriate.

DHS characterized the report as balanced and accurate and agreed with the overall substance and findings of the report. Of the six recommendations directed at DHS, DHS concurred with five of them and partially concurred with the sixth. Specifically, DHS concurred in part with our recommendation to automate collections of the customs and AQI fees assessed on commercial vessels, stating that the agency will analyze the feasibility of this approach and work to identify and obtain funding to implement the recommendation if it is deemed cost beneficial. We appreciate that DHS recognizes the importance of using cost-effective methods to collect fees and look forward to receiving regular updates on DHS’s and CBP’s progress in this area.

In its oral comments, USDA noted it was impressed with the level of explanatory detail and analysis contained in the report and said it generally agreed with our recommendations. Regarding our recommendation that USDA include certain indirect and imputed costs when setting the AQI fee rates, the agency said it will review the fee and seek guidance from its Office of the Chief Financial Officer and Office of General Counsel on this issue.

USDA noted that it has been APHIS’s position that because USDA receives appropriations to pay for departmental and staff office costs and OPM receives appropriations for imputed costs such as future retirement benefit expenses, APHIS did not have the authority to include those costs in the fee. We interpret the AQI user fee statute, however, as permitting USDA to recover all costs associated with its program, including imputed and indirect costs. We recognize that imputed costs, such as retirement and unfunded pension liabilities, may be more directly linked to the fee- funded activity and more easily calculated than seeking to allocate departmental and staff office costs. Further, “full cost recovery” should be viewed from a governmentwide perspective. Even though USDA would have to deposit those portions of user fee collections as miscellaneous receipts in the general fund of the Treasury, and therefore would not directly reimburse the relevant appropriation account under a specific statute, it would still defray a cost that Congress determined should be paid for by the user fees. If USDA believes that the statutory authority does not permit it to cover such indirect and imputed costs, then we believe USDA should seek additional authority from Congress consistent with our recommendation.

USDA also noted that it will need to (1) work with DHS to identify DHS’s imputed costs for the AQI program and (2) consider the impact of the fee increase on payers. We recognize that if incorporating these costs will substantially increase the AQI fees, a measured approach that incorporates the costs gradually may be appropriate.

DOD provided oral comments, and concurred with the findings, conclusions, and recommendations of the report related to the Army Corps’ Harbor Maintenance Fee.

As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies to the Secretaries of Homeland Security, Agriculture, Army, and Defense and interested Congressional committees. We will also make copies available to others on request. 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 about this report, please contact me on (202) 512-9142 or irvings@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

In order to provide context as Congress considers funding options for port programs, we examined (1) what is known about the way selected fees assessed on air and sea port users are set, collected, used, and reviewed (including the views of stakeholders) and (2) the effects of these attributes on program operations.

To meet this objective, we examined selected fees that are assessed on port users; specifically the Harbor Maintenance Fee (HMF), Merchandise Processing Fee (MPF), Customs Inspection Fees, Immigration User Fee, and Agricultural Quarantine Inspection (AQI) User Fees. In selecting the fees, we reviewed relevant policy and economic literature, interviewed user fee experts, and examined Office of Management and Budget data on user charges. We chose these fees because they are levied upon port users, and are related to maritime, safety, and homeland security programs. Additionally, we chose them because they vary in their key design characteristics, specifically in the way in which they are set, collected, used, and reviewed.

In examining the fees, we reviewed user fee legislation and guidance, agency documents, and literature on user fee design and implementation characteristics. We interviewed officials responsible for managing the selected user fees at the U.S. Army Corps of Engineers (Corps), the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS), and the U.S. Customs and Border Protection (CBP) offices in Washington, D.C. CBP administers the MPF and Customs inspection fees, and it collects the HMF on behalf of the Corps. CBP administers the Immigration user fees jointly with U.S. Immigration and Customs Enforcement (ICE) and the AQI user fees jointly with APHIS.

To select the ports that we visited, we consulted with port security experts from within and outside of GAO, with CBP and Corps officials, and with outside stakeholders, in order to choose ports that varied in their type and volume of trade and commerce (including cruise lines, container ships, petroleum products, and liquefied natural gas); maintenance dredging needs, and specific issues facing them such as a high volume of commercial cargo, security challenges, or proximity to a land border or intricate river system. We also considered travel costs in selecting the site visits. In light of the significant amount of ongoing audit work in the Gulf region, and because other ports in our selection are representative of important characteristics associated with Gulf ports, we did not include a Gulf port in our selection so as not to unnecessarily burden an area in crisis. The ports we selected include medium and large ports, natural deepwater ports, and those that require frequent dredging. We visited the ports of Boston, Massachusetts; Charleston, South Carolina; Newark, New Jersey/New York, New York; Baltimore, Maryland; Miami, Florida; Port Everglades, Florida; Seattle, Washington; and Los Angeles/Long Beach, California. At these ports, we observed passenger, vessel, and cargo inspections, and interviewed officials from CBP and Corps field offices. At each port, we spoke with various stakeholders, including port authority officials, customs brokers, shipping agents, harbor pilots, importers, and cruise line officials. We also met with the following national stakeholder organizations: the American Association of Port Authorities, the Cruise Lines International Association, the Association of Ship Brokers and Agents, the National Association of Maritime Organizations, and the World Shipping Council. We coordinated our work with another GAO team that was examining the customs, AQI, and immigration air passenger inspection fees, and drew upon their audit findings as appropriate.

In addition, we reviewed collections and cost data for each of the fees, data on balances in the Harbor Maintenance Trust Fund, and data on channel availability provided by the Corps. We asked questions about APHIS, CBP, and Corps internal controls for the data we used and determined that the data were sufficiently reliable for the purposes of this report. We performed our work from February 2007 through February 2008 in accordance with generally accepted government auditing standards.

Appendix II: Summary of Fees by Payer

Appendix II: Summary of Fees by Payer The HMF is not assessed on domestic cargo valued at less than $1,000, and quarterly payment is not required if the total value of all shipments for which a fee was assessed for the quarter does not exceed $10,000. No payment is required for imported cargo that is entitled to be entered under informal entry procedures.

Appendix III: Comments from the Department of Homeland Security

Appendix IV: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

Jacqueline M. Nowicki (Assistant Director) and Susan E.M. Etzel managed this assignment. Jessica Nierenberg, Kathleen Padulchick, and Amy Rosewarne made key contributions to all aspects of the report. Jay Cherlow, Chelsa Gurkin, Terrance N. Horner, Alessandra Rivera, and Jack Warner also provided assistance. In addition, Pedro Briones and Carlos Diz provided legal support and Donna Miller developed the report’s graphics.