The mission of the MFO is to observe and report on Israeli and Egyptian compliance with the security aspects of the 1979 treaty of peace. The agreement established four security zones—three are in the Sinai in Egypt, and one is in Israel along the international border. The multinational force occupies checkpoints and conducts periodic patrols to observe adherence of the treaty parties to agreed force limitations and patrols the Strait of Tiran between the Gulf of Aqaba and the Red Sea to ensure the freedom of navigation. The agreed force limitations for the four zones (see fig. 1) are: Zone A: One Egyptian mechanized division containing up to 22,000 troops; Zone B: Four Egyptian border battalions manned by up to 4,000 personnel; Zone C: MFO-patrolled areas within Egypt, although civil police units with light weapons are also allowed; and Zone D: Up to four Israeli infantry battalions totaling up to 4,000 troops. The Department of State oversees U.S. participation in the MFO, nominates a U.S. citizen as the Director General, and helps recruit Americans to serve in the MFO civilian observer unit. MFO headquarters are located in Rome and the organization also maintains offices in Cairo and Tel Aviv to address policy and administration issues. The Force Commander—who is responsible for command and control of the force– and his multinational staff are located in the North Camp at El Gorah in the Sinai Peninsula. The U.S. infantry battalion and the coastal patrol unit are based in the South Camp near Sharm el Sheikh on the Red Sea (see fig. 2). The MFO’s annual operating budget of about $51 million is funded in equal parts by Egypt, Israel, and the United States. All parties pay their contributions in U.S. dollars. Currently, 11 countries deploy troops to the MFO. As of December 2003, the MFO military force consisted of 1,685 multinational troops, of which 687 were from the United States (see fig. 3). Colombia and Fiji also provide infantry battalions and Italy provides the coastal patrol unit. In addition, there is a civilian observer unit of 15 U.S. citizens that performs reconnaissance and verification missions. The chief observer and about half of the other observers temporarily resign from the State Department to fulfill 1- or 2-year MFO contract commitments; the other civilian observers are usually retired U.S. military personnel with renewable 2-year MFO contracts. (See app. II for details on the MFO work force.) Retired military personnel are often hired for their familiarity with military weapons and organizations, while State personnel are often hired for their diplomatic skills and experience in the region. All members need to become proficient in navigation, map reading, and driving in the Sinai, according to an MFO official. The MFO Director General must be a U.S. citizen that is nominated by the State Department and appointed by the parties for a 4-year renewable term. The Director General appoints the Force Commander for a 3-year term that can also be renewed. The Force Commander cannot be of the same nationality as the Director General. MFO’s other civilian employees are generally hired on 2-year contracts that can be renewed at the Director General’s discretion. In a 1995 report, we reported that the parties to the treaty and the U.S. government viewed the MFO as effective in helping maintain peace and in reducing certain costs. However, we found that State needed to provide greater oversight due to a lack of assurance regarding the adequacy of internal controls. The report noted that, unlike other international organizations, the MFO does not have a formal board of directors or independent audit committee to oversee audits. Our recommendations in 1995 included that State take steps to improve its oversight by examining MFO annual financial statements for discrepancies and having MFO’s external auditor periodically perform a separate audit of MFO internal controls that State was to review. State has implemented our recommendations except for examining MFO’s financial statements for discrepancies. State has developed but not completely fulfilled its operational and financial oversight responsibilities described in its guidelines for overseeing the MFO. These oversight responsibilities included evaluating MFO financial practices, conducting oversight visits of MFO operations, and recruiting staff for the civilian observers’ unit. We could not determine the full extent of the department’s compliance with its guidelines because it does not have sufficient documentation to describe the quality and range of its efforts. The Office of Regional Affairs within State’s Bureau of Near Eastern Affairs (NEA) is the single U.S. focal point for all MFO-United States government interaction and oversight. NEA’s guidelines called for State officials to review the external auditors’ reports and evaluate MFO financial practices. While reviews of the auditors’ reports were performed, the staff did not possess the accounting expertise to evaluate MFO financial practices and did not do so. NEA is exploring options for obtaining the necessary expertise; however, it has not finalized its approach for redressing this issue. According to the guidelines, oversight is also informally conducted through the transfer of U.S. government personnel to key MFO positions, including a U.S. civilian observer unit. While State has successfully recruited many civilian observers, it has had difficulty in consistently recruiting candidates with strong leadership capabilities for the chief position. Recruiting for the chief observer post remains a concern because many candidates at State seek higher priority posts, such as the U.S. Embassy in Cairo, to enhance their careers rather than seek an MFO position. In response to a February 2004 recommendation made by the State Office of the Inspector General (OIG), NEA agreed to form an advisory board to oversee MFO operations. In June 2004, the advisory board had its initial meeting and discussed options for making the chief observer position more attractive. The board has not fully developed the range of issues that it will address or established timelines for resolving these issues. NEA developed guidelines for conducting MFO oversight in 1995 and updated the guidelines in 2002; however, the guidelines did not require that NEA document its oversight efforts. The guidelines sought to ensure that (1) U.S. government agreements and foreign policy objectives were being met; (2) MFO personnel practices were appropriate and in accordance with MFO regulations; (3) MFO operations were in compliance with its regulations; and (4) MFO resources were spent appropriately, financial transactions were recorded accurately, and internal controls were adequate. We could not determine whether State fully complied with its oversight responsibilities because it did not have sufficient documentation to support the extent and quality of its oversight efforts. We reviewed documentation to support State’s efforts to provide oversight of MFO from 1996 to 2004. These documents recorded communication between MFO and State officials about daily activities and operations of the MFO. However, we found that this documentation did not fully describe State’s oversight efforts, the condition of MFO operations, State’s views on MFO policies/practices, or recommendations for improving MFO operations. As a result, we could not determine the extent and quality of NEA oversight activities. The maintenance of accurate and timely records document efforts undertaken, and reviews by management help ensure that management directives are carried out. Records are an integral part of an entity’s stewardship of government resources. In addition, documentation provides information so that oversight activities can be assessed over time. While State has met some aspects of the guidelines for overseeing MFO, it has not fully complied with its guidelines in other areas such as evaluating MFO’s financial practices. As discussed below, we reviewed the operational and financial oversight guidelines and State’s efforts for complying with them. NEA guidelines called for its officials to maintain regular communications with key MFO officials, discuss U.S. foreign policy issues with MFO, and participate in the annual MFO Trilateral Meeting between Egyptian, Israeli, and U.S. officials. We reviewed letters of correspondence, reports, cables, and e-mails documenting regular communications with MFO officials and State’s participation in the MFO Annual Trilateral Conferences of Major Fund Contributors. At the Trilateral, senior MFO officials discussed with delegates from Egypt and Israel information of interest to the United States. The U.S. delegate conveyed the U.S. position to the treaty parties and the MFO and discussed issues that ranged from routine matters relating to management and other administrative issues to major issues concerning MFO finances. NEA guidelines note that the transfer of U.S government personnel to key MFO positions—including the U.S. civilian observer unit (COU)—is an informal mechanism of U.S. oversight. While NEA has successfully recruited many candidates for the civilian observer positions, it has not consistently recruited candidates with the qualities that senior State officials regard as important for the chief civilian observer post. These qualities include having the capacity to exercise strong leadership and management skills in a predominantly male military culture in an isolated environment. Annually, NEA recruits U.S. government employees for about six 1-year observer positions and a chief observer who serves 2 years in the MFO. State reviews the applications for these posts, develops a “short list” from which the MFO Director General selects a candidate, provides input into the final selection, and recommends the candidate for the chief observer position. In recent years, according to the MFO and State officials, ineffective leadership in the chief observer position contributed to considerable turnover in the unit. A number of chiefs or interim chiefs were dismissed or transferred due to poor leadership capabilities. These problems resulted in low morale in the unit and to the early resignation of several observers. Recruiting for the leadership post remains a concern because many qualified candidates at State desire and accept higher priority posts to enhance their careers rather than seek MFO positions. According to a senior State official, the qualities that make a good chief observer— regional experience, including Arabic language skills, and managerial experience—are in demand at regional posts with higher priority staffing demands. The MFO Director General stated that he would like to broaden the pool of candidates and recruit from other sources for the leadership position if State could not provide a candidate with appropriate credentials. State officials oppose this approach, stating that the position was an important symbol of U.S. commitment and required an experienced Foreign Service Officer. According to senior State officials, the department is reviewing options, such as elevating the position to a more senior Foreign Service level, to make the position more attractive to Foreign Service Officers. However, a timeline for addressing this issue has not yet been established. NEA has fulfilled some of its financial oversight responsibilities; however, its staff lacked the expertise to perform many required tasks. The guidelines called for NEA to review MFO budgets and financial plans; analyze income, expenditures, and inflation rates; review and analyze annual audit and internal controls reports issued by the external auditor; and evaluate MFO financial and auditing regulations. NEA guidelines stated that the OIG would provide assistance in evaluating MFO financial and auditing regulations. While NEA officials reviewed budgets and financial plans, audits, and internal control reports, they did not evaluate the financial and auditing regulations of the MFO, review its accounting notes, or assess the potential financial impact that inflation rates had on the MFO budget request. NEA officials stated that its staff did not possess the needed accounting and auditing expertise to fulfill all of the financial oversight responsibilities and that the OIG has not provided accounting and auditing assistance to NEA since 1998. In June 2004, NEA officials stated that they were exploring options for obtaining the necessary accounting expertise to review MFO financial practices; however, they have not yet determined how they will redress this issue or a establish a timeframe for doing so. Leading practices indicate that personnel need to possess and maintain the skills to accomplish their assigned duties. Staff with the required skill could provide reasonable assurance that U.S. contributions are being used as intended and that financial reporting is reliable—including reports on budget execution, and financial statements. Public Law 97-132 authorized U.S. participation in the MFO and established a requirement that the President submit annual reports to Congress every January 15. The report is to describe, among other things, the activities performed by MFO during the preceding year, the composition of observers, the costs incurred by the U.S. government associated with U.S. troops participating in the MFO, and the results of discussions with Egypt and Israel regarding the future of MFO and its possible reduction or elimination. State has met the annual reporting requirement. NEA officials conducted biannual oversight visits to MFO headquarters and field locations as called for in the guidelines but did not document the results of those visits. In addition, the OIG reported that it found no trip reports that were prepared by NEA during that office’s 20 years of MFO oversight. The guidelines stated that the purpose of the visits is to observe MFO operations and conditions in the field and compare observed practices with published MFO regulations. Among other things, oversight visits were to include tours of MFO facilities, including offices, warehouses, check points, and facilities for U.S. soldiers; meetings with all key MFO and U.S. military officials; and meetings with members of the U.S. civilian observer unit. According to State officials, briefings were held afterwards to describe the visits but written reports of these visits were not completed. However, without the maintenance of accurate and timely records, it is difficult to determine whether management directives were appropriately carried out. In November 2003, State’s Inspector General conducted an internal review of NEA and made recommendations in February 2004 to improve NEA oversight. The OIG recommended that NEA transfer some of its oversight responsibilities from its Office of Regional Affairs to the Office of the Executive Director of NEA (NEA/EX). The OIG also recommended that NEA establish an advisory board to review MFO management practices and internal controls, including internal audits, and ensure the independence of these audits. NEA plans to give responsibility for the oversight of management/personnel issues to NEA/EX while the Office of Regional Affairs retains responsibility for the oversight of policy issues. NEA also agreed to form an oversight board to oversee MFO operations that is to be chaired by NEA/EX and include representatives from the OIG and the bureaus of Human Resources, International Operations, and Political-Military Affairs. The board, which met for the first time in mid- June 2004, discussed approaches to attracting candidates for the position of chief observer and other COU recruiting issues. The board has yet to determine its full range of responsibilities or scope of work. In addition, it has not yet established timelines for addressing these areas. MFO managers have made improvements to MFO’s personnel system but have not systematically updated the personnel system since 1985. For example, the Director General recently appointed a longer-serving civilian with personnel management expertise to replace the short-term military personnel officers serving short rotations on the MFO command staff. Moreover, leading personnel practices suggest that other aspects of the MFO personnel system could be reviewed and subsequently modified. For example, MFO regulations and procedures do not clearly provide for outside mediation or external avenues of appeal for MFO employee complaints involving discrimination or sexual harassment. In addition, the MFO has not addressed disparities in the representation of women in its workforce, especially in management positions, nor identified where barriers may operate to exclude certain groups and address these barriers. MFO’s current Director General has taken steps to update personnel policies to retain staff. In 2003, the Director General appointed a longer- serving civilian with personnel management expertise to replace the short- term military personnel officers serving short rotations on the MFO command staff. According to MFO documents and officials, this new manager for personnel in the Sinai provides continuity over personnel issues, takes a more active role in recruitment, has surveyed employees and acted on their concerns about safety and other quality of life issues, and is responsible for the equitable allocation of housing. Moreover, he has sought additional training to improve his effectiveness in this new role. Finally, MFO leadership has updated grievance procedures pertaining to sexual harassment complaints to boost employee confidence in the system and reemphasized to employees that they have zero tolerance for infractions of this policy. As the current Director General left in June 2004, his successor will have to demonstrate a similar commitment to these changes in personnel policy to ensure that they succeed. MFO management is taking steps to improve workforce planning. MFO managers stated that the personnel system was originally modeled in 1982 on State Department and U.N. systems. In addition, the MFO personnel manager stated that MFO managers have not undertaken a review of the personnel management rules since an outside consultant examined MFO personnel policies in 1985. However, MFO reviewed and updated some sections of its personnel manual in January 2004. MFO has also begun to make increased use of information technology to compare its future work requirements with its current human resources, and is using existing U.S. Army efficiency reviews of the U.S. contingent’s operations to suggest ways to restructure its own military staff (see app. III for excerpts from our model for strategic human capital management planning). To acquire, develop, and retain talent, MFO management has updated its recruitment practices to ensure that its new hires are both qualified and a good “fit” for the demanding work conditions in the Sinai. MFO uses professional recruiters to obtain civilians better suited to the MFO environment. MFO management has also updated its introductory materials, handbooks, and Web site to give prospective recruits a more comprehensive view of work requirements, benefits, and living conditions. MFO managers stated, however, that the “temporary” nature of the MFO mission precluded it from developing a career track for international staff. It does not, for example, provide the benefits that a career service track would offer, such as routine opportunities for promotion and pensions for long-serving employees. Nevertheless, the MFO has introduced incentives to retain long-serving staff, including pay increases normally worth 2 percent of salary for every employee who signs a contract extension and special nonmonetary service awards for 10-year and 20-year employees. The MFO has also introduced improved performance appraisals for new staff on their probationary period and at the end of their contract period. These appraisals include basic assessments of job skills, performance, leadership, communications, cost management, initiative, and adjustment to the work environment and document performance feedback sessions. Staff are allowed to read and comment on their appraisals. MFO, however, does not require its managers or staff to use a detailed formal appraisal to document annual performance reviews and feedback sessions. Instead, managers have the option of declaring that a staff member has performed satisfactorily. The new chief of personnel services stated that it was his intention to systematically collect employee feedback to help adjust MFO’s human capital approaches and workforce planning, but he had not yet developed any data collection instruments as of December 2003. Despite its efforts to improve its personnel management practices, the MFO has not addressed two challenges that leading practices indicate could adversely affect its ability to strategically manage its human capital resources more effectively. These challenges are (1) the degree to which its grievance procedures are subject to outside and neutral arbitration or other alternative dispute resolution mechanisms and (2) the gender imbalance in the international civilian workforce. Although the MFO employee grievance policy encourages early reporting and resolution at the lowest level practicable, it does not clearly provide for an independent avenue of appeal in cases of discrimination or sexual harassment. MFO’s policies against discrimination and harassment allow for the possibility of employees using outside mediators to resolve complaints when an internal inquiry or investigation determines that sexual harassment or discrimination has occurred. However, the decision to use mediation rests with the Force Commander or Contingent Commander, not the complainant. Furthermore, MFO procedures do not allow complainants to seek mediation or pursue appeal outside the MFO when an investigation results in a finding that harassment or discrimination has not occurred. In contrast, the Equal Employment Opportunity Commission calls for U.S. agencies to make alternative dispute mechanisms, such as mediators, available to complainants and U.S. antidiscrimination laws allow complainants to appeal their cases in court if necessary. We noted in past work that a one single model for international organizations’ grievance procedures does not exist because criteria such as the degree of independence of a grievance board or committee depend on the legal environments in which these organizations operate. Nevertheless, our analysis of leading practices in the World Bank and other organizations indicates that a lack of clear means for resolving such grievances could be a concern for an organization’s management because it could undermine employee confidence in the fairness of the personnel management system. For example, the U.S. government and the private sector employ alternative dispute resolution mechanisms such as arbitration, mediation, or management review boards to resolve discrimination complaints and other grievances in a cost-effective manner. Moreover, we noted that U.S. government agencies and international organizations have determined that access to alternative dispute mechanisms and providing an avenue for an independent appeal can enhance employee confidence in the entire human capital system. MFO’s current gender imbalance in management may also merit attention. The imbalance may indicate that there are obstacles to women attaining management positions that may need to be addressed. The United Nations, for example, determined that the gender balance of its professional workforce was problematic, particularly in the management of peace operations. To address this imbalance, the United Nations is trying to achieve a professional work force with a 50 percent gender balance. We examined MFO prepared documents that showed that women represented 29 percent of the workforce (31 out of 108 international and national civilian positions) and women filled only 8 percent of management positions (1 of 13 as of June 2004). In the United States, the Equal Employment Opportunity Commission would consider that such a gender disparity could be evidence of a differential rate for selection for women that warrants management attention. State and MFO managers have noted that there are mitigating circumstances that may explain the lower representation of women in MFO’s workforce. They stated a number of factors that might make the MFO posts in the Sinai an unattractive workplace for women: It is a predominantly male and military culture, there are few posts that allow for accompaniment by spouses, and it has no facilities for children. Nevertheless, these gender differences also exist at MFO locations in Rome, Tel Aviv, and Cairo, where these factors are not necessarily a concern. Leading practices among public organizations include evaluating the composition of their workforce, identifying differences in representation among groups, identifying where barriers may operate to exclude certain groups, and addressing these barriers. The MFO has taken steps to improve its financial accountability and its related financial internal controls over the past 9 years. It has also taken additional steps to improve its financial reporting to the State Department and to strengthen internal controls in response to recommendations we made to the MFO through the Department of State in 1995. Since then, the external auditors of its financial statements found no material weaknesses. The external auditors who reviewed MFO internal controls determined that the internal controls they tested were effective. However, internal control standards adopted by the MFO suggest that the MFO could do more to enhance the external audit function, particularly through the use of an independent audit committee to review the scope of activities of the internal and external auditors annually. MFO and some State officials stated that this concern has been addressed by the new audit and review mechanisms adopted by the MFO since our last report. Israeli and Egyptian officials stated that their governments are satisfied with the degree of financial oversight and control they exercise over the MFO. Nevertheless, officials from State’s OIG and senior managers within State’s NEA Bureau acknowledged that the bureau’s new MFO management advisory board needs to examine the issue of creating an external oversight board. The MFO has taken steps to improve financial accountability and strengthen internal controls. To keep the budget under $51 million and improve the efficiency of the organization by emulating leading commercial management practices, MFO has (1) adopted a business activity tracking software program to improve management visibility over financial activities and logistics management, and (2) hired a management review officer to identify cost savings through the reviews of management procedures and contracts. Although we have not performed any direct testing of the software, or assessed the role or performance of the management review officer, both initiatives appear to be positive steps for MFO. According to MFO staff, its adoption of a commercial business activity tracking software package in 2001 led to greater management oversight over all stages of procurement and other transactions and has strengthened internal controls. MFO officials state that this new system has built-in requirements for managerial approval at each step of the procurement process. Under this system, MFO procurement officers are assigned preset spending authority. Further, all procurement over $50,000 and any sole source contract over $30,000 requires the approval of the Director General. According to MFO officials, the visibility and control provided by this system have also simplified the external auditor’s task in conducting its latest review of internal controls. MFO officials and documents did not attribute any budget savings directly to the implementation of this new system. However, they stated that they were able to reduce the number of staff and centralize four procurement operations. MFO officials did not make available the results of any recent implementation testing, however, and noted that many of the key performance indicators the system will track are under development. In 2001, MFO hired a management review officer to identify cost savings through the reviews of management procedures, logistics contracts, and compliance with MFO requirements and controls. At the request of the Director General, this official performs some inspector general functions by conducting investigations on specific operations and accountability controls, and makes recommendations to improve procedures. According to MFO records and estimates, the MFO has conducted 19 “most efficient organization (i.e., leading practice) reviews” through January 2004. The management review officer’s recommendations contributed to more than $1.6 million in budgetary savings. All MFO special reviews and annual financial audits since 1995 have demonstrated to the satisfaction of the external auditor that MFO maintained sufficient financial accountability. First, in late 1995, its external auditor, Price Waterhouse, reviewed MFO’s internal control structure and made recommendations to strengthen them, which MFO agreed to adopt. Second, in 1996, MFO switched to a new external auditor, Reconta Ernst & Young, to conduct its annual financial audits. It issued unqualified or clean opinions on MFO’s financial statements between 1996 and 2004. Third, MFO commissioned the auditor to perform management compensation and benefits reviews in 1996, 1997, and 1999, which concluded that management received compensation and benefits substantially in compliance with MFO regulations. In 2000, however, the Director General terminated further compensation audits on the external auditor’s recommendation that concluded that these reviews duplicated the annual audit and other reviews. Fourth, MFO commissioned Reconta Ernst & Young to perform separate internal control reviews every 3 years beginning in 1998. Reports issued in 1998 and 2001 stated that its auditors assessed the MFO’s use of internal controls in relation to the criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) and found that the internal controls it tested were effective. The Treaty Protocol and MFO administrative and financial regulations provide the Director General responsibility for political, operational, and financial control issues pertaining to the organization. However, leading practices suggest that the MFO could better use independent input and oversight over external audits. The Director General selects and receives the reports of the external auditor. In addition, he can change MFO operations, policies, and procedures without review, consent, or approval from an oversight or senior management board. We previously reported that this level of authority is unique among international organizations, noting that other international organizations have an independent governing body above the chief executive to oversee and approve operations and finances. COSO internal control standards note that an effective internal control environment could depend in part on the attention and direction provided by oversight groups. These groups, such as an active and effective board of directors or audit committee, could enhance the audit function through their various review duties. Our standards for internal controls in the federal government similarly note the importance of independent audit committees or senior management councils as part of effective monitoring and audit quality assurance. MFO and some State officials stated that there is no need for an oversight board to provide this extra degree of assurance. They note that our concern about the Director General’s autonomy—and the potential for abuse of authority raised in our 1995 report—has been mitigated by the external auditor’s reviews of management compensation and internal controls, as well as steps the MFO has taken to improve financial accountability and strengthen internal controls. Moreover, these officials stated that the organization is too small to employ a full-time independent inspector general. Finally, Israeli and Egyptian officials said that their respective governments are satisfied with the degree of oversight that they exercise through formal annual meetings, informal daily contacts, and review of MFO financial reports. However, officials from State’s OIG and NEA acknowledge that a State oversight board could help ensure that the scope of work for audits are set independently from MFO management direction. Neither State nor its OIG has reviewed the scope of these external audits. The Inspector General concluded that, while State can only advise the MFO on these matters, the board is important because U.S. confidence in the integrity of the MFO is crucial to its continued support for the force. The MFO has maintained a flat budget of about $51 million for the past 9 years, but it faces a number of challenges that will make it difficult to continue operating within its current budget. In particular, the MFO must address the issue of replacing its antiquated fleet of helicopters by fiscal year 2006. DOD projects that replacing the fleet could cost about $18 million. As a result of this and other pressures on the budget, the costs of supporting the MFO are likely to increase if the MFO maintains its current level of operations. However, Israeli and Egyptian officials stated that their governments do not support increases in their contributions, and U.S. and MFO efforts to obtain support from other contributors have not succeeded. U.S. officials have yet to make a decision about increasing U.S. support to the MFO or adjusting its current cost-sharing arrangements with the MFO. In addition, the U.S. Army, State, and MFO officials have yet to agree on who should pay the increased costs associated with changes in the composition and pay scales of U.S. troops under current arrangements. MFO financial reports show that the organization has kept its budget at about $51 million between fiscal years 1995 and 2003. Contributions to MFO’s annual budget are paid by all parties in U.S. dollars. We reviewed MFO’s budget from fiscal years 1995 through 2002. We found that when adjusted using a U.S. dollar inflation rate, MFO’s budget has declined 12 percent between fiscal years 1995 and 2002 (see fig. 4). We also estimated the MFO’s budget in constant international dollars because MFO purchases goods and services in countries such as Egypt, Israel, and the United States, where the U.S. dollar has different purchasing power. Because similar goods are inexpensive in dollar terms when purchased in Israel and Egypt as compared to the United States, the purchasing power of MFO’s budget was significantly greater when measured in constant 1995 international dollars. This figure was $72 million in fiscal year 1995 and $69 million in fiscal year 2002. However, the MFO budget was $51 million in fiscal year 1995 and $45 million in fiscal year 2002 when measured in fiscal year 1995 dollars. Moreover, we found that, between fiscal years 1995 and 2002, the MFO budget declined only about 5 percent using constant 1995 international dollars as compared with the 12 percent decline in fiscal year 1995 U.S. dollars. This decline was partially offset because MFO was able to reduce the economic impact of U.S. dollar inflation by shifting more of its purchases to Egypt and Israel during this period. MFO increased its purchases in Egypt and Israel from 43 percent of its budget in 1995 to 54 percent in 2002 as measured in nominal U.S. dollars. When measured in international dollars, however, goods and services purchased from those two countries increased from an estimated 60 percent of the MFO budget in 1995 to almost 70 percent in 2002 (see app. IV for details on calculating MFO budget in international dollars). MFO has attained cost savings in recent years through better management oversight and reduction of inventory costs. As mentioned previously, the adoption of a commercial business activity tracking software package and the hiring of a management review officer in 2001 led to greater efficiencies in logistics and facilities management, vehicle maintenance, personnel, finance, and contracting. As a result, according to a senior MFO official, recommendations of the management review officer contributed to almost $1.7 million in savings. Moreover, according to a senior MFO official, more effective management of tracking of freight costs and services has contributed to a 46 percent reduction in total storage and freight costs between fiscal years 2002 and 2003, or a savings of $265,000. Furthermore, its projects to connect its two camps in the Sinai to the commercial Egyptian power grid is projected by MFO to save about $825,000 a year on electricity costs, once the North Camp project is completed in 2004. One of the key cost issues for the immediate future is the replacement of aging UH-1H Huey helicopters. The U.S. Army provides an aviation company with 10 UH-1H helicopters to the MFO to perform various mission-related tasks for the MFO. As of December 2003, the unit had about 97 associated Army personnel. According to DOD officials, U.S. Army plans call for the retirement of its entire UH-1H helicopter fleet by fiscal year 2006. Furthermore, Army officials stated that DOD has considered various options as replacements for the MFO helicopter fleet and is waiting for the Secretary of Defense’s decision on this matter. First, the Army is considering outsourcing its MFO aviation unit to a private contractor. This option would reduce U.S. military personnel participation in the MFO, but preliminary DOD estimates indicate that it would cost about $18 million in the first year and $13 million annually thereafter. Second, according to U.S. Army officials, Army is considering replacing the MFO Hueys with eight UH-60 Black Hawk helicopters (see fig. 5). These officials stated that MFO prefers the outsourcing option because there would be no need to upgrade hangar facilities and other infrastructure to support the Black Hawks, thereby limiting their financial obligation. Officials from Israel and Egypt stated that they would leave the decision to the United States. They do not, however, want to incur additional financial obligations. The need to replace aging infrastructure and fund new capital improvement projects will also require additional funding. According to U.S. military officers in the Sinai, the North Camp accommodations for the soldiers will need to be replaced over the next 2 to 5 years. A senior MFO official stated that the MFO has begun to consider replacing some of these accommodations and will be exploring several options in the near term. However, no plan has been finalized, and the official did not have cost estimates to provide as of March 2004. As part of U.S. efforts to reduce troop deployments throughout the world to better meet the demands of the war on terror—and the cost of these deployments—the United States has tried to obtain troop and financial contributions from other nations to reduce its MFO obligation, according to U.S. officials. To date, these efforts have not been successful. In 2003, the Department of State requested military contributions from more than 20 countries that would then enable the United States to draw down its forces. Five countries responded favorably, but only an offer by Uruguay to send additional transportation personnel to replace a U.S. Army transport company was considered feasible by the MFO. The increased Uruguayan deployment in July 2003 allowed the Army to draw down its MFO contingent by 74 troops. U.S. officials also requested financial contributions as part of this query, but other countries declined to provide this support. U.S. attempts to obtain increased financial contributions from Israel and Egypt have also not been successful. In addition to the annual U.S. financial contribution to the MFO of about $16 million, the United States incurs an annual expense for deploying several hundred troops to the MFO that averaged about $45 million annually from fiscal years 1995 through 2003. The cost of supplying U.S. troops to MFO has risen since fiscal year 1999, even though the number of U.S. troops has declined (see figs. 6 and 7). The increase is due to rises in salaries and in the amount of special pay provided to U.S. troops. The MFO agreed to compensate the U.S. Army for special pay categories and other allowances incurred when U.S. troops are deployed to the Sinai. However, in recent years, the U.S. Army has raised the rates for some cost categories and has created additional costs categories that did not exist at the time of the initial or revised cost-sharing arrangement. Currently, Army disagrees with State and MFO over who should pay these additional costs. The increased expense for supplying the MFO with U.S. troops is due primarily to a rise in troop salaries, which are paid by the Army, and changes in special pay categories such as foreign duty pay and family separation pay, which are partly paid for by the MFO. For example, salaries have increased because beginning in 2002, National Guard troops have been deployed instead of active duty soldiers. National Guard troops tend to have been in grade longer than active duty soldiers and are consequently paid more. The U.S. Army pays for the increases in troop salaries. (See app. V for details on the cost of U.S. participation in MFO between fiscal years 1995 and 2003.) The MFO and the United States agreed to share the costs of providing U.S. troops to the MFO in 1982 and revised these arrangements in 1994 and 1998. Under these agreements, the Army agreed to credit the MFO for the costs these troops would have normally incurred had they remained in the United States, including food and lodging, base support, and operations and maintenance costs. The MFO agreed to pay some of the additional costs incurred by the deployment of U.S. troops to the Sinai, including special pay categories and other allowances. In the revised 1998 arrangement, the U.S. Army and the MFO did not reach specific agreement on how Imminent Danger Pay would be shared. While the agreement increased rates for other special pay categories, these rates were less than those established in U.S. law. Army officials believe that MFO should pay these increased costs for supplying U.S. troops; however, MFO and State officials disagree with this position. According to an Army official, the Army will seek MFO reimbursements for special pay categories totaling $3.3 million for fiscal year 2004; an MFO official stated in June 2004 that the MFO protested this action to the Army and Department of State. In addition, Army officials stated that MFO should pay a greater share of the costs for sustaining National Guard troops while they are on duty at the MFO. Army officials reduced by $1 million the credit it will provide to the MFO for sustaining the U.S. infantry battalion in fiscal year 2004 because the formula it used to calculate the credit was out-of-date since National Guard battalions have been sent to the MFO in place of active duty units in recent years. In May 2004, U.S. Army and State officials met with MFO officials to discuss differences but did not present a unified U.S. government position on how the cost-sharing arrangement should be modified. The two parties to the treaty and the United States are satisfied that the MFO is effectively fulfilling its mission of helping to maintain peace between Egypt and Israel. MFO has maintained its peacekeeping operation with a multinational force in the Middle East, a troubled and unstable part of the world. The organization has modified several of its policies and practices to make them consistent with leading practices in financial management and personnel. There are, however, opportunities for the organization to further improve in these areas. MFO has made several changes to its operations even though its budget has been flat for the past 9 years. The organization has benefited greatly because it has increased the amount of goods and services purchased in Israel and Egypt where the purchasing power of the U.S. dollar had increased during that period. Despite these changes, MFO contributors may face increased budgetary challenges due to the possible replacement of MFO’s helicopter fleet. State is the organization charged with overseeing U.S. participation in the MFO and recruits State employees to fill key MFO positions. Nevertheless, State has not provided employees who possess the expertise to carry out many of its financial oversight responsibilities. In addition, MFO raised concerns about the leadership capabilities of some of the staff whom State recruited for the chief civilian observer post. Finally, since the MFO does not have an external oversight board, as do many international organizations, effective State oversight of MFO and agreement between the United States and the MFO on cost-sharing arrangements is essential to ensure that the cost of U.S. troop participation is equitably shared. While NEA has begun to address some of the issues that are stated below, it has not established timelines for their resolution. To promote improved oversight of the MFO and ensure that NEA redresses these issues, we recommend that the Secretary of State take the following four actions: resolve the recurring concern of finding qualified candidates for the chief of the civilian observer unit; ensure that staff with accounting expertise are available to carry out NEA’s financial oversight responsibilities for MFO and, if necessary, review the terms of MFO’s external audits to ensure that they are appropriate; direct the MFO management advisory board to monitor and document NEA’s compliance with its guidelines for overseeing the MFO; and work with Army officials to reconcile differences between Army and State views about the current MFO cost-sharing arrangements. The Department of State and MFO provided technical and written comments on a draft of this report (see apps. VI and VII). The Department of Defense provided oral comments and generally agreed with our findings. It also provided technical comments that we incorporated where appropriate. The Department of State agreed with three of the four recommendations and did not respond to one of the recommendations. State agreed with our conclusion that it had experienced problems in consistently recruiting chief observers with the necessary leadership skills and stated that the new State MFO Management Advisory Board is considering measures to encourage highly qualified State employees to fill the chief observer position. State agreed with our recommendation that staff with accounting expertise carry out NEA’s financial oversight responsibilities for MFO. However, State believes that the current NEA oversight regime provides the assurances necessary and its limited resources do not allow hiring additional accounting personnel to evaluate MFO’s financial practices. As a result, State plans to ask the OIG to periodically evaluate MFO’s accounting and financial practices. We do not agree that the current oversight regime provides the assurances necessary regarding MFO’s finances. We found that NEA did not perform several aspects of MFO financial management oversight—such as evaluating MFO financial practices— because of a lack of expertise among NEA staff. We agree, however, that having the OIG periodically review MFO accounting and financial practices is sufficient. Finally, State also agreed with our recommendation to work with Army to reconcile differences about current MFO cost sharing arrangements. State was not responsive to our recommendation to direct the MFO Management Advisory Board to monitor and document NEA’s compliance with its guidelines for overseeing MFO. State responded that it plans to supplement the annual report to Congress that describes its MFO oversight activities with quarterly reports to the newly formed advisory board. The OIG recommended that NEA establish an advisory board because it found that while NEA policy oversight was strong, its management and personnel oversight were not as satisfactory. While the board works to define its authority and responsibilities, it should ensure that NEA exercise more concerted oversight of MFO activities by complying with NEA guidelines and documenting its efforts for overseeing MFO. The MFO generally agreed with the report’s findings. The MFO welcomed the report’s recommendations for State to improve the recruiting process for the chief observer and for the U.S. government to develop a unified position regarding the Army’s claims for increased payments by the MFO. MFO also stated that it would consider our report’s findings regarding additional outside mediation or review mechanisms for complaints involving discrimination and sexual harassment. It also noted that it will also consider our findings of a perceived gender imbalance in the MFO workforce. The MFO took exception to our finding that, with few exceptions, MFO employees tend to stay in the same positions for which they were contracted. They stated that six headquarters’ employees had been promoted or transferred from other positions. However, the MFO personnel manual states that there is not a career path for employees due to the temporary nature of the organization. Moreover, MFO does not have systems in place that establish standard employment grades for its positions, requirements for competitive promotion opportunities, or advertise opportunities for promotion. We interviewed several long- serving staff in the field who stated that opportunities for advancement were not available and that they have remained in the position for which they were hired. Finally, MFO accepts that there are opportunities to improve its human resource management but noted that the adoption of U.S. government or U.N. human resource practices may entail significant costs and overhead for a small organization. We agree that organizations must be careful to consider their unique characteristics and circumstances when considering the applicability of human resources practices that we have identified in appendix III. MFO also disagreed with the factual accuracy of one of the numbers in appendix II. We made changes to reflect MFO corrections. We are sending copies of this report to other interested Members of Congress. We are also providing copies of this report to the Secretary of State, the Secretary of Defense, and the Director General of the Multinational Force and Observers. We will also make copies available to others upon 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 at (202) 512-8979 or christoffj@gao.gov, or Phyllis Anderson at (202) 512- 7364 or andersonp@gao.gov. In addition to the persons named above, B. Patrick Hickey, Lynn Cothern, Elizabeth Guran, and Bruce Kutnick made key contributions to this report. We (1) assessed the Department of State’s oversight responsibilities for U.S. participation in the MFO, (2) reviewed MFO’s personnel policies and practices, (3) examined MFO’s financial management and accountability, and (4) reviewed emerging budgetary challenges. We focused our audit work at MFO and State on activities and transactions starting in 1996 through 2004, the period subsequent to the prior GAO report. We visited MFO offices in Rome, Cairo, and Tel Aviv and force installations in the Sinai Peninsula. We also met with the Israeli and Egyptian Ministries of Foreign Affairs and Defense in Jerusalem and Cairo. To assess the Department of State’s oversight responsibilities, we reviewed the oversight guidelines developed by the Office of Regional Affairs of State’s Bureau of Near Eastern Affairs (NEA/RA) and supporting documentation including State’s Annual Reports to Congress, cables, MFO Director General Annual Reports for the Trilateral Conferences of Major Fund Contributors, MFO external auditors’ financial statement audit and internal control reports and turnover statistics of staff working in the civilian observer unit. We could not determine the full extent of State’s efforts because it did not document the nature, quality, and range of its oversight activities. We also met with State/NEA officials responsible for overseeing U.S. participation in the MFO to discuss the frequency, nature, and extent of State contact with MFO. We discussed the views of the Egyptian and Israeli governments on the MFO’s performance with military and foreign affairs officials from both countries. We interviewed NEA and MFO officials and current and former members of the Civilian Observer Unit to obtain an understanding of State’s recruiting efforts and interaction with the COU. We met with officials from State’s Office of Inspector General (OIG) to discuss their inspection of NEA, and we also reviewed relevant OIG reports. In addition, we assessed the status of State’s compliance with prior GAO recommendations. To review MFO’s personnel management system, we examined MFO personnel regulations, internal reports and briefings that described personnel policy changes, personnel statistics, performance appraisal forms, and other documentation on the organization’s personnel practices. We also examined leading human capital management policies and practices of public organizations to determine if MFO personnel regulations and policies relating to employee expectation setting, performance appraisals, employee grievance processes, alternative dispute resolution mechanisms, and sexual harassment policies followed the spirit of leading practices. We interviewed MFO officials, members of the civilian observer unit, MFO staff, and NEA officials to obtain their views on the organization’s personnel system. To examine MFO’s financial management and accountability, we reviewed the external auditors’ financial statement audits and internal control reports, other special reviews performed by the external auditor, and reports completed by State’s OIG. We also reviewed MFO management review officer’s reports, MFO financial regulations, and documentation on MFO’s recently installed financial management system. We discussed the scope and nature of the management review officer’s position and recent work with MFO officials. We interviewed NEA, DOD, MFO, Israeli, and Egyptian officials to determine their views on MFO’s financial management and the degree of accountability of the Director General. To report on some of the potential budgetary challenges MFO may face, we examined budget data and supporting documentation for fiscal years 1995 through 2003 provided by MFO, NEA, and the U.S. Army’s Office of Assistant Secretary of the Army for Financial Management and Comptroller. We discussed with DOD, State, and MFO officials trend data on costs and estimates for substituting U.S. Army UH-60 Black Hawk helicopters or a private contractor’s helicopter unit for the current MFO force of UH-1H Huey helicopters. We did not verify the accuracy or completeness of the estimates or verify the accuracy of the budgetary savings MFO officials associated with particular cost saving initiatives. To assess the reliability of the data on the costs associated with U.S. participation in the MFO, we (1) interviewed State, Army, and MFO officials about the sources of their data and the means used to calculate costs, (2) reviewed MFO’s annual financial reports and State’s annual report to Congress on the MFO, (3) traced U.S. Army’s reported costs for its contributions to the MFO back to the source documents, (4) traced the Army’s calculation of the costs associated with providing salaries to the soldiers stationed with the MFO—these salary costs constitute over 80 percent of the total costs of the U.S. Army contribution to the MFO– back to the DOD personnel composite standard pay and reimbursement rates for fiscal years 1999 through 2003, (5) performed tests on the data provided by the U.S. Army regarding the cost of U.S. participation in the MFO between 1999 and 2003 to check for obvious errors or miscalculations, and (6) reviewed the report of the MFO’s independent external auditor on State’s contributions. However, we did not audit the data and are not expressing an opinion on them. We determined that the data were sufficiently reliable for the purpose of reporting the total costs of U.S. participation in the MFO. We conducted our review from September 2003 to May 2004 in accordance with generally accepted government auditing standards. MFO has a small and varied professional civilian workforce of 108 international and local national staff located in Rome, Cairo, and Tel Aviv. Contractors provide an additional 59 expatriate support staff and 454 local workers. Eight of the 13 management-level employees are U.S. citizens. The international staff, including 14 U.S. citizens, support and direct the operations of 1,685 peacekeeping troops from 11 countries with unit or individual tours of duty varying between about 2 months and 1 year. A further 15 U.S. citizens serve in the civilian observer unit (COU): about half the observers, including the chief observer, temporarily resign from the State Department to fulfill 1- to 2-year contract commitments; the other half are civilian contractors, usually recruited from retired U.S. military personnel serving under renewable 2-year contracts. Table 1 provides details on MFO personnel locations, types, and numbers. MFO working conditions present challenges for management and staff. MFO workers have limited prospects for advancement or job mobility because the organization views itself as having a temporary mission. The international workforce has decreased by about 62 percent since 1982. With few exceptions, MFO employees tend to stay in the same positions for which they were contracted and its many long-serving workers in administrative positions lack opportunities to progress to higher positions. MFO managers stated that while MFO’s pay scales and other benefits help it successfully compete for staff with oil companies and other commercial international organizations in the region, it is challenging to find civilian employees with the ability to work successfully in the austere military atmosphere and isolated living environment in the Sinai. The main camp at El Gorah in the northern part of the Sinai is in a sparsely populated area with few amenities outside the camp. Only 17 military and civilian positions in the Sinai allow for accompaniment by a spouse, and facilities for children are lacking. Visits by family members are also very limited. The force’s personnel system reflects the “temporary” nature of the MFO’s mission; most international contractors serve under initial 2-year contracts that can be renewed at the discretion of the Director General. According to MFO documents, employment with the MFO is not a career service and initial employment with the MFO does not carry any expectation of contract renewal or extension. Several long-term employees stated that there are limited job progression opportunities with the MFO. Heightened concerns about terrorism since September 11, 2001, and ongoing violence in areas under Israeli control has led to significantly restricted opportunities for travel off the bases. U.S. and international public organizations have found that strategic workforce planning is essential to (1) aligning an organization’s human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies for acquiring, developing, and retaining staff to achieve programmatic goals. We have developed a strategic human capital management model based on leading practices to help U.S. and international public organizations assess their efforts to address the key challenges to developing a consistent and strategic approach to human capital management. We caution that agencies applying this model must be careful to recognize the unique characteristics and circumstances that make organizations different from one another and to consider the applicability of practices that have worked elsewhere to their own management practices. Our work has shown that the public organizations face four key human capital challenges that undermine agency efficiency. The model consists of four cornerstones designed to help public organizations address the challenges in the four areas—leadership; strategic human capital planning; acquiring, developing, and retaining talent; and results-oriented organizational culture. Each cornerstone is associated with two critical factors that an agency’s approach to strategic human capital planning must address. Moreover, for each of the eight critical success factors, the model describes three levels of progress in an agency’s approach to strategic human capital planning: Level 1: The approach to human capital is largely compliance-based; the agency has yet to realize the value of managing human capital strategically to achieve results; existing human capital approaches have yet to be assessed in light of current and emerging agency needs. Level 2: The agency recognizes that people are a critical asset that must be managed strategically; new human capital policies, programs, and practices are being designed and implemented to support mission accomplishment. Level 3: The agency’s human capital approaches contribute to improved agency performance; human capital considerations are fully integrated into strategic planning and day-to-day operations; the agency is continuously seeking ways to further improve its “people management” to achieve results. Figure 8 illustrates the critical success factors an organization in the second level of progress must address as it develops a strategic approach to managing its human capital. Individual performance management integrated with organizational goals; and management held accountable for achieving these goals through use of clearly defined, transparent, and consistently communicated performance expectations 1. People are assets whose value can be enhanced 2. An organization's human capital approaches should be designed, through investment. As with any investment, the goal is to maximize value while managing risk. implemented, and assessed by the standard of how well they help the organization achieve results and pursue its mission. The MFO receives dollar contributions from Egypt, Israel, and the United States and purchases goods and services from Egypt, Israel, the United States, and other countries. The MFO’s budget has remained flat at 51 million in nominal dollars between fiscal years 1995 and 2002, although it has declined about 12 percent over the same period when adjusted for U.S. inflation. However, MFO officials stated that they increased the purchasing power of its budget by shifting its purchases of goods and services away from the United States and other countries to relatively lower cost Egyptian and Israeli markets. As figure 9 demonstrates, MFO spending in Egypt and Israel rose from 43 to 54 percent of the budget between fiscal years 1995 and 2002. On average, the MFO spent 26 percent of its budget in Egypt and 23 percent in Israel in this period. By converting the MFO’s budget into international dollars, we are able to better assess the impact of these shifts to the lower cost Egyptian and Israeli markets on the overall purchasing power of the MFO budget. As table 2 demonstrates, expressing the MFO budget in international dollars reveals that: (1) the purchasing power of the budget—ranging between $72.3 million in fiscal year 1995 and $69 million in fiscal year 2002–was significantly higher than its nominal level of $51 million suggests; and (2) the real decline in the budget between fiscal years 1995 and 2002 was about 5 percent rather than 12 percent. Moreover, figure 10 demonstrates that MFO purchased a larger proportion of its goods and services in Egypt and Israel when calculated in international dollars than the nominal-dollar budget expenditures suggest—70 percent versus 54 percent for fiscal year 2002, for example. Also, it purchased a significantly greater percentage of its budget in Egypt than in Israel on average when calculated in international dollars during this period—46 percent versus 18 percent on average. An international dollar is equivalent to the amount of goods and services that 1 U.S. dollar can purchase in the United States. Two steps are required to convert an amount valued in local currency into international dollars: First, convert the local currency figure into U.S. dollars using the official Second, divide this dollar amount by the country-specific purchasing power parity (PPP) conversion factor to official exchange rate ratio. The PPP conversion factor converts into international dollars the cost of a basket of tradable and nontradable goods and services valued in local currency units (pounds in the case of Egypt and shekels in the case of Israel). The PPP conversion factor is the number of local currency units required to buy the same amount of goods and services in the domestic market that a U.S. dollar would buy in the United States. For example, a basket of goods that could be purchased in the United States for $1, equal by definition to 1 international dollar, could be bought in Egypt for 1.259 Egyptian pounds in 1995. Therefore, the PPP conversion factor is 1.259 Egyptian pounds per international dollar. In calendar year 1995, the official annual average exchange rate (based on monthly averages) was 3.392 Egyptian pounds per U.S. dollar. The ratio of the PPP conversion factor to the official exchange rate is 0.371. The nominal dollar amount the MFO spent in Egypt in fiscal year 1995 ($11.7 million as shown in table 2) is divided by the fiscal year ratio, to compute the international dollar amount of 32.2 million. The United States agreed in 1981 to provide one third of the annual MFO budget and provide a military contingent in support of the force. Annex II of the 1982 Exchange of Letters between the MFO Director General and the U.S. Secretary of State set the financial arrangements for the U.S. military contribution. The Memoranda of Understandings between the MFO and the Department of the Army established in 1994 and 1998 confirm additional understandings and procedures to supplement Annex II of the 1982 Exchange of Letters. Under the terms of these cost-sharing arrangements, U.S. costs to support the MFO has increased from a low of $55.8 million in fiscal year 1996 to $70.8 million in fiscal year 2003 as depicted in table 3—a 20 percent increase overall. While State Department’s contribution to the annual MFO budget has averaged about $16 million since fiscal year 1995, the number of U.S. military personnel participating in the MFO has declined 11 percent since then, as depicted in table 4 below. However the cost of U.S. military participation has risen approximately 25 percent between fiscal year 1996 and 2003. As depicted in table 3, a number of factors account for this increase in the total cost of U.S. commitments to the MFO over this period: Total troop salaries increased 27 percent, despite a decrease in the U.S. troop contingent between fiscal years 1995 and 2002. These salaries constitute over 80 percent of the cost of the total Army contribution. In FY 2002, the Army substituted Army National Guard forces for the regular Army personnel, contributing to a salary cost increase of 12 percent between fiscal years 2002 and 2003. National Guard troops tend to be older and have been in grade longer than regular Army forces and are consequently paid more. Across-the-board salary increases for all military forces is another factor contributing to rising military costs, according to Army officials. Special pay and allowances paid to U.S. soldiers participating in the MFO mission have increased nearly ten-fold since fiscal year 1995, going from about $300,000 to $3 million in fiscal year 2003. Under the March 1982 Exchange of Letters between the MFO Director General and the Secretary of State, the MFO agreed to pay for certain special allowances to U.S. military personnel participating in the MFO mission, including a Family Separation Allowance for married personnel and Foreign Duty Pay for enlisted personnel. The coverage and rates of these existing allowances has been expanded since then to include both enlisted men and officers and costs about $250 per soldier per month. Moreover, in fiscal year 1997, DOD began providing imminent danger pay to military personnel serving in Israel and Egypt. The current rate amounts to $225 per soldier per month. In fiscal year 2003, the imminent danger pay allowance constituted 78 percent of total DOD special pays provided to military personnel participating in the MFO. Reimbursement payments from DOD to the MFO increased 13 percent. Currently, the U.S. Army provides the MFO a credit or “offset” for certain costs associated with the support of U.S. forces. These costs are those which would normally have been incurred by the U.S. government for food and lodging, base support, and operations and maintenance for such units when stationed in the United States. MFO purchases of supplies from DOD decreased by about 60 percent. In fiscal year 1995, the MFO reimbursed DOD for the purchase of supplies, equipment, and rations totaling $4.3 million dollars. MFO has sought to replace DOD as a source of supply with lower cost local commercial vendors in recent years, limiting its purchases from DOD to medical supplies and certain helicopter parts. In fiscal year 2003, these purchases totaled about $1.8 million. The following are additional GAO comments on the Multinational Force and Observers letter dated July 9, 2004. 1. In its comments, MFO stated that the report does not mention a number of female employees occupying senior positions. Our analysis is based upon information obtained from an early 2004 report that lists all international and national staff by gender in management positions. There may have been some changes made to the data since that time. 2. In its comments, MFO stated that there were factual inaccuracies regarding the number and classification of civilians employees. GAO made changes based upon MFO technical comments and noted that these changes disagreed with data in the MFO 2004 Annual Report. MFO’s annual report notes that there are 636 civilians, while the information provided to us from MFO totaled 650.

Summary: Since 1982, the Multinational Force and Observers (MFO) has monitored compliance with the security provisions of the Egyptian-Israeli Treaty of Peace. The United States, while not a party to the treaty, contributes 40 percent of the troops and a third of MFO's annual budget. All personnel in the MFO civilian observer unit (COU) are Americans. GAO (1) assessed State's oversight of the MFO, (2) reviewed MFO's personnel and financial management practices, and (3) reviewed MFO's emerging budget challenges and U.S. MFO cost sharing arrangements. The State Department has fulfilled some but not all of its operational and financial oversight responsibilities for MFO, but lack of documentation prevented us from determining the quality and extent of its efforts. State has not consistently recruited candidates suited for the leadership position of the MFO's civilian observer unit, which monitors and verifies the parties' compliance with the treaty. State also has not evaluated MFO's financial practices as required by State's guidelines because they lacked staff with expertise in this area. However, State recently formed an MFO management advisory board to improve its oversight of MFO operations. MFO has taken actions in recent years to improve its personnel system, financial accountability, and internal controls. For example, it has provided incentives to retain experienced staff and taken steps to standardize its performance appraisal system. It has received clean opinions on its annual financial statements and on special reviews of its internal controls. MFO has also controlled costs, reduced its military and civilian personnel levels, and kept its budget at $51 million since 1995, while meeting mission objectives and Treaty party expectations. MFO faces a number of personnel, management, and budgetary challenges. For example, leading practices suggest its employees' access to alternative dispute resolution mechanisms for discrimination complaints, and the gender imbalance in its workforce, could be issues of concern. Moreover, MFO lacks oversight from an audit committee or senior management review committee to ensure the independence of its external auditors. Finally, MFO's budget is likely to increase because of costs associated with replacing its antiquated helicopter fleet. U.S. and MFO efforts to obtain support from other contributors generally have not succeeded. Army, State, and MFO officials have yet to agree who should pay the increased costs associated with changes in the composition and pay scales of U.S. troops deployed at MFO.