When developing its annual budget submission, BOP uses three general steps to estimate costs for its two budget accounts—the Salaries and Expenses account (known as its operational budget) and its Buildings and Facilities account. First, BOP estimates cost increases for maintaining the current level of services for operations as provided in the prior year’s enacted budget. These include costs to address mandatory staff pay raises and benefit increases, inmate medical care, and utilities. BOP primarily analyzes historical obligations from the past five years to identify average annual operating cost increases. BOP also considers economic indicator information to estimate general inflationary cost increases, using data from the Bureau of Labor Statistics Consumer Price Index, among other sources. Second, BOP projects inmate population changes for the budget year and for several years into the future. BOP uses a modeling program that identifies each inmate as a unique record tied to variables such as conviction year, sentence term, and conviction type, with data obtained from a variety of sources, including the Administrative Office of the U.S. Courts, the U.S. Sentencing Commission, and the Executive Office for U.S. Attorneys. The model identifies the number of inmates currently in BOP’s system and the length of those inmates’ sentences, as well as the number of inmates estimated to enter the BOP system and the length of their sentences. For example, for the fiscal year 2010 annual budget submission, BOP projected a net growth in its inmate population of 4,500 inmates. Third, BOP estimates costs to both house the projected number of new inmates, including building and facility requirements, and fund any new initiatives. According to BOP, a rising inmate population is the primary driver of new service costs (see figure 1 for graph showing federal inmate population growth from fiscal years 2000 through 2009). Thus, for any budget year, BOP uses inmate population projections to determine the necessary bedspace to house additional inmates. BOP estimates these associated incarceration costs by (1) determining how to distribute the incoming prisoners across newly activated facilities, existing facilities, or contract facilities; and (2) calculating staffing and other operational costs to manage the additional inmates at its facilities. BOP also identifies and estimates costs for new initiatives, such as the activation of a new BOP facility, by reviewing the proposals submitted by its divisions and regional offices, as well as historical data on costs for implementing such initiatives. For its Buildings and Facilities account, BOP identifies new program costs associated with new construction and maintenance and repair of existing facilities. Using its long-term inmate population projections, BOP considers new construction proposals based on need, funding, and the anticipated speed of construction. BOP estimates construction costs largely by using analogous building costs for similar security level facilities, as well as considering assumptions, such as the rate of inflation and when potential construction would begin. BOP ranks maintenance and repair proposals by assigning safety the highest priority and estimates costs based on information it obtains from a construction cost estimation company. BOP’s methods for estimating costs in its annual budget requests to DOJ largely reflect the best practices outlined in GAO’s Cost Estimating and Assessment Guide. Specifically, BOP followed a well-defined process for developing a mostly comprehensive, well documented, accurate, and credible cost estimate for fiscal year 2008. For example, BOP used relevant historical cost data and considered adjustments for general inflation when estimating costs for its budget request to DOJ. Moreover, BOP’s methods for projecting inmate population changes have been largely accurate. For example, we found BOP’s projections were accurate, on average, to within 1 percent of the actual inmate population growth from fiscal year 1999 through August 20, 2009. We identified two areas where BOP could strengthen its methods for estimating costs in its annual budget submission. First, according to best practices described in GAO’s Cost Estimating and Assessment Guide, it is better for decision makers to know the range of potential costs that surround an estimate and the reasons behind what drives that range rather than just having a point estimate from which to make their decision. An uncertainty analysis provides a range of costs that span a best and worst case spread. While not required by OMB or DOJ in annual budget development guidance, conducting an uncertainty analysis of this kind is a best practice. BOP has not conducted an uncertainty analysis, and therefore has not quantified the level of confidence associated with its cost estimate. By providing the results of such analysis to DOJ, BOP officials could share advance information on the probability and associated risks of operating expenses exceeding enacted funding levels— a situation BOP faced in fiscal year 2008. Second, during our review of documentation for BOP’s fiscal year 2008 cost estimate, we sometimes required the guidance of BOP budget analysts to identify backup support. This was because the documentation BOP provided was insufficient to allow someone unfamiliar with the budget to locate detailed corroborating data. For example, in reviewing BOP’s fiscal year 2008 cost estimate for a health service initiative related to expanding kidney dialysis treatment for inmates, we required a budget official’s assistance in locating supporting formulas used to calculate the estimate. Best practices for cost estimation include providing enough detail so that the documentation serves as an audit trail that allows for clear tracking of cost estimates over time. By documenting all steps for developing its budget cost estimate, BOP would be better positioned to recreate its estimates in the event of attrition within its budget office among those who developed initial budget cost estimates. In providing feedback on our initial findings, BOP budget officials indicated that taking these steps would strengthen their methods for estimating costs in their annual budget submission to DOJ. BOP’s costs for key operations to maintain basic services, such as those for inmate medical care and utilities, exceeded the funding levels requested in the President’s budget from fiscal years 2004 through 2008, limiting BOP’s ability to manage its growing inmate population. During this period, BOP’s annual non-salary inmate medical care and utilities costs exceeded funding levels in the President’s budget request by a total of about $131 million and $55 million, respectively, largely due to inflation and inmate population growth. According to BOP, from fiscal years 2004 through 2008, BOP’s annual non-salary inmate medical care costs increased by a total of about $146.5 million. In contrast, during this period, the President’s budget requested funding increases for non-salary inmate medical care totaling approximately $15.4 million. According to BOP, from fiscal years 2004 through 2008, BOP’s annual utilities costs increased by a total of $87 million. In contrast, during this period, the President’s budget requested funding increases for utilities totaling approximately $31.6 million. Table 1 compares BOP’s rates of annual cost growth due to inflation and inmate population growth with the President’s budget requests for funding for non-salary inmate medical care and utilities from fiscal years 2004 through 2008. When BOP has not received funding to cover the operational cost increases it has incurred, in some years it has used Salaries and Expenses funding planned for other areas to cover these costs. For example, one of BOP’s highest priorities is to increase staffing levels of corrections officers. However, BOP officials reported using Salaries and Expenses account funds initially planned for hiring additional corrections officers in fiscal years 2008 and 2009 to instead cover base operations cost increases related to inmate medical care, utilities, and personnel salary and benefit adjustments that were unfunded in the President’s budget requests. As with any other DOJ component, BOP’s budget requests are governed by DOJ and OMB budget development guidance. For example, DOJ budget development guidance for fiscal years 2008 and 2009 required components to limit cost growth for current services to no more than 4 percent greater than prior year levels. DOJ reported that this guidance was a general instruction given to all components, but recognized that BOP is different because its costs are less discretionary since BOP does not control the number of inmates for which it must care. In this way, DOJ reported that it did not automatically reject budget submissions from BOP that exceeded the cap, but instead required BOP to submit substantive information to justify need. DOJ also reported that OMB does not automatically provide funds for inflationary cost increases. DOJ cited OMB policy stating that inflationary adjustments for discretionary costs (such as utilities) can include some, all, or no allowance for inflation. DOJ officials reported that OMB typically does not include general inflationary adjustments that DOJ submits on behalf of BOP. Nonetheless, DOJ has reported to OMB that other DOJ components could reduce operations, implement across-the-board hiring freezes, and implement policy changes that would reduce costs if faced with funding shortfalls similar to what BOP has faced in its operations budget. However, DOJ reported that BOP has already implemented significant reductions to programs and streamlined and centralized administrative functions to eliminate 2,300 positions. DOJ also reported that BOP has limited flexibility because almost all of BOP’s operational costs are devoted to staff salaries and provision of services. According to BOP data, in fiscal years 2007 and 2008, 99.5 percent of BOP’s Salaries and Expenses budget was fixed for its operations for paying staff salaries and providing services to house and care for the inmate population. In each of the last 2 fiscal years, BOP has needed additional funding to meet its operating costs for managing its growing inmate population. However, we found that BOP’s cost estimation methods largely reflect GAO’s cost estimating best practices. Furthermore, BOP officials reported, and DOJ officials acknowledged, that BOP has already implemented significant reductions in operations costs, such as by eliminating positions and centralizing administrative functions.